In a historic debate, the Roman statesman Cicero was the first to publicly postulate, outside the sphere of mathematics, the transitive property that states if variable a = b and variable b = c, then variable a must equal c. It is logically infallible. When maintained within the field of mathematics, the transitive property of equality is a mathematical certainty; broad application outside the direct field of math results in occasional incongruities.
For example, consider how the transitive property of equality has been employed by investors seeking comfort and acceptance in the investment management world: if Investment Manager A that holds investment “X” is great and if investment manager B that holds investment “X” is also great, then individual investor C who purchases investment “X” must also be great. In other words, If I own some, most, or all of the same investments of a widely admired investment manager or two, then I too will be somewhat, mostly, or completely admired; that’s the math, it cannot be any other way.
The postulation can metastasize beyond confirmation bias and sometimes serves to legitimize a form of idolatry. Emulation in the investment world has two purposes; on the surface, it enables one to mimic returns and that’s fine, when it achieves the intended results. The unstated aspect of emulation is that it represents a form of idol worship; “if I own the exact portfolio of a globally cited manager/s, then this also makes me look good.” I can bring up my holdings in conversation: “manager X was quoted on CNBC the other day, and wouldn’t you know it, I’ve got some of those shares myself, that’s so great, isn’t that great, aren’t I great?”
Individuals sometimes ratchet up the transitive property of equality and attempt to posit the “transitive property of superiority”, boldly going where no man has gone before: If great investment manager A holds investment “B”, if great investment manager C holds investment “D” , if great investment manager E holds investment “G” and I hold investments “B”, “D” and “G”, well, then, logic dictates that “I am greater than ALL of them.”
Disregard the practical consideration of too many variables being at play with some variables incorrectly assumed to be constants; each manager may have legitimate style differences that result in the exclusion of one investment vs another, perhaps completely ignore the matter that investments “B”, “D” and “G” might be direct competitors resulting in a zero sum game, dismiss every possible reason that the truly great managers don’t poach one another’s picks “just because they can”; the only reason for cherry picking multiple portfolios, since firms for decades have tried it and failed using the “fund-of-funds” concept, is to promote the transitive property of superiority: “If I cherry pick the great investments of great managers, because evidently nobody has EVER thought of it before, then I’ll be the greatest of all”.
There are some important caveats surrounding transitive property postulations for the investment management world. What happens when time is added to the mix, or when one incorrectly determines a variable to be a constant?
The greatness of a manager is generally assumed to be a constant by the public; is that always so, or is that a subjective premise? How will the transitive property of equality change when that great manager/s plummets to mediocrity, or even worse, for any variety of reasons? Well then, what we should explore is no longer a property of equality, rather we then need to contemplate the property of inferiority. Those who have emulated the picks of that manager/s should now be mediocre or subpar themselves. Will the disciple accept that outcome? Can we go from believing ourselves to be superior, to gradually becoming inferior, resultant from an idol falling off the top of their game? Of course not. In order to maintain our own personal standing, we cannot possibly accept that investment manager A is no longer great; so long as our assumption is anchored on infallibility, that they remain great, even when they are not, that their investment choices remain great, even when they are not, then we also remain great, so there.
Denial plays out all continually with investment media: “business X has really been deteriorating for the last several years, is it time to sell? No, because manager B still owns it, and they are great, therefore, business X must still be great as well, and that makes holding business X “great by association”.” Here’s the corollary that flows from an investment manager holding multiple deteriorating or subpar businesses, if “great” manager B owns a bunch of poorly performing businesses, perhaps more losers than winners, and has failed to outperform for an extended duration, then is that manager still great? In other words, does holding business X actually serve to diminish the greatness of manager B?
Duration and degree of idolatry by the public for investment managers represents a complication in equity markets; the greater the number that buy into a premise of a variable being a constant and the longer they do so, the fewer remain that can acknowledge, let alone adapt, when the change in the variables is as plain as the nose on one’s face. If thousands, tens of thousands or hundreds of thousands of individuals have put a manager or managers on a pedestal, the only way for many to continue to make themselves feel better about subpar results is to deny, because one cannot accept that when manager “A” is doing a poor job and has underperformed for more than a decade, it directly reflects upon more than one’s net worth, it impacts one’s self-worth.
Idolatry is dangerous in the investment world. Equity investors should be exclusively focused on the selection of investments rather than on the attributes of investment managers who own those investments. The best way to avoid the deleterious impacts of denial, when an idol falls, is to refuse to participate in the first place. Otherwise, the transitive property of equality can transmogrify into the transitive property of mediocrity, when the variables change. William Ackman, Bill Gross, Will Danoff, Peter Lynch, Randolph McDuff; all are merely variables, at best, in any investment equation, not constants. Will you accept, or will you deny, such a premise?
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