Thursday, December 27, 2012

The Search For Oracles

"The greatest blessings come by way of madness."  -- Socrates on the Oracle of Delphi

     The focus on recent headlines and worries about the Fiscal Cliff has distracted investors away from the factors critical to long term investment success.  We are content to leave the predictions to others and instead spend our time trying to find value-priced companies that have the potential to grow substantially over time, thereby unlocking the powerful force of compounding.  

     I recently had the privilege of traveling to one of the most important sites of the ancient world:  The Temple of Apollo at Delphi.  Delphi was the longtime home of the priestess of Apollo, an Oracle who was believed to be able to predict the future based on her ability to communicate directly with the Greek Gods.  The Oracle's prominence began to grow immensely sometime around 800 BC and held steady for over 1,000 years ending only with the fall of the Roman Empire.  Citizens from all over the Mediterranean made the long and difficult journey through the mountains simply to seek the Oracle's divine prophecies.  In fact, many of the best known figures of the period (such as Alexander the Great, Cicero, and the Roman Emperor Hadrian) based their decisions for war and politics on her responses to their questions.  The Oracle's prophecies were widely credited as being highly accurate, which is reflected in the incredibly vast store of wealth that was accumulated by the temple (satisfied visitors were expected to make significant donations and gifts).  In many ways, the Oracle can be said to have started the first, and perhaps most enduring, global consultancy.*

     So what does the story of the Delphic Oracle have to do with investing?  When I was touring the site, I couldn't help but think that it speaks to a core element of human behavior.  We all would like to be able to know the future before making decisions regarding inherently uncertain events.  This dynamic is perhaps strongest in today's investment world which is obsessed with predicting the future and constantly in search of modern day Oracles.  CNBC interviews filled with questions about the course of short term events illustrate this quite well with common questions along the lines of, "How will the Greek Parliament vote?", "Where is the price of Gold headed this week?", and our recent favorite, "How are you positioned for the Fiscal Cliff?".  This tendency has helped create a headline-focused trading culture built on the mistaken belief that investing is a predictioneer's game--that those who can most accurately predict the outcome of headline events perform the best.**  The end result is that many investors:
  • Spend considerable time trying to predict headlines
  • View their portfolio in the context of recent news (shows such as Fast Money and Options Action are indicative of this mindset)
  • Trade incessantly, holding securities for increasingly short periods of time (the current average holding period of a stock is now only 3.2 months)
  • Engage in herd-like behavior, crowding in and out of the popular stocks and industries of the moment
  • Spend little time examining fundamentals and the underlying value of businesses
     The most successful investor of our time has been dubbed the "Oracle of Omaha" by the media.  This title strikes us as particularly ironic given Mr. Buffett's well articulated philosophy of generally avoiding predictions.  That doesn't stop people from asking him to predict the future, though, and the most recent Berkshire shareholders' meeting was filled with questions about recent headlines.  His response: "In 53 years, Charlie and I have never had a discussion about buying or selling in which we talked about macro affairs."  Indeed, Buffet has repeatedly advised investors to "stop trying to predict the direction of the stock market, the economy, interest rates or elections."  This sage advice has not been heeded by the masses.  It is clear to us that Buffet's success has had almost nothing to do with his ability to predict the outcomes of events.  Instead, it has been a direct result of his behavioral investment philosophy combined with a keen analytical ability to value businesses and buy them at prices which offer significant value--something we attempt to do on behalf of our investors each day. 

*As a footnote, an interesting question is how the Delphic Oracle held prominence for over 1,000 years while being engaged in such a difficult activity as predicting the future?  With the benefit of history, we now know that the Oracle had a secret.  Upon reaching the large Temple, guests would be lead to a small chamber, the Adyton, where the Oracle (typically a young woman) would receive guests while sitting on a tripod over a smoky vent.  Upon hearing a question, she is said to have become hysterical and begin to speak in "incomprehensible tongue" which was explained to come straight from Apollo.  Male priests would interpret her rantings and write a short, one or two sentence prophecy.  Research now indicates that her erratic behavior was due to the fact that the vent emitted a natural hallucinogenic gas.  While it is incredible to think that ancient visitors would give credence to the rantings of a drug induced teenaged girl, her behavior would have been something most visitors had never seen before, making the experience more believable.  The real power of the Oracle resided in the Priests who actually wrote down the predictions.  It is believed that the priests were great scholars who turned Delphi into a large information gathering center (a powerful tool in an ancient world where information was scarce).  They were able to research questions beforehand and dispense appropriate wisdom and advice.  For uncertain events (such as, "Will my unborn child be a boy or a girl?"), there was more gamesmanship, and the Oracle is famous for delivering prophecies which could be interpreted as being correct regardless of the outcome (the answer: the double entendre, "A boy not, a girl.").

**Notably, this behavioral tendency has also created incentives for pundits to make bold and extreme predictions.  A correct prediction of a low probability event has the potential to instantly elevate the media profile of the individual making the prediction, while a failed prediction is forgotten or can easily be explained away.  Thus, making a bold prediction has a favorable risk/reward trade-off especially for individuals seeking increased notoriety.