A Lesson from Bull Durham
I was thinking this morning about Bull Durham, one of the best movies of all time. There is a great moment where Kevin Costner’s character gives advice to an up and coming pitcher with a lot of potential, and Costner tells him he has to play the game of baseball with a combination of fear and arrogance. I believe that is probably good advice for prospective investors too.
Many of you know I am very much a student of history. I have a lot of books in my office, most of them about history. One of the more interesting things I have been reading recently is a panorama of World War II, working through autobiographies and war diaries from participants on all sides of the conflict.
How Wrong the Insiders Were
Because these were diaries, they were written in real time, and it is fascinating how many bad takes there were. The Nazis were excited about the entry of the US into the war. Mussolini was ecstatic, a tidbit I learned from reading the diary of Count Ciano, Mussolini’s son in law and foreign minister. The scope of the horrible takes was remarkable, and they led people to make some horrible decisions.
But the market was not deceived.
The German stock market peaked even before the Nazi offensive stalled in front of the gates of Moscow, which was the high-water mark of Hitler’s victories. At the same time, the US stock market, which had peaked in ‘29 and gone nowhere for a long time, bottomed in May of ‘42, four weeks ahead of the Battle of Midway, which in retrospect marked another fundamental turning point in the war. The market nailed both of these turns – in advance. If you are not afraid of the market’s almost miraculous ability to forecast, you are not paying attention.
Choosing Your Disagreements with the Market
That is what I think of when Kevin Costner’s character talks about fear and arrogance. If you are going to be an active participant in markets, you need a certain sense of both. Fear, because the market is just really damn smart. It is the collective wisdom of millions or even tens of millions of participants, and it has a wonderful track record of getting important things right in the long run. The challenge you face as an active investor is that you are facing off versus a machine that can distill all of that information and judge it appropriately. Respect, and even fear – is warranted.
I have been an active investor for almost 30 years and during that time I have learned to have a great sense of humility and respect for the insight of the market. But when your job is to seek to add value relative to the market, your job is to choose the disagreements you are going to have with it, and the most important thing is: choose wisely.
Where I Choose to Disagree
The clearest area where I chose to disagree with the market remains in the energy complex, where we are now six months into one of the largest energy disruptions I have ever studied. Sometimes it seems to me that I am the only one anchored on what I view as the long-term importance of this.
Remember the 1973 oil disruption, when the Arabs collectively chose to punish the US for its support of Israel in the 1973 war. That was essentially a 4% supply cut for four to six weeks, and it was enough to triple crude oil prices and prompt a recession in the US. The world responded by building strategic petroleum reserves, which have buffered the initial hit from the ongoing crisis in the Straits of Hormuz. But if my math is correct, that we are facing an ongoing 12% supply hit, that is three times the size of the ‘73 disruption, and this shortfall has endured for six times as long.
So my math says that is a crisis that may be 18 times worse than the 1973 oil shock. The 1973 oil shock prompted a near quadrupling in the rig count as investors woke up to the need to try to increase production. For the S&P 500, the 1970s were generally a lost decade – but for oil services? The companies whose job is to help oil companies increase production? No, for them, stock performance outperformed other sectors.
I believe that there is always a bull market somewhere. And – in my experience – it’s most often found in overlooked corners of the market.
For these reasons, I generally continue to approach investing with a combination of fear and arrogance. I am always fearful, because there is no investment thesis that cannot be improved by further study and questioning.
The lessons of history tend to support this conclusion.
That much is clear from my study of the dairies of key decision makers in World War II. The market got the war far more right than even the insiders who supposedly had better information.
If outperformance is your goal, I believe that you should compete with the market with both fear and arrogance.
