the tao jones
the research puzzle
April 14, 2010
Looking to step back from the market and get some inspiration, on Monday I reread The Tao Jones Averages by Bennett Goodspeed. Subtitled A Guide to Whole-Brained Investing, it was published in 1983, the year I entered the investment business.
Twenty years prior, DLJ had issued the first in-depth research report on a company, which kicked off an era of "analexia" that Goodspeed bemoaned and which still is in force. He argued instead for an approach reflective of the Tao (conveniently pronounced "Dow") that offered a wider net for gathering information and a broader perspective for making investment decisions.
It's always interesting to go back many years later and see whether a book is still relevant. Since this one deals with the timeless characteristics of human nature rather than specific investment ideas, it's probably not surprising that it holds up quite well. Many of the tenets of what we now call behavioral finance are presented in a whimsical but effective fashion.
The passages about herding are all the more interesting with the benefit of hindsight, given that the subsequent quarter of a century provided such stunning proof that market players spend much more time trying to "keep up with the Joneses" than they do studying the fluidity of economic structures and the temporariness of things -- if they did more of the latter, they might see the need for a little risk management.
As the book makes evident, seeing clearly is highly valuable in investing, but it is much is much easier "to adapt the world to our belief systems, rather than try to understand it as it is." While the old saying is that "I'll believe it when I see it," in actuality "I'll see it when I believe it" is how we operate most of the time. (It was eerie to once again read that observation in the book after listening to all of the Wall Street titans say that no one saw the financial crisis coming.) In general, we don't embrace or evaluate new information well at all.
While it's tempting to view the book as gauzy Eastern philosophy with no practical application, its central message is that a good investment process is one of balance, and that the lopsided approach practiced by most organizations and individuals is doomed to fail. Based upon his experience and interviews with notable investors, Goodspeed included concrete suggestions on how to make better decisions. (One of the founders of Inferential Focus, which gathers and interprets intelligence for its investment and corporate clients, Goodspeed died the year the book was published.) As I argued in my own recent piece on "structured myopia," it is critically important to know where your blind spots are and to try to eliminate them before they do you damage.
A number of "real world" investment situations were included in the book and are instructive today despite being of the now-forgotten past. Especially of interest are the stories of investors who looked at information differently than the crowd to garner huge gains. I also found a couple of things prophetic: Jim Rogers was quoted as saying that oil prices were unsustainable and destined to go to "ten dollars or so." Heresy at the time, it came true two years later. The Inferential Focus analysis of the U.S. auto industry's structural weaknesses (including the looming health-care burden) was an inconvenient truth that was ignored repeatedly in the ensuing years by those in hot pursuit of rallies in the stocks, but it was right on the mark.
For those that are suckers for apt quotations, Goodspeed included a raft of them. A couple of my favorites:
"Nothing is more suicidal than a rational investment policy in an irrational world." - John Maynard Keynes
"Stupidity well packaged can sound like wisdom." - Burton Malkiel
Our challenge as investors is to recognize the messages that we are being given by others, the belief systems that we rest our actions upon, and not just the type of environment that we are in now but how it is changing. This book (unfortunately long out of print) is a fun read whose lessons are aimed at correcting our urge to "understand running water by catching it in a bucket."
Our methods and our minds are resistant to change. If nothing else, reading a book like this forces you to consider the possibility that you aren't seeing the complete picture. Sound familiar?
 Amazingly enough, shortly thereafter a novel by David Payne was published with the title Confessions of a Taoist on Wall Street.
 Inferential Focus : The firm's site has some interesting examples of its work. Disclosure: At different times in the past, I have been a client of and a consultant to IF.: http://inferentialfocus.com/
 the research puzzle : The "seeing" theme keeps appearing.: http://researchpuzzle.com/blog/2010/02/25/structured-myopia/
Tom Brakke, CFA, is a registered investment advisor, in addition to providing consulting services to investment organizations and advisors about how to structure processes for better decision making. This piece was originally published on his blog, the research puzzle.
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