Culture Club

By Simon Hallett, Vice Chairman | October 06, 2021

In sports, dynasties like the American football Packers of the 1960s, the New Zealand All Blacks national rugby squad, and basketball’s San Antonio Spurs have demonstrated the power of culture to bind individuals together and enable a team to produce results above what could be expected by simply adding up the expected contributions of each member. The business world has tried to produce similar results; although exactly what culture is remains poorly defined, the hundreds of jobs available on LinkedIn seeking an individual to oversee a company’s culture certainly attest to its importance. I’ve been fortunate to have a front row seat at an investment firm (Harding Loevner) known for its strong culture and, more recently, at a UK football club (Plymouth Argyle) that is trying to develop a culture that will strengthen the organization behind the team on the pitch. As is frequently the case because of my dual roles, the parallels between the two industries and the two organizations are very much on my mind.

There are many similarities between cultures at football clubs and investment organizations, despite the underlying processes required by their core activities—making decisions on the pitch about how to try and score and defend or making decisions about buying and selling securities—being very different.

In both industries, the goal is for the team to be greater than the sum of its parts. On the pitch, an individual must rely on teammates, but certainly not debate or challenge them. Rather, coaches teach decision making so that, like muscle memory, it is instantaneous and requires little active thought.

At Harding Loevner, rules and processes constrain decision making to prevent it from being dominated by cognitive biases. Colleagues think for themselves but must expose their ideas to challenge. This is the core of our investment culture—what we call “collaboration without consensus.” We believe that one of the most difficult biases to overcome in conducting research is the tendency to give precedence to evidence that confirms our beliefs and to ignore evidence that challenges them. So, it is important that our ideas be continuously exposed to challenge. However, this leads to other problems. Humans, as social beings, generally don’t like disagreement; they are literally fearful of it. That’s why an important part of a culture of collaboration without consensus is that it be enabled by both transparency and the value of tolerance. We strive to sustain an environment in which colleagues do not feel threatened by disagreement and recognize that challenges—while discomfiting—are essential for good decision making.

It would be nice to be able to say that our culture at Harding Loevner emerged from a successfully executed plan, but that wasn’t really the case. Thirty-plus years ago, the few of us at the firm just wanted to be good investors and to serve clients who shared our views about what made a successful investment program. The firm’s values simply reflected the personal values of the founding generation. We all believed strongly in acting with integrity and always putting clients’ interests first. Beyond that, I don’t think you could say we particularly held the values associated today with Harding Loevner. We didn’t set out consciously to make a culture based on transparency, personal accountability, tolerance, and the importance of process. Those values only developed as we learned more about decision making, often from our mistakes.

For example, we discovered early on that sharing information with our colleagues was valuable in sharpening our views. But we soon learned that without individual accountability and very clear rules of engagement, disagreements could very easily descend into finger-pointing and personal attacks. We also came to realize that no amount of experience is a substitute for exercising judgement within the constraints of process and structure. The alternative, too often, is a culture of blame and chaos.

Left to Themselves, Even Great Cultures Die

Part of a winning culture is the ability to adapt to changing circumstances, to have processes that change, and to take risks with new ways of behaving. Above all, perhaps, is the willingness to keep learning. Arie de Geus, former head of Royal Dutch Shell’s Strategic Planning group once said, “In the future, the ability to learn faster than competitors may be the only sustainable competitive advantage.” That ability must be embedded in culture no matter what other values the culture incorporates. A good example comes from the success and subsequent decline of Arsenal Football Club, which in the late 1990s broke with English football tradition by hiring a Frenchman to manage the team. Arsène Wenger’s on-the-pitch tactics and approach to nutrition and training overturned decades of English football culture and brought a level of domination rarely seen in professional sports. The Arsenal team of 2003-4 was unbeaten during an entire season, a feat that had not been accomplished since the late nineteenth century. Although the club went on to further success, other clubs gradually learned from, adopted, and refined its methods. Arsenal failed to innovate further and gradually slipped down the league table to a point where Wenger was eventually replaced.

Arsenal's (L to R) Kolo Toure, Robert Pi

The 2003-2004 Arsenal team earned the nickname the “Unvanquished” for becoming the first elite-level UK football club in more than 100 years to go an entire season undefeated—in large part thanks to its disruptive culture. Above, Kolo Toure, Robert Pires, and Ashley Cole celebrate the 2-2 tie with Tottenham that sealed the feat.

Source: ODD ANDERSEN / Staff via Getty Images

As we endeavor to strengthen Plymouth Argyle’s culture, my experience at Harding Loevner has been critical in giving me a clearer sense of what will work. At Harding Loevner, we were taking cautious steps in the dark, with nothing to give us confidence that we were on the right path. But we did learn, and that has been helpful as we try to make an Argyle culture that will enable us to achieve our vision. As such, we are approaching our task with an intentionality that would have felt presumptuous to my younger self. It starts with a more specific goal. English football is a multi-level pyramid in which especially good or poor performance brings promotion or relegation to the next level up or down in the hierarchy. At the end of 2019, a year after we had lost our spot in League One (the third level from the top), we said that in five years our goal was to be financially sustainable and playing two levels above where we were then.

To realize that vision, one of the key values we have espoused at Argyle, just as at Harding Loevner, is transparency. One difference is that our transparency extends to writing down our Vision & Values and posting them to our website. In this way, everyone at the club—as well as our supporters and sponsors—knows what the vision is and what the values are that we expect will underlie every decision. Another of our core organizational values is to be efficient and process oriented. Here, again, we are not exactly inventing the wheel. Increasingly the lessons those of us in finance and organizational science took to heart about the role of process in managing our cognitive biases have also found their way into successful sports cultures. The most famous example comes from baseball where the Oakland A’s, under general manager Billy Beane, incorporated objective data into their decision-making processes to come up with new ways to gain competitive advantage on a limited budget. Once it was widely revealed in Michael Lewis’s Moneyball, Beane’s approach influenced most of the rest of baseball, spread to basketball, and is now beginning to have an impact on English football. At Argyle, our most immediate source of inspiration has been the outrageous success of Brentford F.C., for years a lower-league club of modest means, which, under the ownership and guidance of Matthew Benham (who made his fortune successfully managing his own cognitive biases gambling on football matches) has risen to the English Premier League, the pinnacle of the football pyramid.

I could elaborate on how these and our other values trickle down via our areas of strategic focus to Argyle’s CEO’s goals and to the goals he sets for every individual. But for my purposes here, the point is just that these values and goals are written down, enabling the board to communicate to our fans how we will behave and to our staff what we ask of them. The result has been powerful. Two years into our five-year plan, we have regained our position in League One, halfway toward our goal of climbing to within a level of the overachievers at Brentford. More importantly, everyone at Argyle now knows what we are trying to achieve, what is expected of them, and the values that should underly their everyday decisions.

We are now at that critical juncture faced by any strong culture looking to endure and thrive through generational succession.

I’ve learned from Harding Loevner the kind of culture that leads to sustained success. I’ve learned from Plymouth Argyle how impactful transparency and communication can be in cultivating that culture. Harding Loevner has reached the age where it can no longer rely on the people who made up the founding generation as its cultural torchbearers. Over a decade ago, we began laying groundwork for the transition of ownership and management of the firm from that generation to the next. We are now at that critical juncture faced by any strong culture looking to endure and thrive through generational succession. As the people in whom the culture is most embodied prepare inevitably to move on, they have no choice but to write more of it down. We early settlers will need to be more transparent (at the risk of being annoying) about what our culture has meant to us personally and to the firm’s success under our leadership—not so that it may be set in stone to be accepted immutably, but that it may be evaluated critically. Our younger colleagues may have slightly different beliefs and values. We expect them to receive the vision, turn it over in their minds and revise it so that they may carry it on as their own. It will be their responsibility to make sure that the firm’s culture enables it to serve its clients as well in future as it has since 1989.

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Out of Our Minds—From the Beginning

By Simon Hallett, Vice Chairman | December 02, 2020

People who know a little about the history of our firm sometimes credit us with being ahead of our time. When we set out 30+ years ago we made an early decision that we would only invest in stocks of high-quality companies capable of growing revenues and cash flows over long periods of time, and then only when we could purchase them at reasonable prices. Mind you, this was two years before Eugene Fama and Kenneth French proposed their three-factor model incorporating value, and more than a decade before Cliff Asness’s seminal work on quality or the conflicting studies on the long-term premium provided by growth. So, we weren’t thinking of these aspects of our process as “factors,” or permanent sources of returns, in the current sense of the term. We thought they were merely sensible principles, based on our own beliefs about the markets, that would give us the best chance of achieving the above-market returns necessary to satisfy our clients and sustain our fledgling enterprise. Considering we had left well-paying jobs to stake our futures on these ideas, there were probably some people who thought us out of our minds. And, in a sense, they were right.

Value: Patience as a Virtue

Though we are frequently characterized today as “quality growth” investors, the truth is we started from a place of focusing on value. We have always believed that, as Warren Buffet put it, “price is what you pay; value is what you get.” We also recognize that, while the two converge over time, it is impossible to predict when that convergence may occur. Over the years other value-focused investors have come up with various ways of coping with this unpredictability. Some implement value strategies by timing their purchases so there is not only a share price that implies a discount to underlying value, but also a “catalyst” to accelerate that convergence. Another group, among them followers of the father of value investing, Ben Graham, effectively puts a cap on their patience. They buy stocks trading at a discount to value, but if price and value haven’t converged after some period, they move on to another investment. We were young, figured we had time to wait, and saw no need to identify catalysts or impose a time limit for estimated values to materialize in current market prices.

Growth: In Case We Were Wrong

Investment managers with our very fundamental, bottom-up approach to investing spend much effort determining what a share in a company is worth. That entails thinking about a company’s addressable market, market share, the relative power of its suppliers and customers, volumes, prices, and margins, and making forecasts of those variables, and others, many years into the future. Given that we don’t know what will happen tomorrow, let alone several thousand tomorrows from now, these forecasts are never going to be terribly accurate. Once we translate our forecasts into estimates of the company’s future cash flows, we discount those cash flows to a present value using a discount rate. What that discount rate should be is also highly uncertain. At the end of the day, we gain a rough idea of what a share in a company is worth, but one subject to a very large margin of error.

Cash flows are hard to forecast and future discount rates completely unpredictable. But we figured that if the valuation at purchase was too high and didn’t rise, if at least we had growth the investment would still generate a positive return.

We liked prospective growth because it can bail us out of those forecasting errors. When we buy a stock, the return we achieve over time will be a function of changes in estimates of its value (i.e., its earnings multiple) and in the growth of its earnings. Changes in the multiple come about through changes in estimates of future cash flows and, if not more important, changes in the rate at which you discount those cash flows. Cash flows are hard to forecast and future discount rates completely unpredictable. But we figured that if the valuation at purchase was too high and didn’t rise, if at least we had growth the investment would still generate a positive return.

Quality: The Element of Positive Surprise

Quality came into the process mainly as the way to control risk and boost our odds of success. Quality is related to growth in that a higher-quality company is more likely to make high levels of returns on its capital investments, and to have more growth opportunities in which to invest the cash it generates. But quality is also about financial strength and avoiding the risk of having to rely on a balance sheet that can’t withstand the vagaries of the economy, product cycles, or waves of competitive pressure. Finally, it’s about the ability of management to see opportunities and threats, and to deliver to shareholders the expected returns on growth opportunities.

Ideally, a company will exhibit a track record of such patterns and behaviors that extends across successive management teams—evidence of an enduring company culture that is hard to measure objectively but can lend some degree of confidence to our forecasts amid all the uncertainty. A high-quality company, in other words, is one which will tend to give us pleasant surprises. While we realized we would nearly always be wrong, outcomes can be better than forecast as well as worse. By focusing on high-quality companies, we believed we could skew the distribution of our surprises in the positive, not negative, direction.

Out of Our Minds

Thirty years later, our process has become more structured and systematic, and our methods more refined, but the essential relationship among the core aspects of our investment principles remains very much the same. So has our approach to tackling the intellectual challenges with which we wrestle to this day. Now, as then, we subscribe to a belief that it’s always better to get our thought processes, ideas, arguments, and however-partially baked notions out of our own heads and onto a page, where we are more accountable for them and others can help us make them better. We hope you’ll start looking to this space for more of what comes out of our minds.

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Don’t Just Do Something—Stand There

By Simon Hallett, Vice Chairman | May 26, 2021

Humans prefer to do something rather than nothing. We like office environments that are a “hive of activity” and commend “men of action.” When stuck in a traffic jam, we will take an alternate route just to keep moving, even if it prolongs the journey. We tend, though, to conflate activity with productivity, mistaking the people whom we see doing the most with those who are the most valuable.

We see this bias in many domains. Our political leaders tend to respond to a crisis with ill-considered policies that capture attention but often do little good and may even do harm. It would be unacceptable for them to stand by and simply do nothing. While serving as both vice chairman of Harding Loevner and as chairman of a professional soccer club that competes in the English Football League (EFL), I have been struck by the parallels between investing and sports when it comes to the biases that damage effective decision-making. Studies have looked at penalty kicks in soccer. When a penalty is awarded, the ball is placed 12 yards from the center of the goal and a kicker gets the opportunity to score with only the goalkeeper standing in the way. It turns out that because of the goalkeeper’s bias for action, the optimal place to kick the ball is directly at the center of the goal. A goalkeeper will almost always dive one way or another in anticipation. If he dives the wrong way, he’s forgiven as having simply guessed wrong, or as being sent the wrong way by the kicker’s supposed feint. If he dives the right way, he has a chance to stop the ball entering the goal. If he merely stands in the middle, however, he is the subject of much abuse for doing nothing.

Investors fall victim to similar pressures and impulses. The immediate costs of transacting are low, and the propensity to transact is high. The result is that investors transact too much, and their returns suffer. They tend to transact at the wrong time, buying after prices have risen, and selling after prices have fallen.

Underlying these behaviors is a general misunderstanding of the roles of luck and skill. In sports and in investing, short-term results are the outcome of a combination of the two. Yet, we tend both to attribute the outcome more to skill than to luck and to extrapolate a series of outcomes (good or bad) into the future. This tendency stems from our deep-seated need for explanation, and a need to feel we are in control even when we are not. This occurs particularly in those sports, like soccer, that are generally low-scoring affairs. Unlike in basketball, for example, where there will be more than a hundred points in a game, the average number of goals in a professional soccer game is roughly three. The result of a single game will largely be driven by luck—one bobble of the ball, the inches between hitting a goalpost and scoring, a poor refereeing decision. Yet the narrative in post-match interviews is seldom “we got lucky.” At least, it’s seldom the case that “we got lucky” when the interviewee’s team wins. When the team loses, the loss is the result of bad luck! How similar this is to investment narratives, where there seems to be only two kinds of investment managers: the talented, and the unlucky.

Benevento,Italy,,February,4,,2018:,Lorenzo,Insigne,Of,Napoli,Hits

At my own club, last season, we had a pair of games scheduled close together. In the first, we gave up a 1-0 lead late on and ended up with a tied game. In the second, we scored a late goal from an unexpected source to win 1-0. The narrative of the first was that “we didn’t know how to hold a lead,” and of the second that “we were gutsy and played to the end.” Same team, same players, both close games, but different outcomes drove radical differences in explanation.

As in investing, in sports a series of poor results needs a narrative to explain it, and action to reverse it. Often that action is to replace the coach. Acting to replace him when results go the wrong way attributes far too much causality to the coach. George Steinbrenner famously hired Billy Martin five times as coach of the New York Yankees. Between the Premier League and the three levels of the EFL, more than half of the 92 clubs replaced their manager this season alone. Replacing a manager tends to come at considerable cost—he (it’s always he) will have his own preferences for players and staff, and perhaps may even want to change the style of play completely—with little evidence that the players who actually kick the ball around improve their own performances as a result. Because luck occurs randomly while skill is reasonably constant, after teams are unlucky for a stretch their luck will tend to mean revert. The “manager bounce” is a well-established phenomenon whereby short-term results usually improve after a manager is replaced. It is a statistical phenomenon, though, that has little to do with on-the-pitch performance.

For asset owners, there is a similar temptation to replace a manager after a period when returns have disappointed, but, alas, unlike the fans of a soccer club, the clients of an investment manager do not enjoy the mean-reverting returns that the manager provides those who stuck with them.

For asset owners, there is a similar temptation to replace an investment manager after a period when returns have disappointed. But, alas, unlike the loyal fans of a soccer club, the former clients of an investment manager do not enjoy the mean-reverting returns that the manager provides those who stuck with them. There is plenty of evidence that investors’ urge to act is damaging to their long-term returns. In mutual funds, on average, dollar-weighted returns that shareholders receive from their funds lag the time-weighted returns that the funds generate. This “behavior gap” is directly the result of poorly timed action on the part of shareholders.

Incentives and market structures only make the bias toward action greater. One reason that English soccer coaches get changed is that, once the season starts, players may not be traded outside the month of January. A result is that during the January transfer window it’s almost non-stop activity. The period has become its own media event, with fans, players’ agents, and media pundits all calling for teams to make their moves. This, even though only a few such moves ever have significant impact on a team’s results, and despite evidence that prices paid for players tend to be higher than between seasons.

The investing industry has many incentives to transact; indeed, the revenue models of many participants depend on transactions taking place. When I started in investment management, in London in the late 1970s, our fees were not based on assets managed as is the case today. We were paid when we made a transaction in our clients’ discretionary portfolios. Why is the portfolio turnover of the average equity mutual fund so high, when doing nothing and allowing returns to compound over prolonged periods of time is often a superior way to generate market-beating returns? It’s because the investment industry exploits clients’ bias in favor of action. Managers’ actions are described in emotional terms. We read of “conviction,” of “exciting opportunities” and “story stocks.” The reality is more mundane. Successful investing is about resisting the urge and the calls to action, knowing when to sit on your hands and do absolutely zilch.

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Stock Portfolios, Football Teams, and the Stories We Tell Ourselves about Each

By Simon Hallett, Vice Chairman | July 09, 2021

The world is complex and unpredictable, but humans prefer order, and cause and effect, so therefore tell stories that purport to explain what is simply random. Narratives pre-date writing. They help make events coherent and memorable, while arousing emotions in the listener. Behavioral biases, which all humans share, are in many cases essentially products of the stories we tell ourselves. The more detailed the story, the more entertaining it is and the more powerfully it can affect our emotions. We love stories. That can often be wonderful, but in decision making it can be dangerous.

In investing, there has been at least a little progress towards improving decision making by resisting the power of stories. Quantitative investors describe how they adhere to purely objective rules (rules and lines of code that, of course, they themselves have written) to govern their behavior and reduce bias. “Quantamentalists,” another breed of investor, allow some judgement to enter their decision making once they have established the framework. They do this in part in recognition that, as a rule, most humans don’t like rules. We suffer from what psychologists call “algorithm aversion,” i.e. preferring to go with our gut. That preference results from our need to remain in control, or at least to believe we are. Permitting human override of an algorithm may degrade the quality of its output, but in granting themselves the comfort of exercising some degree of control, decision makers likely improve their rate of adherence, for an overall improvement in outcomes. I fully expect self-driving cars to come with a steering wheel that will have no impact on direction of travel, but will allow the human passenger to feel more secure than if she were simply sitting back and giving herself over fully to the computer under the hood.

In his book The Success Equation, Michael Mauboussin writes extensively about the importance of a strong process and rules in activities where the immediate outcome is driven by luck and skill. He describes how it is possible to improve skill through what has become known as deliberate practice: repetitive, purposeful, and systematic repetition with immediate and specific feedback. Luck, however, can only be managed by having a strong process, with rules or standards constraining decision making and the urge to impute too much importance to our role in any one result. In activities such as investing or team sports—arenas where skill and luck both come into play—narrative is particularly seductive, making adherence to this recipe for success a constant battle.

The pandemic meant the stands were still empty at “Theater of Greens,” the home stadium for Plymouth Argyle this year, but the ideas were plentiful as to how to harness the theories of behavioral economics to put a more competitive squad on the field.

Richard Thaler, who won the Nobel Prize in Economics for his work in behavioral finance, has noted that 1980s basketball superstars like Larry Bird converted their three-point shot attempts at the same near-40% rate as 21st-century sharpshooters such as Steph Curry or James Harden. Yet, Bird took half as many three-point attempts as are normal today, favoring shots closer to the basket, which great players can hit roughly 50% of the time. It took 30 years for the three-point shot to become as popular as it is today or, in other words, for basketball to realize that 0.4 x 3 is greater than 0.5 x 2.

The Bill James Baseball Abstract, an annual compendium of baseball statistics that ultimately legitimized the science of baseball sabermetrics, was neglected for many years before a James disciple, Oakland Athletics General Manager Billy Beane, used the approach to identify underpriced skills for his small-market team, as popularized in Michael Lewis’s 2002 Moneyball. It was only then that James himself landed a job in the front office of the Boston Red Sox, helping the team finally overcome the “Curse of the Bambino,”¹ and win its first World Series in 86 years.

Many baseball fans complain that the influence of Moneyball has been too great—players are chosen purely for their ability to walk or jack balls over the fence; defenders are all stacked on one side of the infield because that’s where the statistics say the vast majority of a given batter’s ground balls will be hit. “It’s no fun anymore!” Clearly, those fans prefer intuition and stories to success and efficiency. They also subscribe to the great man theory, that results are driven by individual managerial genius, the wizened skipper playing a hunch.² And yet, organizations typically strive to create and adhere to processes that can improve their probability of success—to control luck.

I have been involved in two firms with many similarities, one being an investment manager and the other a football (soccer) club. An investment portfolio can, through careful construction, be more than the sum of its individual parts thanks to diversification. It may seem odd, but a football team is a portfolio. It, too, needs careful construction. You can’t simply rank order the most attractively priced available players and take the top 20 to form your squad. You would end up with a team made up only of defenders, and no goal scorers.

More than a decade after John Henry, the Red Sox owner who had hired Bill James, purchased Liverpool FC and brought Moneyball to the UK’s Premier League, systematic use of data analytics has finally worked its way throughout the ranks of English football. At my football club, Plymouth Argyle, which plays in the third tier of the leagues, we have set rules and standards to guide the decision-making of those who select the squad. Beginning with our philosophy, i.e., answering the question “What is the style of football we wish to play?,” we have defined the desired characteristics of each position. Our philosophy includes playing the ball forward from the back with quick passes along the ground to the opposition’s part of the field. Our goalkeeper must, therefore, be able to kick with both feet and play short passes while under pressure from the opposing forwards. We also prefer to play in a tactical lineup, known as a 3-5-2, with a pair of strikers at the front and a couple of fit defenders, one on each side, who dash up and down the wings depending on whether we or the opposition have the ball.

Defining the philosophy this way and defining how we will implement it enables us to search databases for players that match our criteria in each position, such as the defender we recently signed based on some impressive data around his defensive blocks, aerial duels won, and tackles per game. Then, in quantamental fashion, we can conduct research into aspects of players that can’t be quantified (yet!), such as their character, personality, or work ethic.

There are differences between assembling an optimal squad of football players and an investment portfolio. One is that securities prices are freely available, updated continuously, and can be compared with their hypothetical value generated by a model. That is not the case with football players. Transactions can only be made in two “transfer windows,” one midway through the season in January, the other during the summer before the next season starts. And no one has yet come up with a model that can assess players’ value in the way that we forecast cash flows and discount them to a present value to give an idea of what a share of stock is worth. I live in hope, though!

The market for football players is relatively efficient, but not completely so, and becomes less efficient the lower down the leagues you go. In this way, the relative inefficiencies of the market are parallel to those for, say, US large caps compared with those for emerging market small caps.

But surprisingly, perhaps, there are more similarities than differences. The market for football players is relatively efficient, but not completely so, and becomes less efficient the lower down the leagues you go. In the Premier League, the most watched football league in the world, there is a strong correlation between what you pay and the results you achieve. That is not the case lower down, so my club has a strong incentive to improve decision making, to exploit the behavioral biases and subsequent mispricing that is prevalent. In this way, the relative inefficiencies of the market are parallel to those for, say, US large caps compared with those for emerging market small caps. Similarly, though, as the potential gains to improved decision making increase, so does the resistance to replacing intuition with algorithms and process that reduces the degrees of freedom under which individuals operate. Those clubs which can overcome that resistance will generate a competitive advantage—an edge. I believe my football club has such an advantage, but I am on the alert for signs of backsliding—going along with “But that’s the way we’ve always done it!”

We have gone down this path at Plymouth Argyle because we want to spend the Club’s money wisely and compete by being smarter, not by spending more. At Harding Loevner we started down this path 25 years ago as decision making spread beyond the handful of founders to an expanded investment team. Each portfolio remained the product of two single decision makers but was now made with input from over 30 analysts. We had to learn how to structure a process that benefits from group wisdom but is not damaged by “groupthink.” The foundation of that was, and still is today, individual accountability and aggregation of individual decisions. Analysts drive the process and decide what stocks they will cover. They are free from direction by their colleagues, and free from direction by portfolio managers. They are not completely free, though. Just as Argyle’s team must recruit players who meet the objective standards we have established as being consistent with our playing philosophy, Harding Loevner analysts must confine their activities to securities of companies that they judge to conform with our investment philosophy, which focuses on growth, quality—which we have historically equated, in part, with a demonstrated track record of profitability—and price. When we look back at the last 25 years, we can see clearly that the arc of evolution of our investment process has been to define more clearly and rigorously the rules that restrict our analysts’ liberty to follow any company they chose. This has been highly effective at controlling biases and risk, and, overall has been good for returns.

Today, there are any number of voices, both internal and external, calling us away from the framework and structure that have served us well. The rise of the digital economy, and its steady proliferation of fast-growing but still-unprofitable businesses with compelling narratives, continually tests our reliance on an established track record as a guide to the future and the best indicator that a company has the culture and institutional strength to withstand cyclical downturns and shifting competitive landscape. Has the nature of growth changed? Have the kinds of characteristics that define quality shifted? Or are those merely the stories we tell ourselves to justify paying higher prices for the hot new fashion?

I don’t know the answers to those questions yet. I do know that, while it is necessary for portfolio managers to evolve along with markets, such evolution should take place deliberately and only after careful consideration. At Argyle we are at the early stages of translating our playing philosophy into a structured process for how we find players, and how they play on the field. Already, though, there have been occasions when we’ve had to adapt on the fly and adjust our typical tactical lineup. Football, like investing, is a game where the opposition can see what we do, and we must adapt to how they counter our plans. Players get injured, and replacement players may be less capable at implementing the approach. So, how we implement our philosophy must evolve, but we must be clear with ourselves that such adjustments are a change in process, not a change in philosophy. If we were to start changing our philosophy, we would surely be lost, tossed on a swirling sea of narrative.

Endnotes

¹Purportedly begun in 1920 when, after he had led the club to three World Series titles in six years, the Sox traded George Herman “Babe” Ruth to the rival Yankees for $125,000 (about $1.7 million in today’s dollars, or roughly the salary of Boston’s current backup catcher, Kevin Plawecki).

²It could be said the great man theory is also a feature of investment marketing—how often do brand name investment managers attract large amounts of client assets and then collapse in ignominy?

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Out of Our Minds

Left to Themselves, Even Great Cultures Die

Source: ODD ANDERSEN / Staff via Getty Images

Out of Our Minds—From the Beginning

Value: Patience as a Virtue

Growth: In Case We Were Wrong

Quality: The Element of Positive Surprise

Out of Our Minds

Don’t Just Do Something—Stand There

Stock Portfolios, Football Teams, and the Stories We Tell Ourselves about Each

The pandemic meant the stands were still empty at “Theater of Greens,” the home stadium for Plymouth Argyle this year, but the ideas were plentiful as to how to harness the theories of behavioral economics to put a more competitive squad on the field.

Endnotes

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Disclosures