One of our neighbors is a world-class epidemiologist.
He travels the globe, tracking down outbreaks of weird diseases and helping countries fight bioterrorism.
Given these credentials, it's ironic that he is also the one responsible for infecting my family with an impossible to eradicate "superbug"
- one that spreads quickly among humans, not by fleas or tainted water, but via smartphone.
Yup, Dr. Ian Lipkin
, the John Snow Professor of Epidemiology at the Mailman School of Public Health at Columbia University, has gotten us incurably addicted to the video game, "Plague, Incorporated."
Given Dr. Lipkin's job description, I wouldn't blame you for thinking that the game's objective is to save the world from some new Andromeda Strain
. But you'd be wrong. With Plague Incorporated, you must channel your inner misanthrope and try to kill every human on the planet.
This is not as easy as it sounds (fortunately).
Make your plague too deadly, and it won't infect enough people. Make your plague too mild or not contagious enough and the heroic doctors housed within the game will find a cure and wipe you out. As a result, the game makes you strike a tough balance between being lethal and being speedy.
As you might imagine, keeping score against the "villainous" doctors trying to save the world, is complicated. Dr. Lipkin himself, despite a lifetime devoted to the pursuit of deadly microbes, has yet to beat the game, much to his disgust.
Interestingly, all the counting up of millions of people still alive post plague got me to thinking about the scorekeeping we do in this business.
As the year ends, whether bull or bear market, the time of reckoning draws near.
Now, mind you, scorekeeping happens all year round. But there's something about the nights getting longer and the coming winter solstice that creates an extra level of soul searching.
At Daruma, here are the things we ponder as we perform a post-mortem on the year's performance:
- What percent of the stocks we owned over the last year and three years went up? And by how much compared to those that went down? It's easy to focus on the "hit rate," but if the pluses are small and the minuses are big, having a positive hit rate isn't going to do much good.
- Did we add any value with adds and trims? Did we do a better job when we added or trimmed on the way up, or when we added or trimmed when the stock went down? Did we waste too much energy chasing squirrels when we should have focused on elephants? Activity does not always translate into returns.
- How did the stocks that we sold do compared to the stocks we replaced them with or decided to keep? "Out of sight, out of mind" means that we risk scoring ourselves only for what happened, and not for what could have been.
- How did we spend our time? Since one team is responsible for two products, did we allocate our time properly between the two? And while we're at it, did we get the right balance of new ideas versus maintenance research? And did we have the right mix of tasks - calls with analysts versus field trips to companies, for example? It's easy to look at results without examining the success of the actions that led to those results.
- How did we perform on an absolute and relative basis - in addition to the benchmark, sectors and industries - against the true investable universe? Not every stock in a small-cap benchmark in particular can be bought, as there are many teeny and illiquid banks and companies. Did we catch the best possible fish in our pond?
As we tally up our choices, good and bad for the year, all of these real-life tradeoffs must be scored, just like the choices required by Plague, Incorporated. In both cases, whether dealing with a global epidemic or an investment process, the components must be just right:
Not too lethal (don't do damage to returns), and just the right amount of contagious (spread the stuff that works).
Wishing you and yours a happy and, ahem, healthy holiday!