Are investors too arrogant?

In ancient times, it was thought that any successful mortal who bragged about it made the gods angry. So they would destroy that person for his hubris, or arrogance. If you were lucky, or rich, or beautiful, it was best to be quiet about it.

Good investment ideas can also seem to incite the gods’ wrath. Take the efficient market hypothesis: it started out as the simple notion that it is really hard to beat the market when you consider risk. Some reformatted this to imply that current asset prices reflect all material information. The first idea is humble. The second, while consistent with the first, is arrogant. And so the market gods of 2008 destroyed the proponents of the arrogant form of market efficiency.

I thought about this when I read of Warren Buffett’s $28 billion investment in Burlington Northern. He called it an “all-in” bet on the economy. But the Mr. Buffet is flirting with hubris. The last time he made a public, aggressive bet on the economy, the market fell 25% in the next few months. Now, he surely has the cash to weather a downturn, but his investments in GE, Goldman, and Wells Fargo are already pretty levered up.

I’m not predicting Mr. Buffet’s demise. But I’ve seen others who were riding high brought low by the roll of the dice. Remember the Maestro? If the market gods smile upon you, it’s best not to make them jealous in return.

Douglas R. Tengdin, CFA
Chief Investment Officer
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