Before launching his asset management firm Alpha Architect, Dr. Wesley Gray served as a Marine Corps officer in Iraq. Already a student of economics at the time he joined the Marine Corps after graduating from Penn's prestigious Wharton undergraduate program, Wes found that military experience gave him many insights into the nature of people and financial markets alike. An acclaimed author and portfolio manager who received a doctorate in finance from University of Chicago, Wes's hard-won lessons from the battlefield have informed his investment approach. To Wes and his portfolio management style, the rules of combat and competition can be universal.
You now run an investment firm, Alpha Architect, but you've also written books about fighting wars and investing in markets. How has your time in the military informed your work as an investor?
There are two lessons that I took from the military that apply to our investment approach. The first one is what everyone knows: humans are emotional, and the more that things are chaotic and crazy, the more emotional they get. The way you deal with that in a military context is to train all the time, under conditions of stress. We use systematic, quantitative tools [in investing] for the same reason that we shoot live rounds of ammunition over Marines' heads in training to ensure that they're operating effectively under those conditions and following basic procedures. We do the same thing in financial markets: we follow basic procedures that we know on average will accomplish a mission.
The second lesson is the dynamic nature of both the military and the market. If I shoot at somebody, they don't just stand there, they run away and try to shoot back at me. Similarly, in financial markets, if you see something cheap, other people think it's cheap too, and then it gets expensive. There's action and reaction, and understanding the dynamic component of gains--whether in war or a in financial markets--is really important in figuring out how to be successful over the long term.
How do you balance humility with convincing people to trust your judgment? Is there a parallel between persuading clients and inspiring soldiers, and is humility an asset or a setback in those settings?
Sometimes in the military, you don't know what the hell is going on, but you have to give an order with confidence and bravado so people will follow you through the firehole. The troops' trust in you is about your ability to respect them, and your integrity, honor, courage, and commitment. They know that you're not just pulling rabbits out of a hat, and that you're thoughtful and calculating about how you make decisions. You first establish credibility, trust, and confidence, so that when you say 'hey, let's do this,' the troops know it actually means something. The same is true in financial markets. When we conduct research, we try our best to find the truth, but we never claim to know the absolute truth, because anyone who says that is probably full of it. We come to solutions that we think are our best foot forward, and then we say, 'hey, this is what we put all our money into, we are as confident as we possibly can be given the amount of uncertainty in the stock environment, let's do this.'
What's the best war analogy to explain your approach to investing? What type of story would best help people understand what you're doing in the markets?
One example is that value investing works when you have a long time horizon and sit through chaos. It's the same thing in military strategy--if you're doing a patrol, you don't go down the road because the enemy knows that's the easiest avenue of approach. So you have to do something really painful that the enemy doesn't think you're crazy enough to do. Instead of taking the road, you roll through the thistle patch, repel up the thousand foot cliff, get behind the enemy, and shoot them in the head. In investing, just like in war, you have to do the most counterintuitive concept ever, otherwise the enemy has already got that base covered. You just have to be weird or unpredictable, in some sense. Warren Buffett's like that. He bought Geico and had 70% of his wealth in one security. No way someone's crazy enough to do that. Guess what? When you do crazy stuff that no one anticipates, and you're willing to be a little different, that's how you get the edge. So, in that sense, I think there are a lot of analogies between war and investment.
So, you're a professional contrarian.
Yes, there's always this tension. A lot of storytellers want to placate your desire to do things that are easy, simple, and facilitate some need that makes you feel good in the short run. But the problem is, the long term stuff is more painful and tougher to do, and there's some short-term pain for long-term gain. That applies in everything. Why do little kids always want to eat candy and not broccoli? Why do investors always want the guy who promises 20% returns every year with no risk, when they have the nice, simple Vanguard fund? Time and time again, people make the wrong decision because it feels good in the short run. I think these rules, and this philosophy--in war, in life, in investing--it's all the same.