Ep289: Jim O’Shaughnessy – Have the Discipline to Stick With Your Investment Process

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Guest profile

Jim O’Shaughnessy is the Chairman and Co-Chief Investment Officer of O’Shaughnessy Asset Management (OSAM). He is the author of four books on investing, and his book What Works on Wall Street is a BusinessWeek and New York Times Business bestseller.

Jim is the former Chairman of the Board of the Chamber Music Society of Lincoln Center and currently serves as the Chairman of the Capital Campaign for CMS. Jim is married with three children and two grandchildren and lives in Greenwich, Connecticut.


“You got to have the ability to stick with the process. Trust the process.”

Jim O’Shaughnessy


Worst investment ever

Jim started investing when he was 20. Back then, he was doing a lot of mathematical modeling. Jim concentrated on the Black Scholes option pricing model that was a pretty good investing model with about 70% accuracy. The downside of the model was that it was about singles and doubles. There were no home runs. Jim craved for home runs.

Experimenting with other investment models

Jim was having a lot of fun with his model of choice, and his investments were doing well. Then he started experimenting with another model that was more focused on the market and not individual companies. The model would look at whether the market was fairly priced, overpriced, or underpriced.

Riding on a high

For a moment, the model worked pretty well. According to this model, the market was very overpriced, and so Jim started accumulating put options. By early October of 1987, Jim had acquired the largest put position in his life.

Selling it all

In 1987 the market experienced the biggest, on a percentage basis, crash ever. Though, Jim had ignored his model and sold all his puts the day before the crash! He made a small amount of money because the markets were gyrating all over the place. Jim would have made so much more money after the crash had he stuck with his model and held onto his investment.

Lessons learned

Anyone can make a poor investment decision. You are not an exception

We all think we are exceptions, that because we study a lot, do a lot of research, and we are smart, we cannot make poor investment decisions. The truth is that if you are smart, you are probably more likely to fail because you create narratives about how good you are that you believe them, and then you convince other people of them. In the process, you let your guard down and end up making the wrong choice.

For your investment model to work, you must be consistently consistent

You may have this great model that you believe will help you soar as an investor, but it does not work. And not because you are not smart enough to figure it out, but because you are incredibly consistently inconsistent. To make a model work, you must have the discipline to use it consistently.

You must trust your investment process

The vast majority of successful investors who beat the market over time have rigorously researched investment processes they religiously adhere to. Their secret lies in trusting their processes. Sometimes they win, sometimes they lose, but they stick with the process regardless.

Andrew’s takeaways

Don’t sell everything, size yourself instead

One of the biggest mistakes people make is to jump into something 100% instead of sizing themselves into that position. If you want to get out of an investment, the best way to prevent yourself from overreacting is to sell X amount, not everything.

No investment model will work all the time

The whole concept of an investment model is that no model will work every year. But what keeps you winning is your discipline to stick to your model even when it does not work.

Actionable advice

Find an investment process that works for you. It might not work for other people, but if it works for you and feels right to you, stick with it and let it work.

No. 1 goal for the next 12 months

Jim’s number one goal for the next 12 months is to help with a couple of exciting projects that OSAM has. One of the projects is called Canvas, an operating system for investment advisors. The second project to start in 2021 is the fifth edition of What Works on Wall Street.

Parting words


“Good investing is simple. It’s not easy.”

Jim O’Shaughnessy


Read full transcript

Andrew Stotz 00:04
Hello fellow risk takers and welcome to my worst investment ever stories of loss to keep you winning in our community. We know that the winning investing you must take risk but to win big, you've got to reduce it. This episode is sponsored by a Stotz Academy online course. How to start building your wealth investing in the stock market. I wrote this course for those who want to go from feeling frustrated, intimidated and overwhelmed by the stock market to becoming confident and in control of their financial future. Go to my worst investment ever.com slash deals to claim your discount now. Fellow risk takers This is your worst podcast host Andrew Stotz and I'm here with featured guest Jim O'Shaughnessy, Jim Are you ready to rock?

I am ready to rock let's do it.

Andrew Stotz 00:51
So Jim is the chairman and co Chief Investment Officer of O'Shaughnessy asset management. He is the author of four books on investing and his book. What works on Wall Street is a business week and New York Times best seller. Jim is the former chairman of the board of the chamber music Society of Lincoln Center, and currently serves as the chairman of the capital campaign for CMS. Jim is married with three children and two drunk grandchildren, and lives in Greenwich, Connecticut. Jim, take a minute and Philly for tidbits about your life. Thanks,

Jim O’Shaughnessy 01:25
Andrew, are well so you've reminded me that I have to update my bio. Because I am now the proud grandfather of three grandchildren, my daughter just gave birth to a new granddaughter about six weeks ago. And I haven't seen her yet, because she's in Berkeley, and we're in Connecticut. And everyone's a little worried about travel with COVID. But I do get to FaceTime with her a lot. And we get pictures every day. So very, very exciting. And luckily, my other grandkids live about a mile and a half away from me, and I see them all the time. So we're trying to induce our daughter and son in law to move back east. I don't think it's gonna succeed. Ah, I think I think you nailed it with what you said. So other than my happy news, we can get going. Okay.

Andrew Stotz 02:20
One, one of the things I mean, we talked a little bit before we turn on the recorder, but the book, what worked on what works on Wall Street came into my life as an analyst. And as I was trying to understand better about stock picking portfolio construction. And I'm just wondering if you can tell the story of kind of how that book came to be. And maybe just help the audience understand, you know, because at first, you may have, you know, at first you may have questioned what you were doing, but then at some point, you became confident that this is going to be a valuable book.

Jim O’Shaughnessy 02:53
Yeah. So, I had written my first book, which was called invest like the best, which showed the reader how they could basically clone their favorite Portfolio Manager. By putting the stocks in his or her portfolio on a computer using a database like compu stat or the value line, I use the value line because it was much cheaper on and so, as I'm writing that book, I'm like, you know, I gotta go search the academic literature, because this is kind of cool. But I've only got like five years of data. I'm sure there's got to be like some academic research going way, way back. Well, when I went, I did find some stuff, notably French and pharma, who, which most people are familiar with. But they really only did price to book. And so I kept searching, didn't find anything. And I kind of was very excited, came home, talk to my wife, and I'm like, I have an opportunity here. And I think it's a huge opportunity. And you know, the only reason I have this opportunity is because it was born at the right time. I was born in 1960. So this is back when I was in my early 40s. But I was that connection of people who loved all that previous older research that younger people hadn't yet read, but also understood and embrace computers and databases, right. So I got this nexus that, as I said earlier, you know, if Ben Graham had had these computers, I wouldn't have never had an opportunity. He would have written the book. Yep. But so I approached the folks at SMP copy stat, which is the most comprehensive database of us and now other country stocks available today. They have monthly data going back to 1964. They have annual data going back on to 1951, I believe. And then for this fourth edition The book, we also incorporated the crisp data from the University of Chicago, which that's the Center for Research and security pricing, which goes all the way back to 1927. So I was very excited. And no one else was. Because, you know, my wife, who is wonderful and has always supported me and I, whom I love dearly, she would just kind of look at me, and she'd say, wait a minute, because she saw a mock up of what I was gonna do, right? And she's like, so you're just gonna, like, use a template and use the same template for every factor? And I like, Well, yeah, because nobody has seen this stuff. She's like, I just don't think anyone's gonna buy it.

Andrew Stotz 05:48
And it was my question, you know, when we first started, cuz he's like, I mean, sometimes when you create something, you just repeat it? Oh, it's boring, and all that. But of course, that's the value of that book for me. Was that okay? How does this one compare to that one? Precisely.

Jim O’Shaughnessy 06:03
And what you can do is you if you're only interested in like, growth or momentum, there's a chapter on that, right? You don't have to read the whole book. If you're a value guy, there's a chapter on that. And so you don't have to read it from pay from cover to cover, right? You can dip in wherever you want. And it was kind of exactly what people were looking for. That's right. Yep. And then and then we had some fun with previewing the book in Barron's before it was even available, which actually drummed up huge demand for it, we were talking about the power of scarcity. And it really showed there and it inexplicably too many became a bestseller on not only into Businessweek, but also on that New York Times, I'm like,

Andrew Stotz 06:52
and kind of the rest was history. And you, you know, you said that you felt like you were onto something big. But really, truthfully, this. And you also said that nobody really believed that. But you've shared with me that you journal. And the benefit of journaling means you can actually go back and really say, Well, wait a minute, was I such a fan of it, and time. And when you go back and look at what you were writing in your journal around that time, once you've gotten your momentum into it, you're getting ready to go out with it. Were you really feeling that way?

Jim O’Shaughnessy 07:21
I was, as a matter of fact, because of the story I'm going to tell you today was in one of the previous journals to when I wrote what works on Wall Street, right. And so I read the previous one to make sure that my memory hadn't done me a great kindness and upgraded my memory to or update it, to make it consistent with what I think now that's a little trick that our brains do that we're not aware of. And it's By the way, why I witness accounts are like the worst thing you can listen to. Everybody sees differently, and everybody has memories that operate a different way. That's why journaling is so imperative. And yeah, I I read about it, and I was like, This book is gonna make me and so lucky me.

Andrew Stotz 08:08
Yeah. And I was born in 1965. And so a little bit after you. And there was a famous book when I was young called by Scott Peck called what was the road less traveled? Oh, I read that. And I read that book. And it really resonated with me. And I learned a lot from it. And I really, really studied it pretty hard. And then I didn't look at it for 30 years. And I went back and I had kind of forgotten that I had read it so intensely at that time. And when I've started reading, I'm like, Oh, this really resonates with me. You know, this book, really, you know, and it just made me think like, yeah, imprint had a big imprint on me. And it shaped the way I thought. But there was a point in time, 30 years later, where I kind of forgot about the fact that no, in fact, this was the origin of the wiki. So the idea of journal time. Interesting.

Jim O’Shaughnessy 09:02
Yeah. And just quick, funny story about that. So I listened to a variety of mixes I very broad musical tastes, like if I'm like today, I was working on a thread for Twitter. And so it's Bach, right? The Goldberg Variations, something like that. It's very mathematical. And it's really great. It helps you think, but like when I'm exercising, I like rock and roll. I like you know, and broad, broad I love parts of rap, etc. Yeah, but so one time, I'm exercising and I'm listening to what, on my Spotify says, Lael, that's my youngest daughter, labels 80s mix. So I'm listening and working out and I'm like, this is an amazing mix. I can't believe my 25 year old daughter, like pick the absolute best songs from the 80s and just came up and I'm talking to my wife and I'm saying Lael has an Unbelievable tastes of 80s music. And so I texted her, and I went, well, I just got to give you a huge compliment your 80s mix is awesome. And she my phone had she did she doesn't text me back my phone rings, Dad. Yes. You made that for me.

Andrew Stotz 10:20
Ah, and that's the way it goes.


Andrew Stotz 10:26
Now, Mike, I wanted to ask you one little sneaky question. And that is, you know, okay, so you write this book you bring to the world, the truth about all these factors, all of these measures, you know, price, the book, and P and you know, our UI and all of that stuff. There's no possible way that you can now apply this and create any kind of fun management strategy surely. Still, tell me, tell me what the heck you do. And you did then and you do now as far as asset management in relation to what you were bringing out. And I'm, I dropped my pen. So I got to just grab one, but Go,

Jim O’Shaughnessy 11:09
go. Yeah, so we use and have always used the research. That was what works on Wall Street as a foundation for our quantitative research. It's ongoing, even the books show that as you'll find, when I send you this fourth edition, we learn as we go, you know, you don't know everything all at once. But the key reason, in my opinion, why this stuff keeps working, is that these aren't mathematical anomalies. These are behavioral anomalies. by that. I mean, I could

I could

Jim O’Shaughnessy 11:46
rent, you know, a 30 minute spot on every major TV channel, I could have, you know, every internet thing plugged in, and I could give a lecture about here's what works, doesn't matter. People will totally ignore you. Or if they don't totally ignore you, if they try to do it, the minute it does poorly, which I go on at length about in my books, right? It's you got to understand that it doesn't work all the time. And sometimes the drawdowns are really big. But the minute that happens, oh, well, that used to work, but that doesn't work anymore. We are very much guided by recency by what's happening now. Yeah. And, you know, it's, it's, I think it's hard coded into our DNA. And, and I think that it, you know, it just never stops working, right. So I always say what we really are doing is arbitrage in human nature, right? markets change minute by minute, second by second. Human Nature doesn't budge millennia, by millennia, right? I mean, society does, right? We have these great things, and we have this and we have all of these things. But that's aggregate cultural evolution, right? We as individual peoples were not optimized for the environment in which we live. So because our nature changes slowly, if at all, hmm, um, we can continue to arbitrage this. And I don't think it's going to go away as long as human beings price securities, people will then say to me, Well, what about when computers probably securities, I say, I won't be alive when that happens. Honestly, I love AI. I love machine learning. We have some research partners at Oh, Sam, that we're really lucky to have because, you know, they're experts in machine learning. They retired at age 40, from Google or Microsoft, or whatever. But and they're bored. And they want to play with data. The data is very expensive, right? So we take them on as a partner, we give them access to the data. And in return, they write really cool papers, research projects, etc. And so one of our machine learning guys, you know, came to Connecticut gave us a day long seminar, in which he kind of started out by saying, okay, so anything you hear about machine learning, or AI from a marketer is bullshit. Yep. And, and I want to tell you, that it's much more limited than they say it is. But what it can do is truly amazing. And then we learned about that, right? So I think that it's just in our nature, you know, we have this incredible need for an illusion of control. And giving something over to a machine entirely. I just don't see it happening.

Andrew Stotz 14:52
Yep. And I have a prospect of a bank that I've been talking with over the years in Singapore on Some stuff, but they've been implementing and trying to do research, you know, since my specialty is kind of writing research, they've been trying to do research using AI and that type of thing. And basically, the conclusion is, you know, AI can get you 60 or 70% of the way there. But coming up with the final analysis, in conclusion and judgment, you know, you're, you're still going to need the value of an analyst or an individual thinking about something. And our ability to think about something, you know, is still valuable at this point.

Jim O’Shaughnessy 15:35
Yeah, of course, you know, it's like, I just finished, I'm writing a thread that's called the thinker and the approver. And it's about, you know, it's a simplification of the way our minds work. But, you know, one of the things is that, you know, we're all walking around and doing stuff with these quantum computers in our noggins, and there's no user's manual, right? If you look at some of the best research on consciousness, on, on, on why anesthesia works on a variety of things, you know, what you're gonna find, we don't know, that's coming, like from the greatest minds ever. And so, I think that you're right, in terms of the ability, humans are going to be still top of the pyramid in terms of the ability to synthesize knowledge, right. And I think that the best way to look at AI and machine learning is as an incredible research associate, right? Who's gonna see things that you just can't see, who's gonna was going to be able to do go through a million things in a minute. And, you know, no human, no matter how many humans you had on hand, or we're gonna be do that, because even if they try to get so bored, and they just, you know, it just wouldn't work.

Andrew Stotz 16:56
So I think it's very, very helpful for but occasionally, you're gonna find that research assistant running into the wall going, this does not compute, this does not compute. And then you just got to take turn around, okay, go sit back down at your desk, will reroute, you know, recalibrate you and then you're off.

Jim O’Shaughnessy 17:14
If you're, if you're a Douglas Adams fan, you will know from Hitchhiker's Guide to the universe that the answer to that is 42 amps. That was, that was a computer that they made, and it calculated the meaning of life for millions and millions and millions of years. And its answer was 42.

Andrew Stotz 17:32
Yeah. And one of the things that I looked at was a great book I read many years ago called future hype. And the guy that wrote it basically said, you know, the world is moving at such a fast pace. And we all understand that. And he said, No, it's just the opposite. The world is moving much slower than you think. And he, he would take chapter after chapter, he would take something that you would think would be unassailable. Like, you know, we all have photo pictures, you know, on our phones, and, you know, the technology related to phone or so to photography is, you know, miles ahead, and then he's like, yep, and 100% of those pictures on your phone, will not even be able to be found five years from now. You know, and then he said, and here's a picture, that's, you know, and I have it in my house. So a picture that's 120 years old, that's innovation that happened 100, you know, 150 years ago, and Stan stood the test of time. And it made me realize, you know, in the case of one part of my business, which is research, I provide research tools and Research Services to institutions, how can they do you know, analysts type of research at a lower cost and faster, and what I've found really is that it's about kind of trying to standardize and, and focus in and build competency in each little area, and try to get the best thinkers in your organization, doing more time thinking, you know, because if you analyze if you if you analyze the analyst, you'll find that they spend, they say that they spend about 50% of their time in Excel models and excel models is not where the ideas come from. And so trying to get people to use that brain of theirs that is so powerful is the challenge.

Yeah, yeah. Yep,

Andrew Stotz 19:21
I agree. All right. Well, now it's time to share your worst investment ever. And since no one ever, ever, ever goes into their worst investment thinking and will be tell us a bit about tell us a bit about the circumstances leading up to it, and then tell us your story.

Jim O’Shaughnessy 19:36
So the circumstances leading up to it were I was lucky to be able to start investing when I was young. So I was in my early 20s when I started and back then I was doing a lot of mathematical modeling. And I alighted on what at the time seemed to be something that was unique. And it had to do it's, it's a little complicated but I'll to simplify it and say it had to do with using Black Scholes option pricing models implied volatilities for options and comparing those that were asymmetric. And there was a certain like, glitch, if you will, that you if you if you sold the one and you bought the other, in other words, you went long, the one that was mis priced according to the model, and yet, and you sold the one same company, right, so IBM, and you sold the one that was deemed to be overpriced. It was a pretty good model, and a pretty good batting average was about 70%. accurate. And but the whole thing about it was it was singles and doubles. It was not there were no homeruns. Right. And I knew and I knew that going in, right, because I had done as much back testing, as I put back in 1981. And you know, at that time, it took the computer, I had five minutes to compute one implied volatility. So it was arduous. But I was having a lot of fun. And I was doing it in options. And I was and I was doing well. So I started experimenting with some other models that were more, I'm basically looking at the market, not just individual companies, but the market. And was the market fairly priced. Was the market overpriced was the market underpriced. And in my youthful ignorance, I thought that you know, I was gonna be able to figure that out, no problem. Easy peasy, easy peasy head. So for a moment, I had the really bad fortune of having that model of work pretty well. And so this is what's leading up to my worst investment 1987 in August of 1987, I started according to this model, which said that the market was very overpriced, I started accumulating puts put options, and for those who don't know what that is, it gives you the right to sell a security at a pre specified price, right? So if you have a put option at 100, let's say. And the price when you get to sell it is trading at 70 make a lot a lot of money, because options also are using implied leverage right? To so you're levering the hell out of your money. And, and so I start acquiring these. And all the way through September, early October, I had acquired the biggest put position, or call position, the biggest option position that I had ever had in my young life. So I am 28 How old am I I'm 27 at this time, um, and going into the market crash of 1987 the biggest on a percentage basis of any crash we've ever had. I sold them all the day before the crash

all of them,

all of them

Jim O’Shaughnessy 23:32
every single one of them I managed to make a very small amount of money because the markets as you probably will remember were gyrating all over the place very unusual for that time period. So I sold them the day before the market, the great market crash of 1987 which would have made me I won't give the number but it would have made me a very not sizable but a nice small fortune. Um, and Nope.

Andrew Stotz 24:13
Let me just ask some questions about that. So the first one is that was the market giving some signal and it started to come down and then you saw Oh, I'm making a little profit here. I'm gonna take profit on this position or what was happening that caused that so you were kind enough to walk me through the some of the common mistakes that people make with worst investments?

Jim O’Shaughnessy 24:36
Yep. And what caused that was one of the things on your list and that was emotion. So I sold them when the market most people don't know this, but the day before the crash was a horrible day. My standards by standards then, right. Um, and I was listening I had I subscribed to all sorts of services I had on You know, they didn't have financial TV like we have it now. But there was enough on the radio and everything. I had it all on and I listened. You know, I paid services to the gurus of the day. And I and I had brokers that I talked to as well. And so, like going into the last hour that day, I'm listening. And I'm listening. And these guys, the gurus are issuing flash reports saying, This is the bottom, and I'm calling these brokers who I really trust. I'm like, What do you think? And they're like, Dude, this market is gonna soar when it reopens. And, like, I'm just capitulated, it was pure, purely an emotional decision. I'm gonna get wiped out. And so you know, you know what happens, right? When you get something in your head like that now, and you visualize it. All, all you see is, is chaos and mayhem and despair. You know, because those options cost me a lot of money. And so I envision myself losing all that money being wiped down, being wiped out, literally being wiped out. I'm like, I can't get wiped down. I just can't. And so, obviously, my lizard brain was in full deferral, yep, my no completely bypass the prefrontal cortex, completely bypass any the model, right? Because the model is saying to say he keeps those books, buddy. And, and so emotion, right, overwhelmed with emotion. And, and, and sweating. I mean, honestly, I was, I was trembling, and sweating. And I remember and by the way, we mentioned journaling. I went back and looked at what I wrote at the time. And so you're getting the real story here. Yeah. Um, you know, when I called the broker itself, it was kind of like, almost a movie scene, right? Because I'm like, I'm like this right. Thanks. Sell them all. And he goes, man, are you smart? Thank God, you're doing this, buddy. I'll get back to

Andrew Stotz 27:06
you. Quick. Oh, you know, so good.

Do that.

And knock off my, my

Andrew Stotz 27:17
belly. So good. just sell

Jim O’Shaughnessy 27:19
at that moment. Oh, so good. You just felt this amazing release of this weight from your body? Yep. And you just like, you just think oh, man, like Churchill said, there's nothing quite like getting shot at and missed. felt right. That's my,

Andrew Stotz 27:39
that was it. All right. So tell us what lessons did you learn from this experience?

Jim O’Shaughnessy 27:44
Okay, so actually, I have come to see this experience as the best thing that could have ever happened to me. And the reason for that is I wasn't what I would call a full blown quants, back then quantitative investor. I used quantitative tools, and most of them were mathematical. still are. But they weren't taking advantage of human behavior. They were taking advantage of mathematical anomalies. A couple of things I learned about that. That's great. until some academic from nowhere, publishes a piece that guess what outlines the math of your model, right? And then it instantly stops working. Right. So mathematical anomalies are immediately arbitrage away. Behavioral anomalies are not. But the key point here for me, and for my life and my career. Was this was the turning point in my evolution as a total, emotionless, dispassionate quant. I realized that I was not an exception. You know, we all think we all think we're exceptions, right? Yep. We're not. And, you know, if you're really smart, you're actually probably more likely to fall for all this stuff, right? Because you, you create such great narratives man that you believe them. And then you convince other people of them, and so on, and so on, and so on. So, I read a lot actually, in my journal, because I could see the evolution right there. Right. It was like, over the next couple of months, it's just like, and I started reading a lot of psychological research, right. And most people didn't call it behavioral finance back, right. It was just psychology. But you know, there's a great book that I still remember by a guy by the name Robin Dawes called House of Cards, psychotherapy built on myth, and it basically was the first kind of And biology that put together like all the research that had been done on what they call clinical methods. And those are me as the doctor saying, Well, I think this and actuarial method switches, me telling somebody, this has the most relevance in determining an outcome here. And you've got to wait it this way, and then run it through. And that's going to tell you what, what's wrong. Hmm. Well, what I found when I was doing that research was that we thought that the actuarial methods were going to be a floor right above which we human forecasters or decision makers would soar. Not so it was a ceiling that we could never touch. And we couldn't touch it, not because we weren't smart. We came up with the actual models after all, right? It was because we were incredibly consistently inconsistent. So we were our behavior changed if we were hungry. I mean, there's a thing about parolees right, if you're getting paroled. Or going for parole, you better be the first in line, because you're going to get parole probably 98% of the time. If you have the slot right before lunch, you're not getting paroled, right, because they're hungry, they want to go eat lunch. And they would much rather just say denied, denied, denied, let's go and he right. And I can give you a million of these examples. But I was finding them. And this is back in 1987 88, when nobody has talked about this stuff.

Andrew Stotz 31:39
But come on, Jim. I mean, like everybody knows this, how can they not? Like I mean, it's public information. I mean, I love what you talked about, about the behavioral human behavior versus mathematical anomalies. And that helped, that really helped me to think about it, but still, you've got, I mean, how can it be for listeners out there? To think that, you know, you could just apply a model or some sort of structure, and you'd be able to beat the market? Mac the market? What would you be able to do with that?

Jim O’Shaughnessy 32:12
So it depends on what your processes, right? Yep. Um, when I was designing my earliest models, I was a risk. I was like, the most risk seeking person on the planet. And I didn't realize because I was going to manage other people's money, right. Shaughnessy Capital Management, which was my first company that I founded in 1987.


Jim O’Shaughnessy 32:39
I realized that Hmm, a lot of people can't handle these drawings. You know, because I was trying, I was trying to get a home run every time, right? And great for somebody like me, yeah, not so great for 98% of the population who might hire me to be their money manager. My point is, my point is this. There is a lot of public information. Of course, there are a lot of smart people, I don't deny that there are artists in the market who can do it. And God bless them yet, I haven't been able, I haven't been able to find a way to quantify their process. And, and therefore there are mystery, which is great, because there's more than one path to success. However, the vast majority of successful investors who beat the market over time, not every year, that's a big part of studying base rates, right? Because you got to understand you're going to lose, and sometimes significantly against the market, you got to have the ability to stay with it and stick with the process. Right? trust the process, right? Yep. And, and so, in fact, there was a study done by IBM or their pension managers in the 1970s. And then they were looking for what united Devon wasn't style, they were value growth, you know, they it wasn't capitalization, there were small all the way up to mega cap, what they found the report, you can summarize it in three lines. The investment advice, managers who consistently succeeded for IBM's pension, had rigorous, rigorously researched investment processes that they religiously adhered to, hmm. And you know, so I started another company, which was kind of the first robo advisor in 1999 called net folio. I was a, I was a head of the technology thing. But anyway, I had the good fortune of meeting and having lunch with john Neff, who you might remember was the legendary manager of the Windsor fund. Yep. And he was a lovely guy. And so I went down there to have lunch with him. He's very courtly and he's kind of giving me his, you know, he was a value guy. And he's kind of giving me You know, this what I look for, as I'm listening to him, and he, I'm getting the smile on my face. And he's like, finally he goes, Okay, I can see that you find something amusing. What are you finding amusing? I say, not amusing. I'm fascinated. And I went, john, and he goes, Yeah, and I go, you're quiet. I don't know anybody's Exactly. He got this big smile on his face. and looked at me and he goes, I'm disciplined.

Yeah, there you go.

Jim O’Shaughnessy 35:44
That's, that's it. It's hard. It's hard to be disciplined. You know, look, a passive investor have one point of failure. Right. And that is they panic when the markets in a bear market and they sell out of their positions. Right? Yep. active investors have two points of failure. The first one is similar to passive, but also the relative one. And that is if let's say you're a small cap value manager to pick on the most unloved investment category in the world. And right now, yeah, right now, exactly. And, and and you have underperformed your benchmark by 300 basis points, even if you've made money, you're gonna get fired. Yeah. And so these two points of failure, get into things like, you know, agency risk, career risk, lots of stuff. Yep. And so I've been lucky for most of my career, with the exception of a few years, I spent it Bear Stearns, which I loved, you know, it was a great group of people. But I've always had my own company. So I could, I could just insist upon it. And, you know, even to the point, I mean, somebody asked me in another interview, you know, what are you proudest of? And I said, honestly, I think I'm proudest of the fact that I never emotionally overrode a model. And, and some people are like, Well, that doesn't sound like a very big achievement. Until you do it, until you do it, right. You if you read Greek literature, you know about people tying themselves to the mast, because the siren song are going to tempt them over the board of the ship and they'll drowned. Right. So we had a meeting with an analyst who used to work for Lehman Brothers, who suddenly worked for Barclays and didn't have to change office. And anyway, he came out and he was a quant analyst for the sell side. And we were chatting about it and so I just looked at my glint. How many quants overrode their models. Anyway, about 70%. Yep. Yep. And so to me, that's death. You're done. Huh? You have negated your entire track record? Because that is predicated on not doing that. Yep. Right. Yeah. And so, yeah, there's a lot of different paths, you can take advantage of human in consistencies. But you've got to have ice water in your veins. It's hard. It's even hard now.

Andrew Stotz 38:21
Yep, definitely. Oh, well, this year has been a real challenge for that. So let me summarize a few of the things that I take away from what you've said your story. The first thing is I wrote down in my notes, sell half. Because one of the things that I've, you know, learned is that basically, big mistakes that people often make, from my guess is that they jump into something 100%. And they should have probably sized themselves into that position. You know, they should have grown into that position. Because there is definitely a different feeling that you feel when you when you own something versus when you're thinking about owning it. You're in so so the first thing and that also means when you think that you got to get out, it may be one way of preventing yourself from overreacting to that is say, okay, when my signals say it's time to get out, I'm going to sell X amount, not everything. Now, of course, in this case, because it was more of a flash crash. The reality is that to be successful, you would have had to basically close out those positions pretty quickly, if you had held on to them, which brings up a whole nother question of whether you could have done that. Exactly. And I doubt it by the way. Yeah, exactly. So but for the average investor out there, you know, I think that you know, moving into a position slowly moving out of it slowly is often one way that you can help kind of mitigate the emotional rollercoaster. The second thing that I took away is, you know, I just wrote down to myself follow the model and this year has been a challenge for everybody that has a model And in fact, you know, I have to admit that yesterday, my team and I, we went through and ask the question, how much damage did we do to performance by over by slightly overriding the model this year? You know, we didn't ask, how much do we gain? How much damage do we do? And that was really a and it reminds me of one of my guests Episode 165, five Meb Faber. And Matt, I

don't remember is

Andrew Stotz 40:27
a great guy. Absolutely. And he, he talks about, you know, you know, and it reminds me to have that, that saying, you know, you can have anything you want in this world, you just can't have everything you want in this world. And you no matter. Yeah, map goes on, like, you know, you know, every strategy is going to fail for a period of years. So how long are you willing to bear that one year, three years, five years, 10 years. And that's part of the whole concept of a model is that there's no model that will work every year, you can't have it. And so therefore, the discipline of kind of going through that. And then the last thing is that you have you mentioned something that reminded me of what the book I read by Jason Jason's wag, about what was the What was the name of it? But it was basically it was your money in your brain? And yeah,

Jim O’Shaughnessy 41:22
great book, Jason. Jason is a friend and a great guy. Yeah, guy.

Andrew Stotz 41:26
And what he made me realize, and I literally wrote it down that moment when I read that book is that investing is a physical activity. And that seems so strange at the way before I read that book. But once I read that book, and I listened to you say, I started sweating. You know, once you read that book, this is a contact sport.

Jim O’Shaughnessy 41:49
Absolutely. And you know, he uses a great metaphor for risk. And that is we assess people's risk the wrong way. And then he uses the example of what we do is we show them a picture of a snake and say, Are you afraid? Like no. And we think, oh, they cannot do risk. He goes, what we should do is throw a live snake in their lap. That exactly right. And then you're going to find out how power and arrests are going to be. Right. And so I have always loved that story that that metaphor from him, because it's so true. And you're right, it is physical, it takes over your body. Hmm. Oh, cortisol levels spike. I mean, I study all this stuff, just because I want to know about it. Yep. But it makes profound physical changes in your body, whether you're elated, which is one set of chemicals, and whether you're terrified in the title vision, suicidal, but you know, then that's a whole different set of chemicals.

Andrew Stotz 43:03
Yeah, but ever. They're definitely. Jeez, I'd love to hear. I wonder if Jason had a worst investment ever. Hmm.

Jim O’Shaughnessy 43:12
I think that Jason does mostly index investing, so probably not. So he probably did

Andrew Stotz 43:17
with this house that he bought at the wrong time or something, let's probably you're gonna have to reach out to him anyways. So based upon what you learned from this story, and what you continue to learn, what what action would you recommend our listeners take to avoid suffering the same fate?


Jim O’Shaughnessy 43:37
a process that works for you. It might not work for me, it might not work for you, Andrew. Yep. But if it works for them, and it doesn't have to be quiet. It can be a variety of things. But it's got to be a process that you kind of discover through your studies that feels right to you, that feels like you can stick with it, and then let it work. And it's simple, but it's hard.

Andrew Stotz 44:08
Yep. All right. Last question. What's your number one goal for the next 12 months?

Jim O’Shaughnessy 44:14
So it's interesting. Um, I, I think that my number one goal for the next 12 months is to help with a couple of really exciting projects that Oh, Sam has. And one involves kind of what we would call. It's called canvas. And we would describe it as being an operating system for investment advisors. And it allows for the kind of flexibility and fine tuning as far as taxes as far as things that really make a difference. And, you know, if investors hate or love a certain sector, let's say you worked at Google and you wanted to hire Somebody and they have the canvas platform, guess what, we can eliminate all Google, they can eliminate nearest neighbors to Google who quantitatively look like Google. And then, you know, we immunize you as best we can, because you know, most of your wealth is going to be in Google stock, right? Through stock options, you can do, you know, ESG, investing with it, you know, it's just, it's literally, you move a lever, and it works for you, you customize everything. So I'm very excited about that. And we have been running it for about a year, with a handful 10 investment advisors, we got some really good, some really good advice, some from some venture capitalists about, you know, now only do 10 and make them happy. So that we have a couple other initiatives. And then finally, I want to start in 2021, ah, on the road to the fifth edition of what works on Wall Street, and I say edition, because it might not be a book. It might actually be it might live on the web. Hmm. And the reason we're thinking about doing it that way, is a we can learn in public. By that I mean, yeah. Well, you know, we'll do configurable posts that Oh, Sam, and on other sites as well, hey, guess what we learned? If people have a particular set of skills, which we learned through this, oh, Sam, research partner thing, we're going to invite them in. Yep. And you know, then they suddenly get to put on their CV, you know, associate helping on the latest version of what works on Wall Street. And then, and I'm not sure that I'm going to be able to swing this, I hope so. But then what we'd really like to do is publish all of the relevant data and allow people to use it and manipulate it. Because nobody has, like you said, you can have anything, not everything, right. And so I'm not going to have every idea. I'm sure there's a ton of smart people out there who have great ideas that I don't know, if we put that data out there. They can experiment with it.


Jim O’Shaughnessy 47:14
that's what I'm gonna be focused on over the next 12 months. So

Andrew Stotz 47:17
you're making a playground? Indeed.

Well, life, life should be fun.

Andrew Stotz 47:25
Well, for those of you that follow Jim on Twitter, you know, you'll see all the fun that he has, in fact, he goes into moments of, you know, could be days or weeks where he only speaks through memes. Then occasionally, he snapped out of it. All right, listeners. There you have it another story of loss to keep you winning. Remember to go to my worst investment ever.com slash deals to claim your discount on how to start building your wealth investing in the stock market course. As we conclude, Jim, I want to thank you again for coming on the show. And on behalf of a Stotz Academy, I hereby award you alumni status for turning your worst investment ever into your best teaching moment. Do you have any parting words for the audience?

Yeah, well, I

Jim O’Shaughnessy 48:17
good investing is simple. It's not easy.

Andrew Stotz 48:23
Perfect. And that's a wrap for a great story to help us create, grow and protect our well fellow risk takers. This is your worst podcast host, Andrew Stotz saying. I'll see you on the upside.


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About the show & host, Andrew Stotz

Welcome to My Worst Investment Ever podcast hosted by Your Worst Podcast Host, Andrew Stotz, where you will hear stories of loss to keep you winning. In our community, we know that to win in investing you must take the risk, but to win big, you’ve got to reduce it.

Your Worst Podcast Host, Andrew Stotz, Ph.D., CFA, is also the CEO of A. Stotz Investment Research and A. Stotz Academy, which helps people create, grow, measure, and protect their wealth.

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