The Sunday Times 30 April 2017
If you google March 2nd 1962 you will be directed to several links to what many fans believe to be the greatest game of Basketball anyone has ever played.
The Philadelphia Warriors beat the New York Knicks in Hershey, Pennsylvania by 169–147. The star of the Philadelphia Warriors was a man named Wilt Chamberlain. On that night in March he scored 100 points, the most anyone has ever scored in a professional basketball game.
Chamberlain in prior seasons was a horrendous free throw shooter, but that night made 87.5% of his shots (another record). And it wasn’t a one-night wonder; he produced a career-best 61% from the line during the 1961–62 Season and ended up averaging more than 50 points a game, a record considered unlikely ever to be broken.
The story of how Chamberlain went from being a terrible free-throw taker to record setting is incredible. He changed his style that season and started to shoot his foul shots underhanded. Rather than releasing the ball up by his forehead as most players do, he held the ball between his knees and flicked it towards the basket from a slight crouch; often referred to as a “granny shot”.
Laying only scant claim to being a basketball fan I find myself running out of superlatives to describe Chamberlain’s exploits. But what happens next is quite inexplicable. Chamberlain stops shooting underhanded, and reverts to traditional foul shooting. Predictably, his percentages plunged, reaching a career low of 38% a few seasons later. Notwithstanding the incredible success he achieved using the ‘granny’ shot, he later admitted that he felt “like a sissy” when he shot underhanded.
Malcolm Gladwell in a brilliant podcast about Chamberlain asks; why would a Hall of Famer reject a proven, simple solution to his most obvious flaw? The answer Gladwell settles upon has far reaching implications, not least in terms of investment decision making.
Gladwell draws on work from a sociologist named Mark Granovetter to explain Chamberlain’s decision. Granovetter was trying to answer the question of why people do things out of character. He refers to high threshold versus low threshold personalities. In the simplest sense, a high threshold personality (like Chamberlain) needs a lot of people to be doing something different to embrace it. He is more likely to allow a crowd to dictate his behavior, while a low threshold personality doesn’t need the support, approval or company of others to do what he/she thinks is right.
Granovetter uses riots to demonstrate his theory. He could easily have chosen fund management.
Fund management is a notoriously difficult profession. One only has to look at the statistics of success. Based on the latest SPIVA data for the US an incredible 88% of large cap fund managers failed to outperform the S&P500 over the last five years. These are extremely unfavourable odds. There are many reasons posited for why this is so. But I think Granovetter’s threshold model for conformity bears further analysis.
If 9 out of 10 engineers tell you to build a bridge in a certain way, it’s fair to assume that is the best approach to building a bridge. Fund management isn't like that. It’s one of those unusual professions where consensus opinions are unhelpful and rarely deliver success. Social influence, or an unwillingness to depart much from the crowd, plays a role in the mass failure of market professionals in outperforming the market. It’s hard to argue that professional money managers are as willfully blind to the consequences of poor decisions as Chamberlain was, but the statistics bear this out.
Equally so for individual investors. Capital Markets are often praised as marvels of information aggregation in which prices are set efficiently and without bias. But prices are not set by individuals acting independently of one another. In as much as we might choose the restaurant thronged with people over the one with few diners, we are motivated to act in a social way. In its most innocuous form, conformism allows individuals to obtain the benefit of the valuable ideas of others. A more insidious form of it promotes herding in markets which can lead to bubbles.
We all make bad choices for noble reasons. Not every decision is a winner. What’s harder to condone is when people embrace the wrong decision even when they have plenty of evidence that doing so is costly.
Some years ago Jean-Claude Juncker honestly observed “We all know what to do, we just don't know how to get re-elected after we've done it”. Professional fund managers also know what to do, but they don’t know how to hold onto assets after doing it.
For individual investors, sage advice in relation to investment markets may often appear glib – seek advice, diversify, ignore short term gyrations – but there’s ample evidence to back up their efficacy.
Wilt Chamberlain chose to conform and paid a clear price. The price we pay as investors for conformity is less obvious, though no less penal. We make enough mistakes by mistake. Try to avoid making them on purpose.
Gary Connolly is Managing Director of iCubed, promoting better investment outcomes through a collaborative approach to investing. He can be contacted at firstname.lastname@example.org or on twitter @gconno1.