Cameron Hight references Daniel Kahneman's reflection on behavioral economics when discussing the difficulty of getting portfolio managers to maintain discipline.
Assertion Not checkable as stated
Hight: Stock-picking hit rates degrade to coin-flip randomness past position 30
“The batting average for our clients was right around 51%. This is on an alpha adjusted basis, so the top 10 positions was 57%, next 10 was 55, next 10 Was 52, and then it went into, right after 30, it sort of went into randomness. Basically, it was a coin flip…”
Insight
Hight: Managers unable to name their sixth-best idea have flawed processes
“Really the question that an allocator could ask is say, hey, what's your sixth best idea? And pause. And wait for them to tell you what their sixth best idea is. Now, if they can turn to a sheet, or a dashboard, or something like that, that says, that's my six…”
Assertion Supported
Hight: Simple equal-weighted algorithms outperform expert judgment across studies
“They've done hundreds, maybe even thousands of these studies now, and the little simple algorithm wins every time.”
Insight
Hight: Mental heuristics do not outperform systematic models for ambiguous inputs
“As a portfolio manager without the system, we're doing the exact same thing. We're already taking that information in, and we're processing it mentally, and it's implicit, and we believe that our mental calculator is better at taking those ambiguities and refi…”
Assertion Not checkable as stated
Hight: Managers suffer 'probability inflation,' predicting 74% win rate versus 51% actual
“On average, our clients assume they're going to be right 74% of the time. But guess what? They're only right 51% of the time. So there's a big gap, and we can point out those gaps. We call it probability inflation.”
Insight
Hight: Active managers must concentrate into ~30 stocks to generate alpha
“If we as active managers want to survive, we need to do what we're good at, which is picking good stocks, and not diluting ourselves with portfolios of 100 plus stocks. If we can pick 30 good positions, 30 may not be the, there's no magic number here, it's gon…”