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'Skilled Incompetence' And Other Ways Dumb Things Can Happen In Markets

Mar. 02, 2018 9:39 PM ET2 Comments


  • Markets are frequently subject to extreme or unusual conditions that can leave investors wondering what is going on.
  • Efforts to understand such phenomena are often thwarted by "learning disabilities" that prevent active analysis and discovery.
  • In addition, dumb things often result from a web of interrelationships and feedback that author Peter Senge calls "systems."
  • An important property of complex systems is that they themselves are often the root causes of crises.

Curious and thoughtful investors can be forgiven for wondering how so many silly things can be going on. Why is there so much interest in stocks when valuations are so high? Why were central banks so aggressive in easing monetary conditions and are so slow in returning to normal? Why have cryptocurrencies exploded in popularity? What can or should investors do about it?

In the effort to explore answers to these questions, it makes sense to consider a realm that persistently engenders similar types of silliness, that of corporate culture. Indeed, one of the influential business books that has withstood the test of time well, the Fifth Discipline by Peter Senge, provides a framework for diagnosing how dumb things can happen as well as a prescription for how to correct them. Such insights can also be effectively applied by investors to understand much of the silliness occurring in today's markets.

It's easy to pick on corporate culture and office behavior partly because there is so much good material, i.e., lots of stupid things happen. Indeed, Senge points out that "Organizational politics is such a perversion of truth and honesty that most organizations reek with its odor." In addition, many of us have experienced this firsthand. Constantly dealing with such gaffes could be deeply frustrating if not for important outlets of comic relief such as the Dilbert cartoon and The Office sitcom and the empathy of our colleagues.

Senge describes that silly things happen because most organizations have a multitude of "learning disabilities" that cause them to fall well short of their full potential. He goes on to explain that these disabilities impair organizational performance despite "the best efforts of bright, committed people."

One of the disabilities Senge highlights is "the fixation on events." As he describes, conversations in organizations are often

This article was written by

David Robertson, CFA serves as the CEO and lead Portfolio Manager for Arete Asset Management, LLC. Dave has been dedicated to the investment management business for over twenty years having analyzed stocks in a wide variety of size and style categories. Early in his career, he worked intimately with a sophisticated discounted cash flow valuation model developed by Callard, Madden and Associates which shaped his skill set and investment philosophy. Since then, he has worked on large, institutional portfolios as well as those of high net worth individuals. Recent experiences include starting up a mid cap core institutional strategy at Credo Capital Management and managing the Ark mid cap fund at Allied Investment Advisers prior to its acquisition by M&T Bank. Having worked his way through Grinnell College, the CFA program, and the evening program at Kellogg, Dave is intimately familiar with balancing the need for capital preservation with the desire to exploit market opportunities as they arise. He majored in math with extensive studies in economics and philosophy at Grinnell. At Kellogg, Dave majored in finance, marketing, and international business while completing the CFA program concurrently. Dave has served as president and co-chair of programs for the Baltimore CFA Society and serves on the Investment Subcommittee for United Cerebral Palsy, Central Maryland. He has lived in Baltimore since 2000. While Dave has always enjoyed the ongoing intellectual challenge of analyzing investment opportunities, investing means much more to him than just that. Having been the beneficiary of the needs blind admission policy at Grinnell College, which was facilitated by a healthy endowment, he is intimately aware of and compelled by the the socially useful purposes of good investing.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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