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08/01/2012

At the Institute


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This posting marks the end of a very long series about CFA Institute’s annual conference. Today’s title doesn’t refer to that Institute, though, but to a post-conference visit to the Art Institute of Chicago and the musings about the conference, the business, and the profession that it triggered.

For insight, it’s hard to beat a world-class museum. You come face to face with beauty one minute and brutal reality the next. Your perspectives are altered and your beliefs are challenged. You see the sweep of history—the connections across time reveal themselves and the true innovations seem mysterious and remarkable. You think about notions of quality and the nature of genius, of art and craft, of inspiration and perspiration.

Other than its general lack of beauty, a careful observer could talk in a similar fashion about the workings of the investment world. And while I didn’t go to the Institute to make analogies between what I saw there and my vocation, they kept showing up even as I was enjoying the art for its own sake.

Most of the ancient objects in a museum get very little attention from visitors. Yet they represent the cultural foundations on which everything else developed—and they speak to the human condition and the persistence of our behavioral urges. Not too many people spend much time studying financial history either. Perhaps that’s why we repeat the mistakes of the past.

How thoughtful are we in our assessment of art or our assessment of investments? Is our analysis superficial and brief, or do we develop a more robust understanding? I was gazing at American Gothic, Grant Wood’s iconic painting, when a young woman approached with her cell phone, framed the image in the display, took a picture, and walked away. She didn’t look at the painting itself even for a second. Sometimes we do the same thing with investments, considering them only through the view finder of an “expert,” and fixing our beliefs forever in response.

The Impressionists draw crowds at the Art Institute, especially the famous Sunday Afternoon . . . by Seurat. Nearby, the collection of Haystacks by Monet (at six, the largest number in one place) reminded me of how our own impressions are formed through comparison. Like selecting a manager for an investment mandate, we can spend lots of time looking at the little differences from one painting to another, but if we know that one work is thought to be the best among the 25 or so versions of haystacks that Monet painted, the chances are we will tend to agree. Too bad.

There is a new modern wing at the museum. How long is “modern” modern? We have a similar question in investment theory. Modern portfolio theory seems decidedly not modern right now, just like much of the art that carries that name. We can’t resist categorizing things, be they paintings or investment strategies, and some of the names aren’t really applicable. (Think of the range of things we call “hedge funds.”) Really, what we are after is good art, good theory, and good practice—and the ability to know rubbish when we see it.


TJB-Research


In an out-of-the-way part of the modern galleries is The Old Guitarist from Picasso’s “blue period.” His greatness was in part based upon his ability to adapt and to redefine his art, like Warren Buffett, who went from deep value to brand franchises and beyond. Contrast that with the way that much of the investment industry is built upon an adherence to an investment approach rather than the continual adaptation of it.

As befits Chicago, there are remnants of elaborate buildings by Louis Sullivan and Frank Lloyd Wright in the museum, including a reconstruction of Sullivan’s original Chicago Stock Exchange trading room (usually empty), the perfect place to contemplate how trading has changed over the years. Today’s exchanges are emptying out too.

Frankly, the galleries of the Art Institute don’t fit very well together architecturally; neither do today’s markets for securities and investment services. But instead of museum volunteers to guide them, investors must rely on gatekeepers that have more complex motivations. There are no guarantees that someone with CFA behind their name will do better by you than anyone else. But the organization that confers the designation has education and ethics at its core, as the annual conference demonstrated.

That is a canvas upon which beautiful art can be made.

This posting originally appeared as part of a series of postings on various aspects of this year's CFA Institute annual conference. See the PDF index on the research puzzle for the complete series.

–Tom Brakke, CFA

Tom Brakke, CFA, provides consulting services to investment organizations on decision making and the communication of ideas. For more, visit his blog, the research puzzle.

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