Articles | Steven Ayers Investment Management

The Stockdale Paradox and the Pandemic

Thursday, July 02, 2020

The Fourth of July is going to feel weird this year. Several years ago we moved to a house very close to the parade route of a neighborhood Fourth of July parade that has been a mainstay for decades. We turned these morning parades into our own tradition. We would invite any of our friends who were hardy enough to wake up and come over for a 9am parade on a day off, serve bagels, breakfast tacos, coffee, juice and/or mimosas, and watch the various scout troops, school and civic groups, and the famous Lawn Chair Brigade march by while enjoying the reverie and each other’s company. Not this year. Add this disappointment to the mountains of missed graduations, cancelled proms, deferred vacations and postponed plans great and small that we have all lost to the pandemic. Worse still, there appears to be no end in sight. The best hope we are given is that a safe and effective vaccine will be developed, tested, approved and made available “soon”.

It can be really hard to find joy, or even hope, at times. Recently though, in an unexpected place, I found some wisdom that has changed the way I think about our current situation. A podcast interview of business writer and researcher Jim Collins I recently listened to led me to pull my copy of his 2001 classic, Good to Great, off the shelf for a reread. Good to Great is about the journey that a number of companies took from being average or worse to a sustained period of greatness as measured by outstanding stock market performance versus the indexes and its industry competitors. In Chapter 4, entitled “Confront the Brutal Facts (Yet Never Lose Faith)”, Collins discusses the “powerful psychological duality” in which management teams would stoically accept the reality of their current situation, no matter how painful, while simultaneously maintaining an unwavering faith in the endgame and their ability to prevail. Collins’ research group coined the phrase The Stockdale Paradox, named for Admiral James Stockdale, to describe this duality.

Admiral Stockdale was the highest ranking United States military officer in the “Hanoi Hilton” prisoner-of-war camp in the Vietnam War, and was held captive from 1965 to 1973. Not only was he tortured repeatedly, during his time of capture he had no set release date and no prisoner’s rights. He had no clear reason to believe that he would survive to see his family again. Collins, through some fortunate coincidences, had an opportunity to interview Admiral Stockdale on the topic of persevering in the most brutal of environments where conditions were horrifying, survival was questionable and the amount of endurance that would be needed to see the end was unknowable. Collins describes reading Stockdale’s account of his time in captivity, co-written with his wife, In Love and War, and talks of feeling depressed reading this account - even though he was doing so in a comfortable office knowing the story’s happy ending! He asked, “if it feels depressing to me, how on earth did [Stockdale] deal with it when he was actually there and did not know the end of the story?” (Italics in the original)

Admiral Stockdale’s answer was, “I never lost faith in the end of the story. I never doubted not only that I would get out, but also that I would prevail in the end and turn the experience into the defining event of my life, which, in retrospect, I would not trade.” After letting that answer sit for some time, Collins asked, “Who didn’t make it out?” Stockdale’s answer was, “Oh, that’s easy. The optimists.” This answer made no sense to Collins, so he pressed Stockdale to explain. “The optimists...were the ones who said, ‘We’re going to be out by Christmas.’ And Christmas would come, and Christmas would go. Then they’d say, ‘We’re going to be out by Easter.’ And Easter would come, and Easter would go. And then Thanksgiving, and then it would be Christmas again. And they died of a broken heart.”

Confronting the pandemic, we do not control the virus, nor do we control the decisions of leaders; the speed with which an effective, safe vaccine is developed; or the choices of others in our communities. The facts are brutal: The virus is lethal. It is contagious. There is yet to be an effective proven treatment. There is no vaccine. Surviving an encounter with the virus does not appear to guarantee a return to previous levels of health. The supply of tests and personal protective equipment available to the public is inadequate to meet the need.

Like Admiral Stockdale locked up at the Hanoi Hilton with many fellow soldiers, we find ourselves at the mercy of a force that cares not one whit for our well being. In our case it is a microscopic pathogen. Nobody knows the timetable on which the myriad problems we face individually and as communities, states and a country will be solved. So each of us is left with the option as individuals each day to make reasoned, if difficult, choices about how we safely engage with the outside world. We can choose to face the brutal facts, and forego events and gatherings that, while fun, meaningful or important, are widely understood to promote the spread of the virus. Because choosing to say no to doing the things we want, repeatedly, can be so tough to do, we must keep in mind the reason why we are doing so - to preserve the health of ourselves, our loved ones and our communities until the virus is subdued, no matter how long that may take. The other choice is to behave like Stockdale’s “optimists.” The optimists at the Hanoi Hilton never got a break from their captivity, but maintained time-certain hope without evidence of a release date that came and went with no change in their conditions. Many of today’s optimists believe, without evidence, that they will be able to enjoy the activities of life today as they always have and that they and their loved ones will be spared infection because of luck, or age, or that the precautions they have taken will not be nullified by the carelessness of those around them.

Seeing the situation of the pandemic through the lens of Admiral Stockdale’s experience was eye-opening. Even while restricting our activities, how much more freedom does each of us have than Admiral Stockdale did? We can choose what we eat for dinner. We can sleep in a comfortable bed. We can listen to (or perform, or learn) music. We can read the Harvard Classics. We can read, or watch, Just Mercy. Someone once said that “everyone is fighting a hard battle.” You don’t know mine; I don’t know yours; but I am sure most of us cannot imagine the hard battle that the Admiral faced. It hurts me to think about all the events and occasions I have missed and will likely continue to miss. I’m saddened that I did not get to attend my nephew’s graduation from college, because there was no ceremony. Entering July without a full schedule of Major League Baseball games to watch would have been unimaginable a year ago. Football season is in peril. But we have been seeing that trying to jump the gun on getting back to normal is not working. Reading that long-forgotten chapter from a twenty-year-old business book convinced me that playing the long game, even at the cost of giving up many of the things that I and the people I care about love for an unknown period of time, while maintaining faith that we will ultimately prevail, is the key to enduring the seemingly unendurable situation we are experiencing.

I welcome your feedback and comments.

Managing Loneliness As We Age

Friday, November 15, 2019

An article I saw in The Wall Street Journal before the holidays really hit home with me on issues around aging, health and lifestyle. More Than Ever, Americans Age Alone, published two weeks before Christmas, profiles several baby boomers to illustrate a larger trend of aging alone, and the risk that doing so poses to health and happiness. The article claims that loneliness “is as closely linked to early mortality as smoking up to 15 cigarettes a day or consuming more than six alcoholic drinks a day, and goes on to say that eight million Americans that have no close kin, a figure that is expected to rise. The author attributes this statistic to the fact that “[t]he baby boomers prized individuality and generally had fewer children and ended marriages in greater numbers than previous generations.” Isolated adults “are at an increased risk of depression, cognitive decline and dementia, and...social relationships influence their blood pressure and immune functioning, as well as whether people take their medications.”

Worrisome stuff, to be sure, and reading such an article at the height of the holiday season was sure to be an emotional trigger for many, myself included. I recognize my good fortune in having a number of close friendships and a loving wife. Much of my work life, however, is spent alone reading, writing or researching. My wife spent 2018 completing a degree in mathematics, which meant many of her evenings and weekends in the past year were dedicated to her studies. As a result of decisions we each made in our younger days, we live great distances away from some of our closest friends and from other family members. Neither of us has the easy closeness that can result from staying in or returning to your hometown, but we are not interested in sacrificing the good things in the lives we have built together for a chance for one of us to capture that feeling. I have known for some time that, because of my work and life situation, it would be important to make a concerted effort to attend to my own social needs.

Reading the article brought to mind the excellent 2012 book, Triumphs of Experience by the former director of the famous Study of Adult Development at Harvard University, George Vaillant. This study has tracked the lives of 268 Harvard University male undergraduates from the classes of 1939-1944, and continues tracking the surviving men today. The book is well worth the time to read, and is full of interesting conclusions, although I found reading the book required considerable focus. Some of the most important takeaways can be absorbed more quickly through reading this 2017 Harvard Gazette article or watching the November 2015 TED Talk of the study’s current director, Robert Waldinger. The five important points he shared from eighty-years-and-counting study with the TED audience and over twelve million YouTube viewers to date:

1. “Good relationships keep us happier and healthier. Period.”

2. Money and power correlate poorly with happiness; it is better for you to be content with your work.

3. We can become happier in life as we proceed through it - our start in life need not determine our path.

4. Connection with others is essential for joy, and becomes even more so as we age.

5. Coping well with challenges makes you happier.

The learnings of the Harvard study, commonly known as the Grant Study, were further validated by a meta study done by Brigham Young University’s Julianne Holt-Lunstad. Her review of 148 independent studies on loneliness, cited in the Wall Street Journal article, found that greater social connection was associated with a fifty percent lower risk of early death. It seems clear that humans are meant to be social animals, building and maintaining caring relationships is important, and that long-term isolation can be very unhealthy. Because each of our life situations is different, we may not find the kind of love and validation we need among family or work colleagues, and thus need to seek to cultivate relationships elsewhere. Dr. Waldinger points out that connectedness - relationships - increases in importance with age. The point about improving our lives even if we are not born into great circumstances is also exceptionally important to retain. The research shows that one can influence one’s own trajectory, and need not maintain a fatalistic attitude towards aging and happiness.

Many of us have made our lives in cities far away from our hometowns. Some never married; some divorced and never remarried. Some are childless; some are only children. Some of us have lost our parents; others have parents and/or siblings but those relationships may be distant or irreparably broken. Some work alone or in environments that do not lend themselves well to connectedness or cultivating friendships. Those for whom connectedness does not come naturally or easily might need to take affirmative steps to build and maintain a connected life.

The government of the UK felt strongly enough about the public health problems associated with loneliness that it established the Jo Cox Commission on Loneliness in 2018, and appointed a Minister of Loneliness. The Campaign to End Loneliness, also UK-based, says there are nine million lonely people in the UK - more than one in eight Britons. Each website is full of data and reports about the impact of loneliness on health, and advice for public officials and others with a public health responsibility. What advice is there for those who seek to take care of themselves? The Campaign to End Loneliness offers the following:

Think about yourself. Invite friends or family to visit. When you feel lonely, you may not think others want to visit. People do often respond to invitations and will be willing to spend some quality time with you.

Look after yourself. Taking steps to improve your health, eating better, exercising gently or taking other steps to be active can help you relax more fully in your own company.

Find local activities. The Campaign’s website mentions some UK-based groups, but every community has local activities available for all interests and ages.

Speak to a health worker if you feel very lonely. Long term loneliness could contribute to later depression and other help problems. A physician should be able to direct you to local services that can help.

Volunteer your time. Causes large and small are constantly in need of help. Volunteering can help one feel good about making a difference and provide social contact. The Campaign cites UK organization, but in the US, the United Way is probably the best-known volunteer clearinghouse.

Loneliness does not only affect older adults. The Jo Cox Commission on Loneliness defines loneliness as “a subjective, unwelcome feeling of lack or loss of companionship, which happens when we have a mismatch between the quantity of social relationships that we have, and those that we want.” All of us will feel this way occasionally or for stretches of time during our lives. Creating opportunities to mitigate loneliness can support mental health during these inevitable stretches. Below I share a couple of successes I have found cultivating connectedness in my own life.

Creating and maintaining rituals with friends or family. Not long after moving back to Austin, I discovered that a good friend from college who lived nearby had been writing a blog devoted exclusively to reviewing books he had read. I had wanted to broaden my reading interests away from business and economics, but had no plan for making myself do so. Reading my friend’s blog also intrigued me, as I discovered interests of his of which I never knew during our college days. We started a monthly book club, invited other friends to join us over the years, and have managed to keep it going into its second decade. Maintaining this ritual has extended both of our social circles and introduced us to a much wider variety of topics and viewpoints than any of us would have found on our own. Whatever the interest is - reading, golf, quilting, role-playing games, or a thousand other possibilities - finding or building a consistent, meet-in-person, group activity around it can be very rewarding.

Daring to reconnect. I completed all of my formal education before social networks were ubiquitous, so with few exceptions, moving around meant losing touch with nearly everyone from my early years. I also never joined Facebook, as my concerns about privacy, apparently well-founded, overrode my desire to join the world’s largest social network. A couple of years ago, one longtime friend who is active on Facebook told me of my high school’s upcoming thirtieth reunion. He could not make it because he lives in London and could not get away to upstate New York for a weekend. Even though it was easier for me to arrange a trip to go, I struggled with the idea of facing a bunch of people I had not seen since high school. What would they be like? What would we have in common other than faded, old memories? I had no desire to relive the past, but my curiosity about what people were doing now, quite possibly piqued by my absence from Facebook, outweighed my objections in the end. The result was a great weekend of reconnecting, and the resurrection of some old friendships that I thought were relegated forever to the past. My key learning from the weekend was that many, if not most, of the awkward, immature adolescents we were have grown up to be kind, warm, engaging, interesting people. Unlike similar people I might meet today, I share a bond with this group that comes from a common past. Attending the reunion in a lot of ways opened a door to myself that I had nailed shut. Having rekindled those friendships has provided more social opportunities since the reunion and I expect will continue to do so in the years to come. The rewards I got from attending far outweighed the risks of feeling bored or embarrassed for a short time.

high school reunion

Good things can happen when you attend reunions.

For many of us, especially those of us who sincerely value our independence, the struggle against bouts of loneliness is real. In our younger years we may put career and achievement ahead of connectedness. While this may not necessarily be a mistake, time has taught me that taking the time and making the effort to prioritize friendships, family and relationships can pay off as we get older or as life circumstances change. While reading the Journal article that prompted me to write this, I could not help but wonder what decisions the people profiled had made in their youths that contributed to the isolation they found themselves experiencing. We cannot control much of what happens to us in our lives, but just as we can improve our physical health with attention to diet and exercise habits, we can combat our own feelings of loneliness by regularly making a mindful effort to enjoy activities with a variety of friends, family and associates.

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Reimagining the Stock Picking Contest

Monday, August 12, 2019

Original Publication Date: April 14, 2016

Key takeaways:

The typical stock picking contest, while often promoted as a test of skill, takes place over too short a time period for the effects of skill to overcome those of luck. Real-world investing is a process that unfolds over decades, not months or single years.
Numerous business schools promote versions of the stock picking contest which are either pitch competitions which inevitably consider presentation skill over idea merit, or suffer the same timeframe shortcomings as a typical stock picking contest.
My proposed contest model would teach longer term thinking around investment selection and potentially increase attendance at class reunions.

We humans sure love contests! For millennia we have entertained ourselves with contests based on luck, skill, or some combination of both. Luck-based contests such as lotteries and sweepstakes provide entertainment but say little about the winners’ merit. In pure skill or talent-based contests, such as racing in all its forms (100 meter dash, 200 meter butterfly, the Indianapolis 500), winners are determined by a single objective criterion - fastest to finish. Most contests that gain our attention and interest, however, include some combination of luck and skill, such as singing and dancing competitions where talent is important but winners are determined by judges’ scoring or a form of voting rather than an objective criterion like fastest time. (There is an interesting derivative argument a group of my friends has had over many years around what defines a sport versus an athletic competition, the conclusion of which is available here.)

This brings me to the subject of one of the more popular contest types that have grown in popularity alongside investing, the stock picking contest. While stock picking contests and their kin, such as guessing the closing value of the Dow Jones Industrial Average at year end, have been around as long as there have been stock markets, the golden age of the stock picking contest appears to have been from the late 1990s until the 2008-09 financial crisis. This 1999 Wall Street Journal article entitled “Stock Picking Contests Help Teach Novices About Investing” describes typical contests involving the management of a virtual portfolio of a hypothetical dollar amount, such as $100,000, for a given time period, typically one month. I doubt it is coincidental that the dawn of the Internet age and the late-90s dot-com bubble occurred at the same time as the surge in interest in online stock picking contests. CNBC for years held a “Million Dollar Portfolio Challenge” that encouraged contestants to maximize trading gains over a five week period using stock and currency markets. A Google search has led me to conclude that CNBC stopped sponsoring this contest after 2011.

My last note discussed how our culture favors winners and championships. The reason most contests, competitions and tournaments happen over a short time horizon is that humans have a short attention span and easily lose interest in events that do not reach relatively quick conclusions. Short-term results in investing, however, often owe more to randomness, or luck, than to skill. In 2007, James Altucher wrote an article for Thestreet.com called “How to Win a Stock Picking Contest” that to me sums up all that is wrong with this type of game. He says, “Simply put, you want stocks that are most likely to make quick moves in short periods of time, because most contests don’t last for more than a couple of months.” Because investment horizons span decades or longer, the only way a stock picking contest strategy could work as an investing strategy is if it could be successfully, consistently repeated hundreds of times. Any break of a long string of success would likely derail the entire strategy - losing 50% or more of a portfolio in a single year could wipe out many years of success.

Still popular with some business school investment programs are “stock picking contests” that provide students with the opportunity to analyze and present their ideas to panels of judges. Cornell’s business school has one; Ivey Business School in Canada has one; as do business schools at The University of Michigan and Columbia. The CFA Institute also has its Research Challenge. These contests give students a great opportunity to learn and apply the tools of investment analysis in pitching their ideas to panels of judges usually comprised of well-known investment professionals connected with the respective schools or organizations. Winners are often rewarded financially, and always rewarded with bragging rights and an enviable line on their resume. However, it is important to think about what is actually being judged and rewarded. On the day of the competition, nobody knows how well the ideas being pitched will actually perform over the coming years and decades. What is actually being rewarded by the judges - the best idea, or the best presented idea? What is being tested - investment skill or presentation skill? While both play important roles in one’s life and career, one should not be confused for the other.

When one designs a learning exercise, the most important element is to consider the learning objective first. What would a stock picking contest designed to teach investment students the elements of investment analysis and long-term stock selection look like? If in a university setting, how could it be built to accommodate the constraints of courses that last for only a few months? I will not attempt to cover every nuance here, but I think the bones of a contest structure should include the following:

There must be some element of results-based orientation that would necessitate the contest extending into the long term or the very long term, well beyond the confines of a single semester or a single year.
If there is a semester-length or tournament-style component to the contest, the contest organizers should strive to separate the subjective components - the analysis and presentation of the analysis - from the objective component - the long-term performance of the investment idea promoted by the contestants.

Anyone who has written and received a grade for a college-level English paper understands that there will always be some level of subjectivity in evaluating advanced work. However, I have seen time and again how a contest mentality in an investment analysis setting not only encourages the best talkers over the best analysts, but also how excellent analysts who may be less verbally adept can find themselves unable to match barbs with well-crafted arguments from respected colleagues. These analysts may find their ideas ignored and may even wrongly lose self-confidence.

My proposal for a university investment class-based stock picking contest would not be particularly ready for TV or even an auditorium audience, but it would contain elements that are sorely lacking today that could teach important lessons to those genuinely interested in how the investing process really works. This contest’s rules would be as follows:

You start with a virtual account of $100,000.
You can choose one stock.
You may sell your entire position after five years, and deducting income taxes at the highest capital gains rate for the state and country in which your university is based in the year of the sale, invest what’s left in one new stock. You also have the option to continue holding your original position with no tax penalty.
Dividends if any will earn money market interest rates in the currency in which they are paid. The interest will be fully taxed at the maximum marginal rates for interest income.
You will have the same option to hold or reinvest in year ten and every fifth year thereafter.
The contest ends thirty years from the last day of the class.

This model would not be easy for many institutions to pull off. The first and most important thing required would be some sense of continuity at the institution. (This, unsurprisingly, is also a character trait of a worthwhile long-term investment.) Credible institutional support would have to be part of a contest structure that that I propose. This contest model could easily be paired with a pitch competition, which undeniably teaches useful skills and provides valuable experience to contestants. Winning the pitch competition, however, would not equate to winning the contest. The end of the pitch competition, in effect, would mark the beginning of the contest. I believe the discipline of holding a single stock for a minimum of five years as a contest rule would serve as a focusing factor and would also help to mitigate the role of short term factors. “Owning” a stock for five years, unable to sell, and having your (presumably competitive) classmates also know you own that stock might be as close to having skin in the game as you can get in a classroom environment. Moreover, because this contest would go on for thirty years at the outset, and be limited to a single investment idea, students would be highly motivated to put all their effort into researching the long-term merits of that one idea. This wouldn’t be a beauty contest. Thinking about taxes is something I have never heard of in the context of a traditional stock-picking contest, but it would add a serious switching cost that real life investors face all the time. What might be lost in the spectator sport element of the actual contest could be gained through the contest sponsors organizing reunion events every five years where teams would have the ability to make their switch or hold decisions.

If you teach finance or are or have been involved in stock picking competitions, I would love to know what you think. Have you heard of such a long-term contest? Do you think the current “stock pitch” model adds enough value in its current form? Have you participated in stock picking contests before? What did you like or dislike about them?