In the classroom we were constantly praised and awarded for complexity. A desire for higher marks meant creating more pages of writing, more conclusions, more assumptions, more models, more complexity, more and more. Yet when we exit the sterile classroom and apply that approach to the real world in search of profits, it often translates into less success, not more. Complex approaches usually fizzle out, whereas simple ones, combined with basic common sense and perseverance, tend to bring home the bacon.
The market teaches this lesson the hard way. It will take the complex, highly involved PhD thesis and spit it right back into your face in the form of a giant loss or even worse, a completely blown out trading account. The market doesn’t care about fancy complexity and therefore tends to reward the practical street hustler over the high level academic.
Long Term Capital Management’s blow out in the late 90s is a classic example of academia gone wrong. While the professors were scratching their heads as to why their ultra complex model failed, an unknown swimming pool contractor turned his original $10,775 into $18 million between June 1998 and December 1999.
It actually makes sense when you look at this phenomenon a little more closely. Nassim Taleb spells it out nicely.
“For, alas, though those who risk their own funds put a premium on simplicity and practicality, others—academics driven by “rank” and status, management consultants, economic “experts”, and finance analysts—have an incentive to indulge in complexity and muddle.” – NNT
Take Taleb’s observation and consider it in conjunction with this quote from one of our favorite market wizards:
“Win or lose, everybody gets what they want out of the market.” -Ed Seykota
While the academic, analyst, consultant, or keyboard warrior is looking for intellectual acceptance among a community or peer group, the street hustler practitioner is mining for one thing and one thing only -a profitable investing process. The pool contractor could care less whether or not his investment thesis is analyzed and praised on CNBC. He wants profits plain and simple. He is in the game to make money and that’s it.
So how can we make sure we are acting like a street hustler instead of an intellectual?