Quote of the week:

“Have no fear of perfection, you’ll never reach it.” — Salvador Dali

Navigating the madness—and wisdom—of crowds

One investing concept that’s essential to appreciate is that the stock market behaves bothrationally and irrationally. Over the long run, the market inevitably gets it right: there is wisdom to crowds. But in the short-term, markets—just like crowds of people—can go mad and act irrationally. Though these moments are precisely when the best opportunities present themselves, few people are able to capitalize. Why is that? “Survival might be number one,” says Michael Mauboussin in a recent conversation about “contrarian investing” with Barry Ritholtz. “Blame would probably be number two.”

Mauboussin is the Head of Consilient Research at Counterpoint Global at Morgan Stanley Investment Management. His book, Expectations Investing, is a must-read for any long-term investor. In his recent conversation with Ritholtz, Mauboussin explores the three conditions necessary for market efficiency—as well as what happens when one of those conditions is absent. 

“The way I think about market efficiency is really the notion of wisdom of crowds. And when crowds are smart, you need three conditions: (1) diversity (i.e. heterogeneous points of view), (2) aggregation (i.e. some way to bring that information together), and (3) incentives, which are rewards for being right, and penalties for being wrong…  But know there’s the madness of crowds, too. So how does that come about? And the answer is, when one of those three conditions is violated. And by far the most likely to be violated is diversity. Rather than us thinking independently, we correlate our views. I think the biggest thing we need to think about: when are we all thinking the same way? When are we all standing on the same side of the ship?”

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Lessons of success (and failure) from an elite coach

Though he’s not a household name, Paul Assaiante is the winningest college coach—ever. During his tenure coaching men’s squash and tennis at Trinity College, Assaiante (who is friends with Bill Belichick) racked up 17 national titles, including 13 consecutive championships, and gained national attention for an unbelievable win streak: from February 1998 to January 2012, his players won 252 straight matches. 

In a recent conversation with The Knowledge Project, Assaiante explores a number of subjects, ranging from the need to practice your weaknesses, how to manage emotions, and the importance of resiliency. “I am very concerned for this generation of young people because we as adults in their lives will do anything—and it’s human nature, but we’ll do anything to help them not experience discomfort,” he says. “We’ll do anything to make sure they don’t have to go through pain. And it’s through the pain that learning occurs.” He continues: 

“And so in the name of love, we hurt young people’s development. And I think one of the most important qualities to success in the human being is resilience. And the only way you can become resilient is to fail. We have to let them fail. And listen, I have failed in this. I’m not preaching that I’ve done this all right. I haven’t, but I’m trying. Our little one would be walking down the hallway in her diaper, and she would fall on her bum. If when she landed on her heinie, we [made a gasping sound], she would look at us and cry. If she fell on her bum and we said,
‘Yay!’; she [got] up, wipe[d] herself off, and walk[ed] away. It actually starts that early.”

A few more links I enjoyed: 

2023 Investor Letter – via Stone Ridge
“Creativity is impossible without intellectual friendship. When it comes to expertise, we never pretend we have it when we do not, but we are equally unafraid of its absence. I view my main responsibility as helping to create conditions that facilitate uncluttered thinking, rapid learning, and intellectual hunger, not fear, that we do not know what we do not know.”
NVIDIA’s CEO on Leading Through the A.I. Revolution – via Harvard Business Review
“Most autonomous systems, whether it’s as a robotic car or it’s a large organization, want to be designed in such a way that you have diversity and redundancy. And then above that, you want human in the loop. Sometimes you get to a level where you don’t believe you need human in loop inside the car. Maybe you have human in loop outside the car and you’re monitoring the effectiveness. This is no different than air traffic control for example: you have two pilots. You also have redundant autopilot systems, but you also have air traffic control. And pilots keep an eye out for each other. And so there’s a lot of different ways that autonomous systems are designed for maximum safety and reliability. The same line of thinking will have to be done for generative AI.”
2023 Annual Investor Letter – via Tsai Capital 
“There seems to be a heightened level of uncertainty about the economy and the state of the world today. I’m horrified and saddened by what’s happening in the Middle East. But for as long as I can remember, the news has never been good – not really. And yet, over the past 24 years, our economy, as measured by U.S. Gross Domestic Product, appreciated by about three times, from $9.6 trillion to an estimated $26.2 trillion. Not coincidentally, the market, as measured by the S&P 500 Index, also appreciated by about three times, from about 1,464 to 4,770. The data is clear. Over time, economic output and the stock market closely track each other.”

This information should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the investments or strategies referenced were or will be profitable, or that investment recommendations or decisions we make in the future will be profitable. This article contains links to 3rd party websites and is used for informational purposes only. This does not constitute as an endorsement of any kind. While Nightview uses sources it considers to be reliable, no guarantee is made regarding the accuracy of information or data provided by third-party sources. Nightview Capital Management, LLC (Nightview Capital) is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Nightview Capital including our investment strategies and objectives can be found in our ADV Part 2, which is available upon request.