Jeremy Grantham on Career Risk
Lance on Jan 29 2008 at 9:16 am | Filed under: Great Investors
In line with the comments in the previous post about the reasons people invest the way they do, and repeatedly fall for the excesses of short term speculation, Jeremy Grantham has long spoken of the career risk of unconventional success and failure.
The great paradox of our business is that reducing or avoiding real risk in portfolios can seriously increase career and business risk, which rises with any deviation from standard behavior. So everyone has to manage his or her own career risk, and being too extreme or ‘wrong on your own’ has cost many people their jobs, however right they might eventually have been.
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By exceeding the client’s tolerance for short-term underperformance and getting fired, you commit a substantial disservice to yourself as a manager, but even more so to the client, who has not only underperformed with you, but then in addition often transfers into a stronger performing alternative, usually doomed to suffer the consequences of a mean-reverting world by falling badly just as the investment strategy they terminated recovers. And we have certainly been there and done that!
-Jeremy Grantham
Needless to say that is the concern of myself and Jeremy, I certainly do not expect many of our readers to care about our fate. However, the lesson applies to our individual behavior as well. We wish to go with the herd, especially when the ride is fun, when we can talk with our coworkers about our gains and adventures. When we lose we can all commiserate over our losses together. Not doing well when everybody else is, is what we at all costs wish to avoid. That is how we are wired as human beings. It is an important aspect of our humanity, but it can be disastrous for investing.
Some delude themselves they are different, the wisest know they are not and establish ways to compensate and check this unprofitable impulse. Those of us who invest for others have to manage that risk very carefully, from both ourselves, and our clients.
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