I really enjoyed a recent blog by Cliff Asness of investment firm AQR Capital. It’s called “Liquid Alt Ragnarök?” and it’s on how to deal with the intense pain of investments going badly.
Liquid Alt is the name of AQR’s investment strategy. It’s explained in the paper, but that’s not the important part. The important part is about the extreme discomfort that arises when your investment strategy performs poorly. Ragnarök is kind of like the end of the world in Norse mythology, and yes, things have been going badly enough that Asness wonders if this is it.
Well, not really. But the thing is he feels awful. I mean terrible – even though he still believes in his strategy and hasn’t found any evidence to stop believing in it. He starts out this way:
“This is one of those notes. You know, one from an investment manager who has recently been doing crappy . . . I must admit up front that they all sound kind of alike to me. Performance attribution sounds like an excuse . . . There is often at least a dash of a tone of ‘we’re losing because everyone else is an idiot.’ Optimism for the future often sounds forced and self-serving. . .”
The paper is a good review of what has been happening with value investing, which has had an unusually long period of poor performance. AQR is not a pure value investor -- but it does believe in value among other attributes. You might say that AQR likes individual stocks with good value but also good momentum, low risk, and high quality. But again, that’s not the important part here.
Asness talks about the psychological toll that poor performance has taken on him. He writes that he is embarrassed he has had such a difficult time keeping a “long-term” perspective even though it is his job to encourage other people to stay “long-term.” He even invokes Casey Stengel, the 1962 Mets coach who lost 120 games, saying, “Can’t anybody here play this game?”
But the thing is, there are really only two things you can do when your investment strategy stops working. First you have to re-examine why you believed in your investment process in the first place and look at strength of the evidence behind it.
Second, you have to look for any kind of evidence that ‘this time is different’ and why what has been true wouldn’t be true going forward. Of course, this is very hard to do. You look at the numbers. You look for real-world explanations. But there are no clear answers.
Asness goes through this exercise himself in the paper and can’t find any evidence for things being fundamentally wrong. He concludes with Winston Churchill saying, “If you’re going through hell, keep going.” Actually what Asness says is, “So, while it’s been hell to go through for a value investor, we’re going Winston Churchill on this one.”
This 23-page paper isn’t for everyone. There’s some geeky investment stuff in it, and Asness’s sense of humor might not be for everyone either (though he’s pretty funny). But the paper is a great account of how bad investment can feel -- and how hard it is to separate your head from your heart, or your nerves.
You know, it’s easy to trivialize those small declines from the past you see when you look at a graph of a generally rising uptrend over the long-term. Those small blips don’t look like anything at all. But it is so very different when you’re living it every day. “Time slows down in a drawdown,” Asness says. His paper can be found here (https://www.aqr.com/Insights/Perspectives/Liquid-Alt-Ragnarok).
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