Woods, Miller and the broken promise of alpha
- November 17th, 2011
For well over a decade Tiger Woods was the #1 ranked golfer in the world, the winner of 14 major championships and was well on his way to becoming the greatest golfer that ever lived. Then seemingly in the blink of an eye his ability to perform at the highest levels was gone. Today in Australia he and his playing partner Steve Sricker suffered the most lopsided loss in the history of the President’s Cup.
Coincidentally today Bill Miller co-manager of Legg Mason Capital Management Value Equity announced he was stepping down as CIO of LMCM effective April 2012. Like Woods Miller had a fifteen year period where he was seemingly unstoppable. His fund topped the performance of the S&P 500 every year over this time period. Then also like Woods that performance streak ended and his performance ever since has been nothing short of disastrous. Nor is Miller alone in this category. In investing a fall from grace is a common occurrence. In 2011 we have seen both John Paulson who conducted the “The Greatest Trade Ever” and Bruce Berkowitz, Morningstar’s manager of the decade both stumble badly.
There are clear links between sustained excellence in sports and trading/investing. Brett Steenbarger at the now dormant TraderFeed blog has written extensively about how trading is a performance discipline not unlike elite athletics. He writes:
The idea of trading as a performance discipline is that the process of mastering markets is similar to the process of mastering any performance domain, such as athletics or public speaking.
Given this we should not be all that surprised when elite performers ultimately fail. Sustained outperformance is the exception not the rule. The reasons behind the decline of Tiger Woods are likely many, but an inability to maintain his discipline is likely near the top of the list. Unlike in golf where one is quite literally playing against the course, in investing the course, i.e the market, is always changing. For instance Miller recently sold his entire stake in Eastman Kodak ($EK) after a decade and 90%+ losses.
We cannot be sure exactly what problems befell Miller, Paulson or Berkowitz. Their processes are, despite everything in the public domain, ultimately opaque. However a greatly increased pool of assets made their jobs infinitely more difficult. This made adjusting to changing market conditions all the more difficult. In any event it does not take much to change a winning strategy into a losing over time.
Golf, like investing, is a game that no one ever truly masters. Some are able to perform at a high level for long periods of time before seemingly losing whatever edge they had. Investors should never become complacent. Alpha is promised to no one.
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- Tuesday links: being the market
- Top clicks this week on Abnormal Returns
- Monday links: assuming more risk
- Sunday links: a clean slate
- Saturday links: studying failure
- Friday links: trading places
- Podcast Friday: active management
- Thursday links: making the illiquid liquid
- Wednesday links: human ingenuity
- Tuesday links: self-awareness and self-control