A Lesson On Black-Box Investing: Kurt Lindner And The Lindner Dividend Fund

“When the facts change, I change my mind.  What do you do madam?”

– Winston Churchill, John Maynard Keynes, Paul Samuelson?

The CFA Institute’s second quarter 2017 Financial Analysts Journal included a research article penned by Martijn Cremers, professor of finance at the University of Notre Dame, entitled “Active Share and the Three Pillars of Active Management:  Skill, Conviction, and Opportunity.”

We are currently struggling with portfolio construction due to historically high stock prices and interest rates that provide a little reward, and I thought it would be beneficial to share with you Cremers’ understanding of what it takes to be a successful money manager:

The three pillars of skill, conviction, and opportunity are an application of the philosophical idea that practical wisdom involves the full triad of right knowledge, good judgment, and effective application and are not just a subset of these three components.  In other words, to be successful in the long term, one must have a good understanding, make the right choices, and have the practical ability to do so effectively.  It is insufficient to have a good understanding but not enough willpower or to have both but face practical obstacles that prevent effective implementation.  Perhaps worst of all is to have strong willpower and great opportunity but lack understanding.  Applying this triad of requirements to investment management means that successful managers must have (1) the skill to identify good investment opportunities appropriate for their clients, (2) the right judgment or willingness to choose prudently among the identified opportunities, and (3) sufficient opportunity or lack of practical obstacles to do so persistently.

After reading this, my memory flashed back to Kurt Lindner and the failure of his fund.  I believe it is a great example of what can happen if a portfolio manager relies exclusively on a black box formula, and has neither the skill nor conviction to adapt when market opportunities decrease due to a changing marketplace.

When I first entered this business, I made the same mistake almost every individual investor today does – thinking past performance is the best guide to future performance.  It takes a loss or two to recognize the fallacy of this approach to investing.  Being from Iowa, I was close enough to Missouri to adapt their “show me” attitude.  Kurt Lindner also did just that – he “showed” what a great manager he was through his fund’s performance.