Santangel's Review


‘Non, je ne regrette rien’

This is an interesting article about an allocator who redeemed from the Paulson Funds in 2007 prior to the fantastic performances of 2008 and 2009. The allocator, Momentum Global Investment Management (MGIM), was an early investor in Paulson back when the fund had under $20 million in AUM.  MGIM redeemed for two reasons — Paulson had been a M&A/Arb investor and the “subprime trade” was something totally different from what he had done in the past and the fund size had grown dramatically.

This was the classic Type I error (from the world of statistics) where a true hypothesis was rejected.

Here is what they said about this decision:

The practice of ‘sell discipline’ should be exactly that – a ‘discipline’ that investors follow strictly, even if it is painful – and even if in retrospect, it sometimes seems very painful.

This is an interesting case study of sell discipline. Sometimes decision making processes can be correct, yet outcomes can be far from good. Of course, when this happens it makes it that much harder to stay disciplined the next time. From my studies, great investors tend to stay disciplined regardless of the circumstances and regardless of previous Type I Errors they may have made. I think they rationally assess that the risk of Type II errors where false hypotheses are not rejected (think Madoff) far outweigh the potential gain from finding a Paulson circa 2007.

Here is a story about Buffett that has always stuck with me regarding being disciplined:

When playing golf with his buddies and fellow billionaires, a wager was proposed by Jack Byrne, president of GEICO. For a ‘premium’ of $11, Byrne would pay $10,000 to anybody who made a hole-in-one that weekend. When others reached for their wallets, Buffett didn’t. Razzed by his colleagues for his cheapness, Buffett grinned. Warren Buffett said the premium was too high – he measured a $11 wager the same as he did $11 million.

I haven’t been able to find the actual line that Buffett often gives when telling this story, but my recollection of it is this:

If you aren’t disciplined in the little things, how can you expect to be disciplined in the big ones.