The "Dad" I am talking about is Bill Miller. No, not the one you already know, although we admire the Legg Mason fund manager. I lost my Bill Miller last year, but the lessons are still there. Some of them are quite relevant for investors. (We did a little father/son bonding at Chez Dash this weekend. Missions accomplished with only one circuit breaker kicked and a couple of buckets of water. Dad was smiling.)
A Famous Miller Family Story
Here is a signature moment from the young Bill Miller. I am quoting the key elements, but the tale is told in more detail in this article, Respect versus Arrogance.
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
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
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.
No Substitute for Knowledge
A crucial lesson from this is that there is no substitute for actual knowledge about a subject. It does not matter what your rank is. It does not matter how many years you have served. It does not matter how many other people call you "Sir."
If you do not have the knowledge, you cannot make the engine start.
The Investment World
There is an interesting difference between social science and engines. When a theory about an engine is incorrect, the results show up right away. When a theory about social science is incorrect, the idea may persist for many months — even years.
This makes it much more difficult for the consumer of information. How do you know when the engine is not going to start?
Here are some red flags.
Misuse of the word "rigor." A long causal chain with a lot of unsupported assumptions may seem powerful, but it does not meet the definition of rigorous. A strong argument begins with an assumption that everyone would share, and then provides evidence at each point. The longer the chain, the more evidence that is needed. Whenever someone makes a big argument about "rigor", make sure that he has some credentials for each step in the chain. Big hint: Rigor usually means peer review. Those with thin skins about criticism of their work are usually not rigorous.
Selection Bias. This happens when one starts with a pre-conceived notion of the world and distorts evidence to fit the conclusion. It is a characteristic of many of the leading investment blogs. Ironically, many of the same bloggers talk frequently about behavioral economics and the dangers.
The "Slick" Factor. Many of the top-ranking pundits are there because — well — because they are top ranking pundits. They are cited as "friend/buddy/pals" of someone, or called "doctor" or "professor" to amplify credentials. Most of them are good with sound bites on TV. None of them could actually start the engine. Most of these guys have never created a quantitative model, and would have no idea how to begin. They do not know SPSS from American Idol. Their charts come from others — those with a world view they want to sell. Many become famous by making a prediction that works–eventually. There is no real accounting of the investment impacts.
The "Big Money" Managers. Statements from the "big-time" fund managers carry a special warning. Does it really need to be stated that these people always have an agenda? If a manager has a fiduciary responsibility to clients and a fund, and then gets a spot on TV, what do you expect him to say? It would be irresponsible and deceptive to talk against his own book.
Conclusion: Strong Voices are Leading You Astray
Here is Bill Miller's lesson, some great principles applied to investing.
- Don't take some long-winded analysis to be "rigorous." Check whether the author has the relevant expertise — research methods, economics, government, etc.
- Check your sources. It is pretty easy. If your favorite source dishes up a constant stream of one-sided commentary, you should already know the answer. You can enjoy reading your source for entertainment, but not for investing.
- Look beyond the "talkers" and check the actual predictions.
- Do not conclude that someone in a uniform with braids really knows how to start the engine.
And finally, realize that everyone is an expert on something. Learn to listen instead of pretending that you already have all of the answers. Be willing to challenge, but do not be arrogant.