What important truths do very few people agree with you on? This is the penetrating first question Peter Thiel asks readers in his great book Zero to One. The question is designed to promote deep and creative thinking, to uncover ideas that move us from “zero to one.” Moving from zero to one happens when we create a whole new category of business or thinking. The alternative, moving from “one to n,” is far more common—most of what we create is an iteration of some category that already exists.
I realize the irony here: writing a reaction piece to Thiel is just the sort of 1 to n, derivative thinking against which Thiel rails. Oh well. Reading the book, I was constantly reminded of a line from novelist David Mitchell, ‘The one dog who barks at nothing answered by a thousand dogs barking at something …’ This sums up a lot of things these days.
Thiel implores us to be the first dog, to be contrarian thinkers. For fun, I thought I’d answer his central question. Here are 15 things that I think are true even though most disagree.
1. Brunettes > Blondes
2. Risk controls increase risk. Risk has many definitions, but the most common that I come across is that risk equals deviations from the market/benchmark portfolio. These deviations can be in holdings (names, industries, geographical regions) or in factors (value, momentum). Many managers try to minimize tracking error (roughly the difference in returns) between their strategy and the market. Other risk controls neutralize exposure to things like the price of oil or rising interest rates. I think of risk instead as the percentage chance that a strategy will lose to a simple benchmark over one’s investment time horizon. If you have a 10 year horizon (really truly, not just paying lip service), then all you should care about is “will this strategy beat a low cost index over this period, and what is the percent chance that it will win?” Anything that increases the odds of winning reduces risk, and anything that decreases the odds of winning increases risk. Most risk controls make portfolios look more like the market. That may reduce short term risk, but it often increases real risk. Strict constraints (i.e. risk controls) reduce flexibility, reduce active share, and reduce the likelihood of long term outperformance. There is a role for some constraints in portfolio construction, but they should be loose. As Howard Marks says, to win, you have to “dare to be great.”
3. Heavily seasoned steak > basic salt/pepper
4. College is a waste for most people. If all college graduates could run a simulation where they instead started working and gaining experience at age 18 (and avoid the cost/debt associated with college), I am convinced that most people would be better off. Having interviewed tons of people over the years, I know that college is all about getting that first job, but that it matters less and less after that. Of course there are some people for whom college is great and appropriate, but at its current cost I think it’s a waste of time and money for most.
6. Deep dives into value stocks will hurt your returns. As a quantitative money manager, I am of course very biased, but every time I dive deep into a value stock that come out of our models, I am appalled by the business and its prospects (Seagate Technology from three years ago comes to mind). If I did that for all value stocks, I’d probably never buy any of them. Some people may be able to improve on simple value screens by going very deep into the business, but in my experience you find many more reasons not to buy than reasons to buy. People disagree as to why value works. Some say it’s a compensation for taking more risk, others that investor psychology drives the opportunity in value stocks. I fall in the latter camp. Either way, it has always paid to be a contrarian value investor. Being one is much easier if you don’t know all the dirty details.
7. Reading broadly is better than reading deeply. Don’t get me wrong, expertise in a certain area can be very valuable. But I think reading lots of different, unrelated things is the key to coming up with worthwhile ideas. The last five books I’ve read are Zero to One, Ready Player One, Waking Up: A Guide to Spirituality Without Religion, As One Is: To Free the Mind from All Condition, and The Masks of God, Vol. 2: Oriental Mythology. I’ve learned as much about investing by reading psychology and mythology (a psychology derivative) as I did when studying the CFA curriculum. A well-worn library card (or, these days, kindle unlimited subscription) is more valuable than just about anything.
9. EQ > IQ. I used to wish that I had just 10 or 15 more IQ points. Now I wish that I had a higher level of emotional intelligence (EQ). I’ve met lots of great and not so great people in my career, and the most successful ones (and the ones I’ve liked the most) have an uncanny ability to connect with people. I first learned the power of EQ by watching my wife navigate a crowd or meet someone for the first time. She has a talent that I envy (and she’s doubly lucky because she’s smart, too. I hope she is reading this). It is remarkable how much easier things are if you just know how to deal with people and make them feel comfortable and appreciated. Luckily, it’s easier to grow your EQ than your IQ.
11. Quantitative asset managers should be much more concentrated. The quant party line is that you should place broad bets on factors (e.g. value, quality, momentum) not individual stocks, meaning you should own enough names that your success isn’t dependent on any one name. I think a large advantage exists for those willing to use quantitative screens to build concentrated portfolios. 25 or 50 holdings is better than 250 or 500 (although you’ll need to agree with me on my definition of risk from above). I will have a detailed post about this soon.
12. Introspection > hard sciences
13. U.S. stocks are not the place to be. Sure they have done really well, are secure, and operate in a wonderful environment. But they are terribly expensive relative to international alternatives. Value–along with reversion to the mean–indicate that U.S. investors should see past their home bias and build more international portfolios.
14. Open minded agnosticism > atheism > anthropomorphized god based religions
15. Now that I’ve mentioned religion, taboo topics (money, politics, religion) > all other topics.
What would your list be?