Dopamine

It never ceases to amaze me how often investors have to be reminded that trading is synonymous with market timing and that market timing is synonymous with gambling.

I was listening this week to a recent Oaktree podcast featuring a discussion between Howard Marks and Annie Duke, poker legend-turned bestselling author. It’s an entertaining chat (“such a fun conversation,” as Duke puts it at the end) assuming you enjoy probability and statistics. Marks is a fan of Duke’s Thinking in Bets. In fact, it was the inspiration for “You Bet,” a January 2020 memo which some regard as a classic. (Marks’s fanbase considers every Marks memo a classic.)

As regular readers are aware, I suffer from a fair bit of cognitive dissonance when it comes to investing. I write about markets as if they’re intensely engaging and worth observing on a day-to-day basis, and I do “like to lay the occasional bet,” as the late Jon Polito put it in Miller’s Crossing (in my opinion the best film in American history). But when I’m being completely honest (and part of correcting for decades of bad karma is being honest all the time in my second act), I’m compelled to admit there really isn’t much about markets that interests me at all.

Investing is, and has always been, easy for me, and thereby less than interesting. Like anyone else, I had to learn my way around a balance sheet (in business school) and later, the ins and outs of high finance (mostly from an unwitting mentor who’d tell you that very much contrary to the old adage, it’s sometimes better to “give a man a fish” than to teach him how to catch fish on his own, lest that man should keep fishing from your stream in perpetuity after the two of you are no longer sharing meals). But successful investing, where that means reliably generating a decent return on invested capital, came naturally to me. I’ve never had to “work at it,” so to speak. It ceased to be interesting to me within a year or two of owning my first mutual fund.

I was fortunate this year to get a phone call the day before Thanksgiving. It’s exceedingly rare that anyone calls me, let alone on a holiday. That’s by design. No one should feel bad. My isolation is purposeful and engineered, the result of a deeply-held belief that a requirement (a prerequisite) for engaging with other people is being reasonably sure that in doing so, you can help them live more fulfilling lives. Inserting yourself into the life arc of other people is to change their trajectory forever, an irrevocable decision that merits careful consideration. Experience indicates I can’t satisfy my own rules of engagement (so to speak), so I generally confine my interactions with humanity to the virtual sphere.

For me, the problem with detachment (which until very recently was physical, on a literal island, as well as emotional) isn’t so much loneliness, something I’m apparently incapable of experiencing, thank God. The issue, rather, is the lack of an outlet for unfocused, out-loud editorializing. I have an online audience (a cult following) for structured, focused commentary, but no real-life sounding board for unstructured eccentricity. There is, however, one person in the world willing to be that sounding board, a significant act of goodwill on her part. It’s a profoundly asymmetric situation: I view her as akin to the big sister I never had, she views me as a peripheral acquaintance who, even on prominent days, exists only on the fringe of her life radar. My awareness of that asymmetry is what makes it work.

When we talked two weeks ago, ahead of the US holiday, the idea of markets as easy-to-understand and not especially difficult to navigate, came up. She noted, correctly, that after so many years steeped in the discussion, it’s not hard to say something about markets that comes across as profound. Sometimes, she went on, the ease with which she can conjure incisive observations feels guiltily incongruous with the plaudits she receives from other market participants and observers. I feel the same way. Only without the guilt. If you want to believe investing is difficult or interesting or immersive or worthy of a career, who am I to argue?

What’s amusing to me about people like Marks is the lengths they go to in order to convince themselves they haven’t wasted their lives, even though they probably have, with the (important) caveat that many billionaires and titans of finance have dedicated enormous sums to philanthropic efforts. (Whether or not I might’ve given more if only I had the same resources is irrelevant since there’s no realistic path for my net worth to match Marks’s barring rapid and significant advances in life extension technologies.)

I used to enjoy Marks’s memos immensely, and explaining why I became disillusioned with them some years ago is a bit of an editorial Waterloo for me. Like Ray Dalio, he seems to harbor pretensions to philosophical profundity that are meaningfully detached from what’s on offer, but then again, the sheer amount of effort Marks puts into his writing is an ironic testament to the idea that investing isn’t very rewarding beyond the financial gains. Plainly, the point of diminishing returns for Marks with regard to incremental happiness derived from accumulating ever larger sums of money was much higher than my own, but his memos (and particularly those penned during the pandemic) seem to demonstrate a desire to extract from capital markets something that just isn’t there — namely, deep meaning.

By contrast, Warren Buffett, a fan of Marks’s memos but an investor of incomparably greater stature, endeavors very little in the way of penetrating insight while penning Berkshire’s annual letters. That’s not to say Warren’s folk wisdom isn’t in some ways enlightening, it’s just to state the obvious: Buffett understands, and is satisfied with, his place in the world, and rarely stakes a claim outside of his own arena. Buffett’s letters are, in some ways, the opposite of Marks’s memos. Buffett’s investment strategy doesn’t entail or require any deep insight, or demand any sort of value judgements other than those associated with buying good companies at good prices.

Reading Marks, on the other hand, is like reading the treatises of an aristocrat who, having realized that wealth isn’t the be-all and end-all, is determined to place himself among the ranks of great thinkers. But can’t quite get there. If you’ve ever read a historical survey of Western political thought or philosophy, you’ve come across references to such treatises. They’re usually referred to tangentially, and with a tinge of pity for their authors.

I started reading Marks again last year, and I came away with the same impression: He seems to want more from investing — more from capital markets — than investing and capital markets have to offer him. To the extent that’s accurate, he can’t be blamed. At a fundamental level, capitalism (the market economy) is a simplistic secular religion. Capitalism posits for itself the task of providing property-owners what they think they want. Rights become synonymous with property ownership, and everything else follows from there. The tension emerges when people without property start making claims on having rights too. Over decades, we’ve constructed a casino atop the market economy’s foundational “efficient” capital allocation mechanism. That’s where the gambling happens.

As Marks made clear four years ago in the above-mentioned “You Bet,” he’s a gambler, and always has been. Which accounts for his admiration for Duke. “You Bet” reads like a casino manual. No matter how many times Marks (and Duke) try to explain away their gambling addiction by dressing it up as a philosophy of decision-making, it is what it is. By his own account, Marks’s affinity for strategic games of chance dates back six decades, and he doesn’t seem to delineate between the foundational purpose of a market economy and the often superfluous gambling that goes on at the casino upstairs.

There are no deep lessons to be learned from the fundamental capital allocation process, and trying to superimpose meaning on that process is an exercise in futility. It’s not difficult to make money by participating in that process: You buy shares in good companies (stock is property) and you hold onto them (your property becomes more valuable, and in a market economy, you de facto secure more rights as a result). That process is very efficient and highly reliable when it comes to creating wealth for the patient and the prudent. But it’s not always efficient when it comes to providing for social justice. That combination (the “any idiot can do it” reality of passive investing and the sometimes deleterious social outcomes capitalism produces) makes investing in a market economy rather uninteresting intellectually and profoundly unsatisfying morally. If you’re not troubled by boredom and immorality (or at least amorality), you can become one of the richest people on Earth in nine (or 10) short decades. Just ask Buffett (or Charlie Munger before he finally died).

If, however, you want a little excitement — if you want to believe there’s more to it all and that you’re something other than a cog (big, small or anywhere in-between) in the capital allocation process — you might venture into the casino and become a risk-taker. If it works out for you consistently, you can claim some level of skill, at which point other gamblers will look to you not just for poker tips, but for wisdom in general. As these things go, you’ll be tempted to oblige. Before long, you’ll convince yourself of all sorts of things, virtually none of which will be true. “Investing is a game of skill,” Marks declared, towards the end of “You Bet,” on the way to calling investing “challenging and stimulating.” “I feel good about the way I chose to spend my career,” he wrote.

Late last month, Marks spoke to Bloomberg’s Tom Keene and Lisa Abramowicz about Munger, who’s quoted in “You Bet,” after his passing. “He never tried to guess what a company would do in the short-term. He was a great practitioner of sit on your hands,” Marks said. He also claimed, while discussing Buffett’s sometimes concentrated positions, that “concentration and patience don’t accomplish anything if you can’t make above-average investment decisions.” But that just isn’t true. Time and time again, the market shows that being content with “average” ends up making you in some sense above average. Because most people can’t resist the temptation to aspire to outperformance.

In a December 8 article looking back on 2023, Bloomberg’s Lu Wang noted that out of nearly two-dozen technical strategies for trading, not a single one outperformed buy-and-hold this year. If, while trying to trade tactically, you missed the best five sessions, you underperformed an S&P index fund by 11ppt. “Of course, if one is lucky to dodge the worst five,” you would’ve outperformed by 9ppt, Wang wrote. “Lucky” is the key word. It’s fair to suggest that if you traded based not on technical indicators, but on various fundamental narratives in 2023, you might’ve underperformed an index fund by an even wider margin.

In the same linked article, one pro told Wang that, “timing the market is one of the most fun things you can try to do because it’s like a dopamine-type behavioral thing.” As the National Institutes of Health explains, “mesolimbic dopamine, the chief neuromediator of incentive motivation, is indeed released to a larger extent in pathological gamblers.”

The ultimate irony is that the inspiration for Marks’s memos in the first instance was one pension fund manager’s explanation for how mediocrity breeds excellence over the long-term. “My memos got their start in October 1990, inspired by an interesting juxtaposition between two events,” Marks recalled, in September. The first of those events was dinner with Dave, then head of the General Mills pension fund. Dave told Marks that in 14 years in the job, the fund’s equity return “never ranked above the 27%ile of the pension fund universe or below the 47%ile percentile.” Guess where Dave ended up ranked after 14 years? Fourth percentile.

Marks remembered being “wowed.” “It turns out that most investors aiming for top-decile performance eventually shoot themselves in the foot,” he said. “But Dave never did.” And yet Marks spent the next 30 years of his life aiming to outperform. He’d tell you a different story about his investing philosophy and that of Oaktree, and he’d surely claim there are no contradictions in his memos, or no glaring ones that can’t be reconciled, anyway. Maybe you’d be convinced. I wouldn’t be.

No matter what anyone tells you, the bottom line at the end of the day is that, as Munger put it, “The world is full of foolish gamblers, and they will not do as well as the patient investor.” Investing isn’t complicated, which means the vast majority of ostensibly profound insight and dynamic, play-by-play color commentary you come across on a daily basis isn’t worth the digital paper it’s printed on. Present company excluded, of course.