Bob Maynard is one of the best investors you’ve probably never heard of. He runs the $14 billion pension fund for the state of Idaho and his long-term returns are consistently in the top quartile of the institutional fund world.
The thing that sets Maynard apart from his institutional peers is the fact that he runs a more conventional portfolio that eschews the complex, illiquid model that many of these large pools of capital now run. These days many institutions mainly focus on building portfolios using hedge funds, private equity and real assets in lieu of the more traditional public markets, which is where Maynard invests.
I’m doing some research for a project I’m working on and came across an old presentation Maynard gave to a group of investors outlining his approach. Here are the basics:
- Start with a long-term time frame in mind
- Adjust for the short-term (i.e., stay liquid) to survive extreme market dislocations
- Control leverage
- Avoid huge mistakes
- Publicly equity oriented
- Broadly diversified by asset class, but not overly diversified
- Control costs
One of the more interesting aspects of Maynard’s philosophy is how this more conventional way of managing money in the institutional investment community is now an outlier. A simple approach is something of a contrarian stance in the more complex world of pensions, endowments and foundations.
In his talk, Maynard says that there are three ways to make money in the markets:
Option #1 is physically exhausting: You work harder than everyone else.
Option #2 is mentally exhausting: You’re smarter than everyone else.
And option #3 is emotionally exhausting: You need to have patience with a long-term strategy and mindset.
Most professional investors assume that they fall into option #2 while many also try their hand at option #1 to make up for any shortfall in smarts. My feeling is that there are always going to be people who are smarter than you in the markets and working harder doesn’t necessarily lead to better outcomes. Therefore, the third option offers the best chance for the majority of investors to succeed.
But an emotionally exhausting investment approach offers it’s own challenges. Maynard says this is the type of plan that takes 5-20 years to see the best results. Shorter time frames in the 1-4 year range won’t always lead to favorable outcomes. You have to be willing to accept volatility and abandon the quest for short-term alpha. It’s also boring and not as exciting to take a more long-term stance in the markets. And maybe the hardest part of all is that it’s much easier to do something rather than nothing even when doing nothing is the right move the majority of the time.
Hearing Maynard’s description of the various ways to make money reminded me of the Charley Ellis classic, Winning the Loser’s Game, in which he talks about the four ways to beat the market:
(1) Market timing
(2) Stock or industry selection
(3) Changes in portfolio structure/strategy
(4) An insightful, long-term investment concept or philosophy
Ellis tells the reader that the only way any of these four works is if someone else is wrong. The first three are much more intellectually stimulating than the last, but also much harder to execute. Yet many investors still try their hand at 1-3, hence the fact that many end up on the wrong end of a bad trade.
One of the more simple, yet profound points that Ellis makes in his book is the importance of minimizing mistakes to succeed. He talks about the results from a famous study on the game of tennis that shows the biggest difference between professional and amateur players:
He found that in expert tennis about 80 percent of the points are won, whereas in amateur tennis about 80 percent of the points are lost.
I think one of the first steps for any investor is to define what their edge in the market actually is. Most don’t do this and mistakes ensue. This is true for professional and amateur investors alike. You have to understand what type of investor you are in order to succeed. In both the markets and in life it’s useful to define your limitations.
Conventional Investing in a Complex World (go to minute 26 for this topic)
Winning the Loser’s Game
Now here’s the stuff I’ve been reading this week:
- Past performance is overrated (Howard Lindzon)
- The grey markets hypothesis (bps & pieces)
- Portfolio positioning vs. portfolio construction (Reformed Broker)
- Brexit happened. Now what? (Washington Post)
- The market’s response to crisis (Irrelevant Investor)
- Scary vs. dangerous (A Teachable Moment)
- Live on less. Have more. (Bason)
- A dozen lessons from The Simpsons (25iq)
- Every financial crisis is different (Morningstar)
- Valuations and a wide range of outcomes (Pension Partners)
- What will you do when your strategy underperforms (Abnormal Returns)
- Your new word of the week: Agnotology (Bloomberg View)