Escape from Freedom; The Glenn McGrath Model of Investment

Escape from Freedom; The Glenn McGrath Model of Investment

In his widely-acclaimed book “Escape from Freedom” (published in 1941) the German philosopher Eric Fromm extolled the virtues of reducing our own options – something that goes against the tenets of basic economics and even militates against common sense. He argued that lack of freedom represented by social or biological determinism made life easier. In this case with limited number of options, life has a well-defined structure with less requirement for decision making, low chances of confusion, enhanced commitment, and even lesser possibility of regret in hindsight.

Burning the Boats

Life in the ancient era was hinged largely on the above framework. There was this incident where a Chinese general called Xiang Ji set his army’s ships on fire on the night preceding an important battle with a formidable enemy – the Qin armies. As his troops watched the boats go up in flames they  realized that their rations also had been burnt down with the ships. From there-on they had only two options left – fighting their way out through the enemy ranks, or perishing in this self-imposed pursuit of glory. Armed with clear focus and absolved of fear, Xiang Ji’s heavily outnumbered army emerged victorious after a protracted set of battles defying heavy odds.

Even in the current era there are many instances where lesser number of options makes life less complicated and improves the average happiness levels. The tenacity and vigor that comes from shutting all doors save one can often lead to unexpectedly positive results.

More Options Better Than Less Options?

However in real world a rational human being (the “econ” in economics parlance) always prefers more options than less. A student is likely to be happier if she has admission offers from the three Indian Institutes of Management (IIM) at Ahmedabad, Bangalore and Kolkata than she is when she has just one offer – only from IIM Ahmedabad, even if the latter is considered to be much better than the other two IIM’s. Here the student gets more satisfaction if she has admission offers from Bangalore and Kolkata also since it adds to her self-esteem even though the latter offers are redundant in the face of the offer from Ahmedabad.

A football club manager wants to have 8-9 defenders in his squad of 25, even if he knows that 2-3 of them will never be used, even if he is convinced that the latter 2-3 defenders are not good enough to be in the first team, even if he knows that other 6-7 defenders are capable to carry through the season assuming the normal injury rates and form reversals. This is a case of over designing which eventually curtails the manager’s ability to rotate strikers as the season progresses. The manager, with his economically rational approach, gets more satisfaction in the knowledge that he has 4-5 additional back-up defenders versus the back up strength of 2-3 players that he may actually need.

Another example – an investment manager feels constrained if all his fund schemes are based on the same investment style. Most investment managers enjoy using discretion especially the one that comes with being in a position to apply various models and styles of money making. In this case the larger number of options add to the feeling of excitement, level of active involvement and sense of being in control which often act as emotional drivers for higher level of satisfaction.

However over-designing, or keeping all options open till end may not necessarily lead to the most desired outcomes.

Same line, same length, same height, same speed – ball after ball, over after over, spell after spell

Cricket lovers fortunate enough to have witnessed the great Australian test cricket teams of the nineties in action, would recall whom does the above description refer to. Glenn McGrath, arguably amongst the best fast bowlers of all times, will always be remembered for his persistent accuracy which led to his spectacular feats on record books and to his domination of the game in the nineties. He rarely tried variation, novelty or deception in his deliveries nor was he a speed merchant. McGrath used to surprise- even the best players of fast bowling- with his irritatingly repetitive but exceptionally accurate bowling spells. Most of his deliveries would be a couple of inches outside the off stump, would be of good length and at a pace of around 130-135 kmph.

McGrath had deliberately curtailed his armory and instead focused on perfecting one kind of delivery. He sent down similar deliveries over long spells and waited for batsmen to commit a mistake. This enabled him to curb his own mistakes as a bowler (as evidenced in his top class bowling averages and economy rates) as well as in reducing the need to make too many split second decisions (regarding what type of ball to deliver) before releasing the ball form his hand. Cutting down on options is what differentiated him – and fetched him spectacular success and provided elegance as a fast bowler – versus some other top class fast bowlers of his generation.

Where do investors stand

Admit it – when the friendly wealth manager suggests instruments like derivatives, commodities, cash equities, real estate, arbitrage fund etc doesn’t it feel like that the best way to go about it is to distribute the corpus amongst all these asset classes and instruments? Similarly, the freedom and the mandate to invest in any geography, in any asset class, and in any portfolio proportion is amongst the most alluring factors for a professional fund manager. Indeed, there are many fund managers who manage more than one fund schemes based on meaningfully different investment styles.

Consistently Strong Returns -Over Long Term- Demand Consistency in Style too

History is replete with examples that suggest that sticking to one style offers better success rates for investors. Warren Buffet (quality, margin of safety, buy and hold) and Charlie Munger (quality, buy and hold), Phil Fisher (quality, buy and hold), Ben Graham ( margin of safety), John Templeton ( contrarian), Peter Lynch (quality, bottom up), George Soros ( global macro, arbitrage), Howard Marks( margin of safety, arbitrage), Jim Simons ( quantitative strategies), Ray Dalio ( Arbitrage) etc are some legendary investors who have led the investment world with consistency and scale of their performances over long periods.

While they have different styles and philosophies for investment, one factor that separates these names from the “also rans” is that they stick to their styles, philosophies and principles with extreme diligence. Even as their styles have evolved over time they have never spread themselves thin by chasing too many ways of money making. Keeping down the number of fundamental options in terms of styles and philosophies at a minimal level has helped many of these super investors reduce the number of decisions they take thus shrinking the odds of mistakes, stay within their circle of competence, avoid procrastination, and remain focused.

There are Always Exceptions, But Not Many

Of course, Phil Fisher’s saying that “There are exceptions to every rule; though not many” is apt here too. There are some investors who have delivered good returns even with a medley of investment styles in action. However, such investors are much less in number as compared to the prophets of consistency named above.

Alignment of Philosophies of Life and Investments

Perhaps among the most important drivers of an investors’ performance over long term is if her investment style is aligned with her philosophy and perspectives on life in general. If one has done enough introspection then one will be clear on one’s basic value system, principles and philosophy of life. There can-not be a multitude of value systems and philosophies that a person can hold and follow in life. Accordingly, the investment style too must have some core, non-negotiable factors which are aligned with the person’s perspectives on life, and which if practiced with diligence over time can fetch healthy rewards. It is very important for an investor not to try to be someone who she is not.