"A man who carries a cat by the tail learns something he can learn no other way."
It is widely believed that the single worst-tasting alcoholic beverage is Jeppson's Malört, a wormwood-infused distilled liquor from Chicago. The word "Malört" comes from the Swedish mal, which means "awful," and ört, meaning "seriously awful, like having a large sweaty man sleep in your mouth."
Humorist John Hodgman describes Malört's flavor as "pencil shavings and heartbreak." Jeppson's itself calls people's first experience with Malört as a "shock-glass," noting that only one out of 49 men will ever have another. If you'd like to have some fun, do a search for "Malört face."
(Go ahead; have some fun. I'll wait right here.)
But the people who describe Malört as the most disgusting drink on Earth are mistaken. For the winner, we must travel north and west from Chicago to Dawson City, in Canada's Yukon Territory, for the "Sourtoe Cocktail," found exclusively at the Eldorado hotel bar. Legend has it that a local guy named Dick Stevenson found a human toe preserved in a jar of alcohol while cleaning out an old cabin. He took the toe to the Eldorado, and it became the centerpiece of the Sourtoe Cocktail.
What comprises a Sourtoe is quite liberally defined. It can be any kind of drink, but it must be garnished with the toe. The rules of consumption are simple: Your lips must touch the toe. The Eldorado has been through several toes over the years, as customers have somehow managed to swallow them in pursuit of joining the Sourtoe Cocktail Club.
You might want to run a search on the Sourtoe as well. Or you might not. That's your choice, but I can assure you that I'm not making this up.
Why would you do such a thing?
There are lots of reasons why someone might attempt a Sourtoe Cocktail or a shot of Malört. High on this list is what you might call "1 a.m. logic" -- the sort of reasoning that only makes sense to those who are several drinks deep. Another reason is that some people simply like to try something extremely unpleasant in the name of fun.
It's also possible that some people enjoy it. People enjoy lots of things that are really, really weird.
Let's just call Malört and Sourtoe what they are: "dare shots." Some people drink them because most people won't. There are instances where being brave for the sake of fun is great. You can skydive, bungee-jump, be a Brony, drink something that tastes of grapefruit and malice, whatever. If bravery allows you to stand apart from the crowd, then whatever you choose to do must be awesome.
Here's the thing, though: If you're going to be brave about something, it had better be worth it. This is true in many arenas of life. Kevin Kelley is the football coach for Pulaski Academy in Little Rock, Arkansas. His game-management philosophy is entirely at odds with nearly all other coaches. His teams never punt, not even when they're deep in their own territory, and they always attempt an onside kick to try to get the ball back after they score.
The reason for his approach is simple: He has run regressions against probabilities spanning decades' worth of football games that show these decisions are statistically superior to simply giving the ball to the other team. But you can just imagine the horror on fans' faces the first time Kelley's team gave up the ball deep in their own territory, rather than punting it away.
What would have happened if Pulaski Academy had lost a bunch of games? Most likely, Coach Kelley would have been fired and, moreover, considered a bit of an idiot. He had to be brave to make the choices he did, because the punishment for failing unconventionally can be merciless. And Coach Kelley certainly was brave -- but he was also smart. By going for an onside kick every time, he wasn't throwing back Sourtoe shots; he was simply looking for an outcome superior to the one that conventional wisdom would yield.
And so it is in investing. Our realm, like sports, is almost custom-built to push people into conventional thinking and actions. Did you beat your benchmark this year? This quarter? Yesterday? None of these considerations creates a favorable environment for intelligent, unconventional thinking -- quite the opposite, in fact.
Let me give you an example.
"It's always 'Marcia, Marcia, Marcia!'"
Index provider MSCI is thinking of including U.S.-traded Chinese securities in the calculation of its benchmark. That might seem strange, but some big Chinese companies, such as Baidu, Tencent, and CTrip.com, are not listed on Chinese stock exchanges at all. MSCI is (rightly) thinking that its China index would become more robust by including these big, meaningful companies for tracking the performance of China, even though they don't trade there. But as a helpful Wall Street Journal article noted about the move, "It will require fund managers measured against a Chinese benchmark to buy these companies."
If you think about this, the implications are startling. Fund managers, who are supposed to actively manage their portfolios, are being "forced" to own certain companies. Too much benefit accrues to these managers by hewing to convention.
But what about their clients? Might they expect that the fund managers they pay to make decisions with their money make those decisions based on more than "have to"? I find the mere concept amazing. It is a simple fact that in order to generate market-beating returns over a long period, one must be unconventional in one's approach. Conventional strategy begets conventional results. That's a tautology. But there is no great honor in charging a premium and then staying close to the index.
Unconventional strategy means experiencing periods of discomfort. None of this is to say, however, that thoughtless nonconformity is a good thing. The Pink Sheets, for example, is where companies too small, too non-compliant, too sketchy, or too bankrupt to be listed on major exchanges go to attempt to attract shareholders. It's where capital generally goes to die -- the drunken-sailor bar of the investing world, where the decision to enter was bad, and all subsequent decisions that don't involve leaving are most likely worse. It's the realm of pump-and-dump artists, who stay in business because they know full well that they will have takers.
We have seemingly entered into a time of great market uncertainty (which is a term I generally despise -- I mean, when are markets anything but uncertain?), with some huge macroeconomic shifts taking place. It has already been a strange year: In the first half of 2015, six companies (Apple, Amazon.com, Netflix, Gilead Sciences, Google, and Facebook) accounted for half of the market-cap gains of the S&P 500, and the second half has been off to a highly volatile start. In such situations, the performance of the overall market can mask what is happening on a more granular level. I believe the next year will be a period in which brave but savvy investors see an opportunity to distinguish themselves. Yet such environments lead overeager investors (as we've seen in the Chinese market and in many social-media stocks in the U.S.) to find out that the term "go for broke" sometimes means exactly what it says.
All I'm saying is, please don't accidentally swallow the toe in the pursuit of glory.
But be alert
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