Investment Advice from Tom Brady and Howard Marks
Tom Brady would make a great investment manager.
Alright, maybe that’s a stretch. But listening to Brady give an interview this morning, I couldn’t help but notice he attributes his success to many of the same disciplines successful investment managers do.
“We’re trying to avoid the big mistakes.”
“We try to prepare for everything and stick to our game plan.”
“We play with discipline, try to play smart football and not make dumb mistakes.”
“We think about the risk/reward balance.”
“You can’t win a game in the NFL until you keep from losing it.”
Despite being one of the greatest quarterbacks ever to play the game, his reputation isn’t one of flashiness. Most seasons, his stats aren’t gaudy and he is rarely an early round pick in fantasy football drafts. For the most part, he’s known as a great game manager and admired for his consistency. In any given year his numbers are frequently overshadowed by many of his peers. Only twice in his fourteen-year career has he had the highest quarterback rating in the league.
Last spring, the New York Times set a corner of the finance world ablaze with an article titled: How Many Mutual Funds Routinely Rout the Market? Zero. The article cites a study showing very few actively managed mutual funds are in the top quartile of performers year after year. The author leans on this data to conclude that since most managers aren’t consistently top performers, and it would be difficult for investors to pick those managers ahead of time, investors would be better off going with passive index funds.
“And that, in a nutshell, is the kernel of the argument for buying index funds.”
Does a manager have to outperform every year to be valuable? Is it possible for very good managers to have average or below average years? I think so, and so does Howard Marks.
For those unfamiliar with him, Howard Marks is the founder of Oaktree Capital Management and is regarded as one of the greatest investors of his generation. His funds have racked up annual gains of over 19% (after taxes/fees) for the past 22 years. Earlier this year he was a guest on Barry Ritholtz’s radio show Masters in Business. Discussing how he decided to pen the first of his now famous Chairman Memos, Marks told the following story:
HM: I had dinner with the CIO of a large pension fund and he explained to me that in his fourteen years on the job, his fund had never been above the 27th percentile or below the 47th percentile [annual performance]. He was solidly in the second quartile of pension funds. And as a result, for the 14 years overall, he was in the 4th percentile.
BR: So in other words, by not having any huge blowout years, which often follow those top ten years, he gradually managed to rise to the top.
HM: He never had a top ten year. He was solidly a bit above average and because of the peculiar math of investing, that made him one of the best in the world.
BR: That’s amazing.
HM: And then, I came back to New York and read about the president of an investment management firm that was having a particularly bad year that year, and he said, well it’s unfortunate, but the truth is if you want to be in the top five percent of money managers, you have to be willing to be in the bottom five percent. And I said to myself, I am absolutely unwilling to be in the bottom five percent and I don’t care if I am in the top five percent in any given year. Obviously my previous discussion had shown that it’s not essential. But I sure didn’t want to be in the bottom five. So that was a good look at two different ways to think, and it was clear to me which one had the appeal.
BR: So consistently, second quartile over long periods of time puts you in that top 5% or better.
HM: And no blow ups.
In that first Chairman Memo, dated October 12, 1990, Marks says:
Simply put, what the pension fund’s record tells me is that, in equities, if you can avoid losers (and losing years), the winners will take care of themselves. I believe most strongly that this holds true in my group’s opportunistic niches as well – that the best foundation for above-average long-term performance is an absence of disasters. It is for this reason that a quest for consistency and protection, not single-year greatness, is a common thread underlying all of our investment products.
Throughout his career, Tom Brady’s average rank season to season for QB rating is 8th. Only once has he ranked in the bottom half of the league in this statistic for the season (17th in 2013). This remarkable consistency, without bad years (blowups), puts Brady in the top 5 of all-time for career QB Rating.
Comparing investing to football isn’t exactly apples to apples but the lessons here are important. You don’t have to get a first place trophy every single year to be successful. If you play smart (manage risk), stick to the plan and don’t make dumb mistakes, consistent results usually pay huge dividends down the road.
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