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.
Abnormal Returns is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com. If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small commission, yet you don't pay any extra. Thank you for your support.
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.
Abnormal Returns has over its seven-year life become a fixture in the financial blogosphere. Over thousands of posts we have striven to bring the best of the financial blogosphere to readers. In that time the idea of a “forecast-free investment blog” remains as useful as it did six years ago. More »
- Thursday links: a potentially false doctrine
- A perfect example of the behavior gap at work
- Wednesday links: consistent outperformers
- Should you buy what Tony Robbins is selling?
- Finance and digital journalism: Charlie Rose edition
- Tuesday links: easy to explain
- Monday links: buyers of last resort
- Sunday links: your own portfolio
- Top clicks this week on Abnormal Returns
- Saturday links: smart beta strategies