The future belongs to algorithms.
The views expressed here are those of the author and do not necessarily reflect the views of Morningstar.
This past spring marked the 50th anniversary of The Graduate, which should be of interest to financial analysts. The 1967 movie had an annoying subplot about the seduction of a young college graduate by a glamorous older woman, but for our purposes, the key event was an economic forecast. Mr. McGuire, a boring middle-aged man, advises 21-year-old Benjamin Braddock (Dustin Hoffman): “I just want to say one word to you. Just one word … Plastics.”
The line became a cliché laugh line as an example of misplaced enthusiasm for an industry marked by conformity, superficiality, and pollution. However, the plastics industry would have been a great place to work. Over the next 20 years, the annual production of plastics in the world increased at a compound growth of 11% per year. There was also enormous innovation in the plastics industry. Your cellphone, eyeglasses, and private jet are lightweight, durable products because of the advanced plastic in their frames.
Being a Williams graduate, Benjamin could have joined the Pittsfield, Mass.-based company GE Plastics. GE Plastics would grow to 11,000 employees, $6.6 billion in sales, and $675 million profits. Benjamin would be 71 years old now, a wealthy retired vice president of marketing, and sad that GE sold his division to the Saudi firm Sabic for $11.6 billion.
From an investor’s perspective, however, plastics was a hard industry to make money in, because most plastics manufacturers were divisions of Dow
Benjamin is an illustrious member of a class of young men who become involved with older women. Another such man is Emmanuel Macron. He was elected president of France in May, but one could pretend that he had lost the election and called me up for advice on what career a young man ought to pursue. Could I come up with something as wise as what Mr. McGuire told Benjamin?
“Just one word … Quant!”
Portfolio managers in my era were storytellers who swapped tales of exciting stocks. People like Peter Lynch and Mario Gabelli became rich and famous. But we are being replaced by computer programmers who have Ph.D.s in physics, not MBAs.
Computers use algorithms to solve problems. I think most portfolio managers who succeeded did so based on a couple of simple mental algorithms, sometimes called “heuristics,” or “theme investing.” In my case, I chose smaller companies because they were cheaper than the successful blue chips. I had one very profitable theme, which I called “downstream from technology.”