Cliff Asness: Investors Should Avoid These Two Extremes

Johnny HopkinsCliff Asness, Investing StrategiesLeave a Comment

In this interview with the Insightful Investor, Cliff Asness discusses the challenge of evaluating an investment strategy during difficult periods. He warns against two extremes: abandoning a strategy too quickly due to short-term losses or stubbornly refusing to adapt when necessary.

He highlights Warren Buffett’s ability to stick to his principles despite setbacks. Asness explains that while markets evolve, fundamental investment principles change more slowly. However, investors must remain open to the rare cases when structural shifts occur.

Continuous improvement is crucial, regardless of market conditions. During tough times, investors should rigorously question their approach to determine whether issues are temporary or signal a permanent change.

Here’s an excerpt from the interview:

Asness: First it’s a very hard question. No one has a perfect answer to this. The two extremes you want to avoid, and I don’t think this is insightful, I think it’s obvious but still fun. One is “Oh it’s not working. We’ve had a painful year, a painful two years, let’s change everything.”

Real life investment processes you go again I’m picking on Warren Buffett but only in a complimentary way.

Both relative to markets and an absolute senses he’s had disasters, three-year runs. My colleagues wrote a paper on his returns looking at which factors help explain, but they did find some great stuff that he really did buy profitable low-risk but reasonably priced companies. But what he also did was never back off when he was losing, which is really harder than it sounds.

One thing you certainly don’t want to be too quick if you have a philosophy you believe in. That’s not a four sharp ratio, that’s not whatever Jim Simons created.

And by the way not the stuff Jim Simons created that he’d sell to clients, that was good but human. I mean the stuff he kept for himself. If you’re not that, you’re going to have bad periods.

So you can’t be too quick to throw it out or else you’re constantly getting rid of good models at the exact wrong time. On the other hand, you really never want to be the person who’s, you know, the ostrich who plants their head in the sand and says “It’s always worked, it’ll work again, don’t bother me.”

A, that would be disastrous client relations. Let’s just make a practical observation: nobody wants to hear that. But it would also be disastrous just intellectually because even if you’re extreme and think 19 out of 20 times when the world starts changing everything’s different.

Well, the world starts saying everything is different this time. If you think 19 out of 20 times they’re wrong, and I’m probably somewhere in that camp, I think things changed less. At least the core technology changes, right?

Technology was railroads in the 1910s and it’s AI now. What constitutes markets and companies changes, but I don’t think, I think the principles change much more slowly.

But that doesn’t mean they don’t change. That doesn’t mean suddenly value investing for instance could stop working because people have figured it out and arbitraged it away.

So I think you do have to be very cognizant of that one out of 20 times where the world really did change. And a lot of what you do during bad times, you always work on making your process better.

That should be steady. You should be trying to do that in good or bad times to be frank. Just because things are working out well, that could be just as much luck as a bad time.

You always want to try to get better at what you do. But a lot of what you’re forced to do, and should want to do actually, I shouldn’t even say forced, in bad times is ask every possible question within the realm of reason and even push that to the unreasonable at times.

What if this is what’s messing up our process and it means our process is permanently broken?

You can find the entire interview here:

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