What do legendary investor Warren Buffett and former basketball star Rick Barry have in common? It has to do with how the former makes investment decisions, and the latter shot free throws.
Barry perfected the “granny” shot — shooting free throws underhanded — that is a rarity in professional basketball. The shot, which proponents hail as improving accuracy, is a good illustration both of how going against the grain breeds success and how the more common bias in favor of following the crowd leads to poor decision-making in the face of peer pressure. Whether to go with or against the crowd can determine the payoff in both sports and finance.
Let’s start with the basketball example. While better results can be achieved with the underhand foul shot, it is rejected by players because it is not cool to employ it. As explored by the radio show This American Life last year, players’ rebuff of the “granny” shot is a decision to move away from a type of throw that was more successful to one that was less successful.
In his own podcast series, Malcolm Gladwell delved into two examples of player decision-making related to underhand free throws. NBA legend Wilt Chamberlain’s highest free-throw percentage of 61% was in a season when he used the underhand technique. But he admitted he felt like a sissy and switched to the more readily-accepted style. This led to a decline in his free throw percentage, at or even below 50%.
Barry, meanwhile, stuck with the underhand free throw style despite peer pressure to switch. At the time of Barry’s retirement, his 90% free throw success rate record was first in NBA history. His son, Canyon Barry, has similarly found success using the underhand shooting style. What does this tell us? In Gladwell’s telling, the world is divided into people with a high-threshold personality, who are more likely to allow the crowd to dictate behavior, and “low-threshold” personalities — those less likely to allow the crowd to dictate.
This is valuable insight for the world of finance and specifically the world of investment banking and market trading.
There are of course some attractive aspects to traders who follow the herd, or better yet those who lead the herd. Take the case of the dot-com bubble. It was 2001 and the first internet boom had reached a zenith. Henry Blodget and Mary Meeker were pronouncing ever higher stock price targets for their favorite dot-com stock picks. People scrambled to buy each of these stocks as they reached ever greater price heights. Folks like Blodget were able to ride a popular wave, and funds and banks easily raised assets when they promoted internet funds and stocks.
In the short term, folks with a high threshold enjoyed great success. Meanwhile, folks like Buffett, who have a low threshold and so can confidently go against the crowd, were having a hard time achieving good returns and raising assets. Such investors, however, clearly had the last laugh after the dot-com crash; their low threshold proved to be a great asset in the longer term.
Another example was in the ultimate outcome for those who promoted Bernie Madoff’s funds, versus his detractors. Investing with Madoff had popular appeal among certain social circles; it became a mark of social standing for those who cared about such appearances. Underpinning this appeal was, of course, the very successful track record that was promoted by Madoff and his marketing machine. There were certain folks, however, that were not so impressed and did homework to try to understand if these returns were perhaps too good to be true. These were examples of low-threshold personalities. One example was Harry Markopolos, who analyzed the fund performance of Madoff in the face of all the cries of genius, and argued that there was something fishy.
Thinking that someone like Madoff, who was so established in the inner sanctum of Wall Street institutional structures, could have been making it up took a lot of imagination. Markopolos followed that up with actual letters to the Securities and Exchange Commission with warnings about Madoff. His view was so deeply unfashionable that it was apparently not taken very seriously at first by the SEC, despite the evidence he had brought. Markopolos’ sticking to his guns required a low-threshold personality; his view was proven correct over the long run.
In 2005, the herd similarly was stampeding towards mortgage securities. The few who didn’t or who bet against those securities were eventually rewarded for their contrarian positions. John Paulson, who spent a few years hawking his ideas and finding few likeminded souls to invest with him, is another such low-threshold personality.
On Wall Street, high-threshold personalities are the rule, but low-threshold personalities are sometimes the key to success. Going against the grain in selective scenarios is a rare quality but one that over the long term can be richly rewarded.