Respect versus Arrogance

There is a fine line between confidence and arrogance.

Traders and fund managers need confidence.  They need to believe in their methods, their convictions, and their conclusions.  They must be prepared to act in a rapidly changing environment, reacting swiftly to new information.  The job description requires knowing something about many stocks, many sectors, and many market factors.  The result is that many people managing money have knowledge that is a mile wide and an inch thick.

The passing of my father, William H. Miller, last week, and some hours of thought on the road have sparked some introspection.  What we try to do at "A Dash" bears his mark.  In a way, that is strange.  Dad went to war instead of to college.  Growing up in the Detroit area, he understood engines.  The principles are simple:  Fuel, Oxygen, Ignition.  It is amazing how people can get this wrong.

As a sailor on his first ship he found himself in an interesting situation.  The engines had been overhauled, but would not start.  Experienced machinists could not figure out the problem.  Officers were hovering and complaining.  The young sailor asked if he could try something.  There was a lot of skepticism, but he was given his chance.  He knew that the fuel and air were OK, so he removed the spark plug and tapped it on the deck, narrowing the gap.  When the plug was replaced, the engines started!

If you could see a picture of the young sailor, cap tilted at a jaunty angle, you might guess the mixed reaction.  The officers were delighted at a problem solved.  Those in charge of the engines were less enthusiastic.

This story was repeated many times over in his Navy career.  While he never got all of the promotions he deserved, he was a fixture on the boats deployed by his Captains.

Dad did college work, but did not graduate.  He wanted to manage a foundry, touched all of the right bases, and became the expert at turning around troubled plants.  At one point as we drove down a highway, he could point at every passing car and tell me which part was made in his plant.  He moved from company to company, taking unprofitable operations into the black, generating jobs for all who worked there -- and staving off foreign competition.

Dad divided the world into "talkers" and "doers."  Guess where those of us in fund management land in this world!  I was the first in the entire Miller family to graduate from college.  Everyone expected me to get a job, so the feelings were mixed when I went on to graduate work.  A few years later my father's two sons were both PhD's and college professors.  Much of his example -- work habits, diligence, attention to detail, daily logging, and confidence in analytical methods -- led directly to our success.

So what does that have to do with trading and investing?

Mostly, it is respect for those who are running companies and "meeting a payroll" as Dad would say.  Money managers do not mean to be arrogant, but they have not really learned to respect the expertise of the others.  Here are some examples of the mistakes we are tempted to make:

• We expect executives on each conference call to say what the Street wants.  Many managers are young and believe that every CEO is dishing out hype.  They are fighting the last war, the era of 1999-2000.  Anyone who really listens to the calls, instead of just reading the headlines, knows that in the Sarbannes-Oxley era the message has changed.  Many managers are cautious in estimates, which is why earnings have been exceeding expectations for several years.
• We think we are smarter than those at the Fed.  I cringe when I see some twenty-something interviewed on CNBC pontificating on what the Fed should be doing and whether they are "behind the curve."  The Fed, including the various regional banks, has about 350 economists.  They are very talented and devoted to research on all of the key topics.  I listen to the TV commentary, hearing statements like "The Fed now understands what we know."  This is from people who could not get a job at the Fed.
• We think we understand economics better than economists.  Everyone on the Street thinks that they know what is wrong with government data and how to do it better.  But they have never done it.  Amazing.  The top fund managers think inflation is under-stated.  The Fed thinks that the CPI over-states inflation.  The difference is that the former group is seat-of-the pants (think the martini index) while those who really have the job spend entire careers on finding the best measures.
• We think that because someone manages a lot of money they have some special knowledge.  It is amazing how money chases recent performance.  Those who are hired, those who get new investment, and those who get press -- the assumption is that big money equals knowledge.  There is always someone who hit it big last year and even those who failed get respect because they did "size."  Even the Amaranth guy is out there based on his "experience."  This is true in spite of the record of Street analysts, a solid contrarian indicator.

These are the themes we pursue at "A Dash."  We do not think we know all of the answers.  We follow an eclectic method, giving credit to those who have established credentials on key topics.  We try to understand corporate managers, discovering  sound business models that do not come with a lot of hype.  The fundamentals of sound companies will eventually prevail.

Thanks, Dad, for teaching us some key principles.  While I may have wound up as a "talker," at least I operate with due respect for the "doers."  Talkers can help clients achieve their life objectives.

Comments

[CrossProfit]

Though we have never met or corresponded, please accept our condolences on the passing of your father. From your brief observation of his life, we recognize that your loss is our loss as the generation that built America dwindles with each passing day.

CrossProfit team.

[oldprof]

Thanks, Barry. You have pointed to an article that all should read.

[Barry Ritholtz]

Todd Harrison has a great piece out on the same subject titled:
Stay Humble Or The Market Will Do It For You
http://www.minyanville.com/articles/index.php?a=11913