Jul 20, 2023

Being Right or Sounding Smart

Someone said this to me recently on Twitter: “Investing is about being right, not sounding smart.”

I said, “You must be new here!”

For as long as there has been a stock market, investing is about sounding smart. For example, if you’re raising money for a hedge fund, you must put on a suit, get in front of people, and sound smart. It doesn’t matter how skilled you are as a trader. If you don’t sound smart, you are not going to raise any money.

Most people who invest in a hedge fund want something that only goes up, never goes down, and has zero volatility. You think I’m kidding. Allocators don’t tolerate drawdowns and volatility. The days of the swashbuckling risk-taker with triple-digit returns are over. People basically want a CD that returns twice as much as a CD.

And to satisfy those conditions, a potential hedge fund manager must construct a slide deck filled with charts and graphs showing how this strategy is going to deliver bulletproof above-market returns, and he or she has to do so in such a way that the investors feel safe.

There is a larger conversation here. If you’re hiring professional money management, you’re doing so for a reason. Because the alternative is index funds, and if you invest in an index, you get the volatility of the index. Ideally, a hedge fund will deliver a higher Sharpe than an index. Ideally.

So there is not a single hedge fund manager in existence who talks and writes like a moron, no matter how good a trader they are.

The Value of Communication

As a finance professor, one thing I have always tried to impress upon my students is that communication skills are more important than anything they are going to learn about finance, and those communication skills are a better predictor of their career than their ability to solve for x in the Black-Scholes options pricing model.

Look at me—I have made a pretty good living writing about finance. One thing I’ve noticed about high-level finance guys that go on TV is that they tend to say obvious things, something that one of my undergraduates would have pointed out. But they’re wearing a $10,000 suit and a $100,000 watch, and they say it calmly with conviction. And we think they’re oracles.

Jeff Gundlach is an oracle. He is also wrong a lot. I know because I keep track of some of his calls. I’d argue that my calls are better than Jeff Gundlach’s. But I don’t get to go on TV because I’m too fat for my suits, and I don’t have any facial expressions.

So, I reiterate: Investing is about sounding smart, not being right.

The 10th Man’s Role

It’s not just the hedge fund world. It’s also mutual funds. It’s on the sell-side. You think the trader who is right all the time gets to be a managing director? Nobody cares about that. It’s also financial advisors—you wouldn’t give your money to someone who talks like a ding-dong. Really, the only place in finance where communication skills don’t matter is in the quant world. And even there, I would argue that they do.

How many money managers do you know who have had a long and productive career despite being wrong all the time? Quite a few. And they keep getting invited back on TV, and their presence is compelling. And when they speak, it is mesmerizing, and they keep attracting assets and underperforming. The person who tweeted that to me—that being right is more important than sounding smart—is very incredibly naïve.

I would also argue that the nature of being a finance personality means that you have to say the things that are popular and consensus to build a following. If you go on TV and say contrarian things, you are going to make people angry, and you won’t be invited back on TV. How many people went on CNBC in the last few months and said that commercial real estate was going to blow up the planet? Before that, how many people went on CNBC and said that the housing market was going to crash when interest rates went up?

That is the purpose of The 10th Man—when everyone thinks alike, it is his role to argue the opposing viewpoint. This is a safe space. I can do that in this newsletter without fear of retribution.

You subscribed to this newsletter because you wanted to get a divergent view. You subscribed to this newsletter because you wanted to listen to the guy who was right instead of the one who sounded smart.

If you want the best investment advice, take it from the person who is willing to take the reputational risk instead of telling people what they want to hear.

Jared Dillian, MFA

P.S. We’re going to get a correction in the stock market soon. I think that stocks have peaked in the near term and that we could have a correction of 10%–12%. That may not sound like much, but it will come as a surprise to a lot of people. Things will get bumpy. Make sure your portfolio is well-diversified and offers protection from the volatility. My Portfolio Suite can help, and you can join now for a limited-time discount. This offer expires soon, though—it’s coming offline on Sunday at midnight—so click here to get all the details before it’s pulled.

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