There is a lot of recent buzz about active management – basically showing that excellence is difficult to achieve. The conclusion is popular, especially among those who have no aspiration to beat average.
I cannot do this in a single post, but I must start somewhere. As I often do, let me start with something far away from financial markets as the original illustration. As the TV lawyers say when wandering off course, “Your honor, just give me a few questions and I’ll connect it all up.”
Let us suppose we have a difficult situation, not unlike a complex market. In this case, you are golfing. Your ball is in the rough, and there is a danger of going over the green on your approach shot.
If you are a golfer, you will get a laugh out of Golf Digest’s 26 most difficult shots. I have experienced all of them. The “shot over water” was especially intimidating at Butler National, where I asked my caddy about the drop zone. He wisely told me, “You need a better swing thought.” That was great advice!
Here is an example of Phil Mickelson hitting a 64-degree wedge. It is not a cherry-picked result. A google search will show many other similar shots.
The commentator observes that Lefty might be the only one who could hit that shot.
Finding the Expert
I hope everyone is convinced that there are experts in golf. In fact, there are experts in any field. In most cases there is a problem of “Untangling Skill and Luck” as Michael Mauboussin astutely poses it. In the case of Mickelson’s flop shot, the skill is evident. Many important cases are more challenging. What about someone with a model that provides a 10% improvement in forecasting hurricanes? Or earthquakes? The social gain from such expertise is important, but it might be difficult to identify.
If you are an investor in search of excellence, this is the challenge. For over ten years I have taken pride not in my own expertise, but in the ability to spot the best experts in various fields. That is now more important than ever for those who want more than mediocrity.