Robertson was a value-style investor who mentored, and invested with, a new generation of money managers after he retired. He closed his fund just as the dot-com bubble was bursting at the beginning of 2000.1. “Smart idea, grounded on exhaustive research, followed by a big bet.”A colleague of Robertson said: “When he is convinced that he is right, Julian bets the farm.” George Soros and Stanley Druckenmiller are similar.
Munger’s colleague Warren Buffett makes the point that the way to beat Bobby Fischer is to play him at something other than chess. Buffett adds: “The important thing is to keep playing, to play against weak opponents and to play for big stakes.” And: “If you’ve been playing poker for half an hour, and you still don’t know who the patsy is, you’re the patsy.”
This approach is actually involves an attempt to hedge exposure to the market, unlike some hedge fund strategies that involve no real hedging at all. When Robertson started using this a long-short approach, it was less popular; short bets especially were more likely to be mispriced than they are today.4. “Avoid big losses. That’s the way to really make money over the years.”
When an investor shorts a company with a bad management team, it is a safer bet since a business with a good management team is far more likely to fix problems. In other words, if a shorted business has a bad management team, it is insurance that the real business problem underlying the short will continue.
Someone can be a great analyst and yet a lousy trigger-puller. Successful trigger-pulling requires psychological control since most investing mistakes are emotional rather than analytical. A gold speculator is engaged in a Keynesian Beauty contest: “It is not a case of choosing those [faces] that, to the best of one’s judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.
Robert Merton used this cumulative-advantage concept to explain advancement in scientific careers, but it is far broader in its application. Cumulative advantage operates as a general mechanism that increases inequality and explains why wealth and incomes follow the power law described by Pareto.