Don’t Just Do Something . . . Sit There!
“All man’s miseries derive from being unable to sit quietly in a room alone.” – Blaise Pascal, c.1630
The CFA North Carolina Society recently hosted a series of meetings on Avoiding Short-Termism across the state. Jack Gray, Adjunct Professor at the Centre for Capital Market Dysfunctionality at the University of Technology in Sydney, was kind enough to allow us to share his presentation with our readers. Jack is an extremely engaging speaker, and we highly recommend spending some time with him if the opportunity presents itself. His presentation identified the sources of short-termism in addition to offering suggestions for overcoming said barriers, and exploiting long-term value creation.
Keynes once observed human nature’s desire for quick results. Further complicating the problem, investors are obsessed with information. While the idea that more information must be better may appear to be intuitive on the surface, Jack reminds us that this is far from the truth. During his time spent at GMO, he recalls an old saying that “too much hard work gets in the way of thinking. In fact, most of the ‘news’ that comes across our screens today is simply noise. Jean-Marie Eveillard, First Eagle’s long-term value focused CIO, explains, “It’s very common to drown in the details or be attracted to complexity, but what’s most important to me is to know what three, four, or five major characteristics of the business really matter.” We’ve taken this advice to heart at Broyhill, and created a simple checklist to guide our decision making (more on this in a later post).
Making matters worse, we can’t resist the urge to “do something.” In a peculiar study of soccer goalkeepers, the authors of The Case of Penalty Kicks conclude that:
Goalkeepers choose their action before they can clearly observe the kick direction. An analysis of 286 penalty kicks in top leagues and championships worldwide shows that given the probability distribution of kick direction, the optimal strategy for goalkeepers is to stay in the goal’s center. Goalkeepers, however, almost always jump right or left.
Because the norm is to jump, norm theory implies that a goal scored yields worse feelings for the goalkeeper following inaction (staying in the center) than following action (jumping), leading to a bias for action. The seemingly biased decision making is particularly striking since the goalkeepers have huge incentives to make correct decisions, and it is a decision they encounter frequently.
When asked why they chose to dive rather than stand in the center, the goalkeepers explained that at least they felt like they were making an effort when they dove left or right. Turns out, they would have been better off following the clever advice of the great philosopher, Winnie-the-Pooh – never underestimate the value of doing nothing.