The Weekend Edition includes a market update (after the editorial) plus Morningstar adds links to two additional articles.
Wealth equals income minus ego.
Our ego is part of who we are, though too much of it can hurt decision-making and destroy wealth. Here are three short stories about how ego can affect decision-making, and some tips on how to tame overconfidence to become a better investor.
1. Shooting for the moon
It’s 1958 and America’s still reeling from the Soviet launch of Sputnik 1, the world’s first artificial satellite. Since the end of World War Two, the US and Soviet Union had been locked in a tit-for-tat nuclear arms race. Sputnik 1 signalled that it had evolved into a space race too.
The US feared it was falling behind the technology of its archrival. The question was: what could it do to boost flagging morale at home and, at the same time, show its military superiority to the Soviets and the world?
Enter Project A119. The US Air Force approved the top-secret project, named ‘A Study of Lunar Research Flights’. It was led by leading physicist, Leonard Reiffel, who would go on to become Deputy Director of NASA’s Apollo space program.
The Air Force asked Reiffel to fast-track the project to examine the visibility and effects of a possible nuclear explosion on the surface of the moon. Reiffel knew early on that the project wasn’t about technology but politics. He said later:
“It was clear the main aim of the proposed detonation was a PR exercise and a show of one-upmanship. The Air Force wanted a mushroom cloud so large it would be visible on earth.”
Reiffel headed a ten-man team which included a young Carl Sagan, an astronomer who went on to become an author and celebrity, and Gerard Kuiper, the man now considered the ‘father of modern planetary science’.
It’s never been revealed how the nuclear device would have reached the moon, but Reiffel claimed it was technically feasible to hit the moon with an accuracy of within 3.2 kilometres. It’s likely that the mission would have included an intercontinental ballistic missile and the nuclear device would have been an atomic bomb.
Despite his scepticism, Reiffel – in a 1959 report - said Project A119 could achieve several things:
“It is quite clear that certain military objectives would be served since information would be supplied concerning the environment of space, concerning detection of nuclear device testing in space and concerning the capability of nuclear weapons for space warfare.”
Though the report went on to state that while the blast would be relatively small, it could come at a huge cost of contaminating the moon with radioactive material, and ‘if such biological contamination of the moon occurred, it would represent an unparalleled scientific disaster, eliminating several possibly very fruitful approaches to such problems as the early history of the solar system, the chemical composition of matter in the remote past, the origin of life on earth, and the possibility of extraterrestrial life.’
That killed off the project.
News of the nuclear plans only came to light in the late 1990s. It was revealed then that the Soviet Union had a similar plan to the US at that time and it also got canned.
Thank goodness ego didn’t win out in this instance, though it nearly did again four years later when the two Cold War combatants came perilously close to starting a nuclear war during the Cuban Missile Crisis.
2. Betting big
In 1982, Jim Paul had it all. He was a star futures trader who served on the board of governors at the Chicago Mercantile Exchange. He made loads of money, travelled frequently, and was considered among the best at his craft. His confidence and money-making skills knew no bounds.
Then he had a trade which seemed like a sure thing. The soybean oil market was exceedingly tight as limited supply met still buoyant demand. Paul was sure that soybean prices were about to jump.
And he bet big on his convictions - his futures trades exceeded the limits on positions set by the Chicago Board of Trade. He even borrowed US$400,000 from friends to increase his personal position in the trade.
When soybean prices started falling, Paul’s confidence didn’t waver. While his clients and other traders abandoned the trade, he held on. He ended up not only losing clients’ money, but $1.6 million of his own, including that borrowed from friends. And, unsurprisingly, he lost his job.
He later wrote a book about it called What I Learned Losing a Million Dollars.
3. A personal story
To a personal story. I was once a relatively new equities portfolio manager, and I went on an offsite meeting with my team to discuss strategies for the year ahead. We had several new team members and our boss asked each of us what our goals were for the fund. I was up first and answered, ‘I’m a competitive guy and want our fund to be among the best. I don’t want us to be like your typical benchmark-hugging fund’.
I don’t recall many of the answers that followed except one from a senior team member, who said, ‘I want us to sustainably grow our clients’ wealth so they can help their families and possibly fund their retirements’.
At that moment, I realized how lame my answer had been.
It was more than that. I reflected on how I’d let my ego affect other decisions I’d made as a portfolio manager. A few weeks earlier, I got the investment fund into a stock which had fallen hard but where I felt business fundamentals would soon improve. I’d put our fund into a big, contrarian bet.
At the team meeting, I saw that I’d taken this large position to prove myself to the team and others.
Put simply, it was an ego trip that put client money at risk.
How to park your ego
These stories show how ego can affect decision-making in all sorts of ways.
Life might be easier if we could just get rid of ego, yet that isn’t possible. It’s part of our identity. Ego gives us confidence in our abilities and judgments. Science suggests that confident people are more likely to be resilient and find professional success. And ego also protects us from the opinions and judgments of others.
Taken too far though and ego can cause long-lasting damage. In investing, too much self-confidence can destroy wealth, as it did with Jim Paul.
What can be done to tame the ego? I like Aristotle’s analogy of a warped piece of wood to describe human nature. To eliminate warping or curvature, a skilled woodworker slowly applies pressure in the opposite direction - essentially, bending it straight.
Here are four tips to help straighten your ego:
1. Turn down the competitive streak
We are trained to compete and win contests. From standardised testing at primary school through to sports and getting jobs. Competition is about beating others and boosting your self-esteem. Done in moderation, it can be a good thing; taken too far, it can do harm.
In investing, too much focus on making more money than your neighbour will impact your decision making and returns.
2. Detach your ego from the outcome
In markets, gains and losses can be taken personally, as a reflection of your self-worth. That’s the ego at work. But being right and making a profit aren’t necessarily the same thing. And being wrong and taking a loss aren’t the same either.
Jim Paul addresses this in his book:
“Personalizing successes sets people up for disastrous failure. They begin to treat the successes totally as a personal reflection of their abilities rather than the result of capitalizing on a good opportunity, being at the right place at the right time, or even being just plain lucky. They think their mere involvement in an undertaking guarantees success. This phenomenon has been called many things: hubris, overconfidence, arrogance. But the way in which successes become personalized and the processes that precipitate the subsequent failure have never been clearly spelled out.”
3. Add a dose of humility
We can all heed the example of William Tecumseh Sherman, who rose from nothing to become a great general during the American Civil War, but repeatedly turned down higher military titles, and promoted the successes of others for the good of his country. A biographer said of him:
“Among men who rise to fame and leadership two types are recognizable-those who are born with a belief in themselves and those in whom it is a slow growth dependent on actual achievement. To men of the last type their own success is a constant surprise, and its fruits the more delicious, yet to be tested cautiously with a haunting sense of doubt whether it is not all a dream. In that doubt lies true modesty, not the sham of insincere self-depreciation but the modesty of "moderation," in the Greek sense. It is poise, not pose.”
Poise over pose; humility over the ego.
4. Diversify your investments
Concentrated portfolios reflect self-confidence, or ego. In expert hands, they can work. In mere mortals, they can be a disaster. Having a diversified portfolio is the best way to keep your ego in check.
In this week's edition ...
Matt Reynolds of Capital Group says investors should look beyond high yielding stocks to include dividend growers – stocks that pay and consistently grow a dividend. He believes these stocks will more sustainably increase dividends and generate real long-term returns.
Magellan Financial Group has been in the wars, though Andrew Brown of East 72 sniffs an opportunity. He sees deep value in the stock and thinks the impact of institutional fund outflows has been overplayed. Brown also raises the intriguing possibility of Magellan teaming up with Barrenjoey to build an investment banking 'powerhouse'.
John Abernethy is licking his lips after the market fall. He says economic growth, profit growth and therefore dividend growth in Australia is fairly assured over the next decade and the chance for patient investors to benefit is enhanced by the recent correction.
It's great to welcome one of Australia's best international investors, Willy Packer, to Firstlinks. Packer's fund has had only three negative returning years since inception 28 years ago (and was positive in 2022). He also predicted the 2000 tech crash, the 2008 GFC and the popping of last year's 'everything bubble'. Today, Packer remains cautious, though sees bright prospects for nuclear energy, oil and cheap China plays.
GQG Partners were one of the few international investors to pivot away from tech stocks before last year's crash. The research team sees more downside for software companies, drawing on lessons from shale oil's boom and bust in 2014-2016. It suggests software and shale oil represent excesses of the last decade driven by easy capital, as well as the dangers of ignoring capital cycles.
Stephen Miller of GSFM is concerned that the RBA and interest rate markets are underestimating inflationary pressures. Combined with a government intent on increasing wages, there's a risk of entrenching higher inflation in Australia compared to elsewhere.
And Peter Zeihan is back with a unique take on the rise of electric vehicles. Zeihan predicts they're not going to be a large part of our transport future for at least the next decade, probably closer to three decades.
In the weekend update by Morningstar, Christine St Anne reports on the outlook for the big 4 banks, while Susan Dziubinski presents the new list of Morningstar’s top analyst picks in the US.
In this week's white paper, Cromwell Funds Management looks at how hybrid work and ESG will transform the office property market.
***
Weekend market update
US stocks rose Friday to cap off a winning week as investors weighed a batch of quarterly earnings results from big banks that shed light on how companies are holding up in a slowing economy.
The three major stock indexes opened lower but steadily gained through the trading session. The S&P 500 rose 15.92 points, or 0.4%, to 3999.09. The Nasdaq Composite was up 78.05 points, or 0.7%, at 11079.16. The Dow Jones Industrial Average added 112.64 points, or 0.3%, at 34302.61. All three benchmarks finished the week with gains of at least 2%.
Despite four of the nation’s major banks reporting quarterly results that on balance missed expectations, the S&P 500 financials sector closed 0.7% higher, with JPMorgan +2.5% Citigroup +1.7% BofA +2.2% and Wells Fargo +3.3%.
Of the big tech names, Amazon was +3%, Apple +1% and Tesla -0.9%.
From AAP Netdesk: The local share market closed higher on Friday for the seventh session of the past eight after more signs inflation has peaked in the United States, paving the way for less aggressive monetary tightening.
The benchmark S&P/ASX200 index on Friday had its highest close since December 1, gaining 47.7 points, or 0.66%, to 7328.1. For the week, the index gained 3.07% in its best weekly performance since early November. The broader All Ordinaries on Friday rose 50.2 points, or 0.67%, to 7540.1, a 3.17% gain for the week.
On Friday, sentiment was positive with nine of the ASX's 11 sectors gaining ground. Energy was the biggest gainer, climbing 1.5% as Brent crude rebounded to a one-week high. Woodside rose 1.2% to $36.70, Santos added 2.4% to $7.30 and Beach Energy closed up 0.9% to $1.61.
The heavyweight financial sector advanced 1.1%, with gains for all the big banks. NAB rose 1.6% to $31.30, CBA gained 1.3% to $106.50, Westpac climbed 1.1% to $23.76 and ANZ added 1% to $24.49.
In the mining sector, BHP had its highest close ever for a third straight day on surging iron ore and copper prices, gaining 0.5% to $49.64. Rio Tinto was up 0.9% to a 10-month high of $122.29 but Fortescue dipped 0.5% to $22.80.
Graham Hand is back from sabbatical leave next week. Thank you for putting up with me while Graham has been away. I'll continue to help edit Firstlinks and contribute articles.
James Gruber
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