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Enterprising Investor is the flagship podcast of CFA Institute and the definitive program for the investment management industry. As stewards of the investment industry, Enterprising Investor will feature intimate conversations with some of the most influential people from the world of finance about the topics that matter most to investment professionals.
Hello, welcome to the Enterprising Investor, the flagship investment podcast for CFA Institute. I'm Mike Walberg, I'm joined today by Eddie Perkin. Eddie spent about twenty years between Eaton Vance, which is now part of Morgan Stanley, where he led a team of 70 as the Chief Investment Officer for their $75,000,000,000 in global equities, and then as CIO for International and Emerging Markets Equity at Goldman Sachs Asset Management. A market veteran whose career has been devoted to improving investment decision making, Eddie combines extensive practical experience with a deep interest in behavioural finance and organisational decision making. And in recent weeks, he published a book capturing the key learnings from his life in the markets.
Mike Walberg:In Running Against the Herd, he translates lessons from investing, psychology, sports, and leadership into a framework for overcoming cognitive biases and making better decisions. We're going to learn today how to overcome our worst impulses, folks, so strap in. Welcome to the show, Eddie.
Eddie Perkin:Great to be here, Mike.
Mike Walberg:So, Eddie, as I mentioned to you before when we were chatting before today's recording, one of the things I really appreciated about this book was that unlike academic texts, you know, tend to highlight the types of biases that can affect your decision making, you offer specific tangible tactics to help combat them. Can you talk a bit, just before we get into the actual tactics, can you talk about your experience with battling bias in the teams that you've led and how process emerged as the magic bullet?
Eddie Perkin:Yeah. Sure. Thank you. The there's been a lot written over the last forty years on the topic of behavioral finance. There are something on the order of 200, cognitive biases that have been identified.
Eddie Perkin:And as you mentioned, a lot of it is written by academics, either academic papers or academic non fiction books. Less has been written by practitioners, particularly practitioners in the investment industry, and there's been less that focuses on solutions rather than simply identifying the problem. So that's where I felt like I had something to offer from my nearly quarter century in markets, investing real capital behind these decisions. The nature of investing, equity investing is my background, is you're dealing with uncertainty. You're dealing with not having as much information as you would like about an uncertain future.
Eddie Perkin:And when you work on an investment team as I did, I worked as part of teams and led teams. You have all of those cognitive biases that working as this individually magnified in the form of group thing. And so the idea behind the book is how can you overcome those biases, turn them, turn a vice into a virtue, take some of the principles of what, where human beings go wrong with their decision making, and turn them into assets rather than liabilities.
Mike Walberg:Yeah. Because I guess it's really those two things, right? It's one, identifying it in yourself and trying to realize that. And then I guess two, be recognizing it in others. And then three, figuring out how, as a team, to help constructively help each other overcome those biases and see your blind spots.
Eddie Perkin:That's right. And I think in a team environment, if you have the right culture, and the culture I always was an advocate for was one of constructive disagreement or constructive conflict. So you're being you're professional, but you recognize that you're, trying to help your colleagues get to a better answer. And so rather than just pat them on the back and say, good job with that one, you feel it's your obligation as their colleague to challenge their ideas, help pick apart their earnings model, and point out some of the risks they might have overlooked themselves. And so having that devil's advocate or red team, blue team, if you prefer that term, someone who's around the table who knows, what you're trying to accomplish and has enough expertise to challenge you and poke holes in arguments with the goal not of making you look dumb in front of your colleagues, but the goal of helping you get to better decisions.
Mike Walberg:So in the book, you highlight 15 behavioral biases that impact decision making. And I should say up front, there will not be a test. At a high level, though, you cover all the biggies, and I thought I would just list them here for our listeners so they get a sense of kind of the breadth of what you cover in there. You've got sunk cost fallacy, hindsight bias, outcome bias, survivorship bias, framing effect, mental accounting, anchoring, recency bias, short termism, analysis paralysis, action bias, optimism bias, overconfidence, and the endowment effect. Now, I've long believed that people learn through stories.
Mike Walberg:And you do, I think, a good job of bringing these concepts to life through examples and stories. So, I wonder if you could tell us about the last one there, endowment effect, in the context of a BMW dealership, and how you've addressed it on your teams.
Eddie Perkin:Absolutely. The endowment effect is one that comes up a lot in investing. So the concept of the endowment effect is that human beings have a documented tendency to put a higher value on something that is in their possession than in, something that they do not have or own. And so that has obvious ramifications for stocks where you might own a stock that's gone up and it feels really good and you wanna keep it even though it's reached its price target or its fair value. Likewise, if the stock has fallen, you might be reluctant to let it go because you're attached to it.
Eddie Perkin:This comes up a lot in different environments and one place that comes up is when you take a test drive of a car. So the story we tell in the book is one of a, an individual who's doing his research and due diligence on types cars he might wanna buy, one of which is a BMW. He goes to the dealership and the lovely sales lady is happy to encourage him with a test drive, turns up the volume on the radio, and, really helps him feel like he already owns the car. And then when she mentions that there's another potential buyer showing up an hour from now, his decision is made. The due diligence goes out the window.
Eddie Perkin:This is his
Mike Walberg:there. Car.
Eddie Perkin:Right? Exactly. And so it's something salespeople use. It when you have free returns for items you might buy online or we try something on in the, in the dressing room at a department store. All of these things are, psychologically driven to make you feel like it's already yours, and therefore you're reluctant to let go of it.
Mike Walberg:And so how do you break that sense in the context of an investment team then? Like, certainly you've seen it over the years. I I have, where analysts, they get, like, call it get married to the stock, right? Yep. Write it all the way down, you double down when things get bad, and you're unable to sort of see your own blind spot as to you're married to it, but you can get divorced.
Eddie Perkin:And my exactly. And my background is one of, being a value investor, and the value investors take particular pride in being willing to add to a position that is going against them, but it it can really hurt you if you, you know, there's a term value trap and catching a falling knife that define that that outcome. I think one one real one exercise we used to run that I thought was really powerful was what we call the zero based rebuild of the portfolio. So this is like zero based budgeting. Rather than start the new year by looking at what you spent last year or start the new portfolio by looking at what you already owned or owned in the most recent portfolio, imagine you have a blank sheet of paper.
Eddie Perkin:An old boss of mine used to say, imagine we have a new client funding today. They're giving us their money for the first time. They don't care what we owned last year, what's done well, what's done poorly. They want our very best portfolio that we can put together for them today. And we would go through this exercise as a team with each individual writing down not only their own sector of coverage, not only their own ideas, but across the entire portfolio.
Eddie Perkin:What not only what positions would you buy, but what size would you buy them in? We'd each reconstruct a brand new portfolio. And of course, then you, at that point, compare it to what you already own in the existing portfolio. And if there are significant differences, that's gonna lead to some of the debate we talked about. And so I think that's a useful exercise.
Eddie Perkin:The the devil's advocate that we talked about earlier, the zero based portfolio rebuild. You're trying to create short circuits for yourself to break through those mental heuristics that lead us to these poor decisions. So that's one that I put right at the top of the list, the zero based portfolio rebuild.
Mike Walberg:Gotcha. So you're you're obviously a sports lover. Anybody who reads the book, well, that will come through in spades there. You develop a few examples tied to that, and and I would love for you to tell the story of how you actually pitched a strategy to NFL owners way back in 1998. If you could tell us the story of the two point conversion and and how it ties to outcome bias.
Eddie Perkin:Absolutely. The outcome bias is when you judge a decision by its outcome rather than by the process that went into it. It's prevalent in sports. Monday morning quarterback is a great way of capturing that concept. So I was I'm a lifelong San Diego chargers fan.
Eddie Perkin:I still call them the San Diego chargers even though they're in Los Angeles now. And there was a game I saw in 1995 where the two point conversion had just been introduced. They were playing the eagles. They were trailing fourteen zero and they went for they scored and went for a one point conversion. In football, you can go for a one or two point conversion.
Mike Walberg:So they get from six to seven or six to eight.
Eddie Perkin:Exactly. And I thought about it after the game and I penciled out some numbers and I concluded that the teams in the NFL were using using it wrong. Well, couple years went by and in the fall of nineteen ninety eight, I actually, it was the summer that year I sent a letter to every owner in the NFL. I got a few replies, a couple of which expressed interest. One was with the Tennessee Oilers.
Eddie Perkin:They were still the Oilers. They just moved to Tennessee. And I met with the general manager for three hours and we discussed how they could have you know, I could provide an improved two point conversion chart as well as ideas around fourth down conversions and all sorts of things. So in the end, his reluctance he, I think, grasped the idea and thought thought it had value. But, in the end, he, I think he felt like it would be too easily disseminated throughout the league.
Eddie Perkin:Everyone would share the information. It'd be too hard to keep it proprietary. But, of course, we've now had a thirty year period since then of money ball and sports analytics becoming more and more prevalent. Every team in the NFL now has an analytics department, but it was kinda cool to be there in the early days pitching what essentially was an improved two point conversion chart to the, Tennessee Oilers now Titans.
Mike Walberg:That was good of him to to to tell you why. Maybe that was self preservation as well in terms of paying you for the for the analytics, but it's interesting. He's just like, yeah. This is this is all gonna get shared around as soon as you tell me someone's gonna, you know, college ball's gonna start doing it, and everyone's gonna know kind of the secret sauce for it. Yeah.
Mike Walberg:Yeah. Yeah. That's pretty
Eddie Perkin:I think one thing I've come to appreciate I saw Bill James, who's the sort of godfather of sabermetrics in baseball. I saw him speak at a conference, about five, six years ago and he made the point that when you have a good having a good idea is not enough. It takes any major professional sports league about ten years to embrace and adopt and implement an idea after it's been discovered for the first time. So it's that implementation phase that I find fascinating because there's so many good ideas out there, but if you don't implement them and operationalize them, then they don't they don't have the predicted value.
Mike Walberg:Right. What is a what is a Robin Crusoe stock?
Eddie Perkin:Robinson Crusoe, it was Robinson.
Mike Walberg:Sorry. Book What did I did I say Robin? Yeah. Sorry.
Eddie Perkin:Robinson Crusoe. It was a book written by Daniel Defoe several hundred years ago now. Person on a ship who gets marooned on a desert island. Think of Castaway, Tom Hanks. So he's on the he was on the island for many, many years in the book.
Eddie Perkin:But he I I love it as a visual, as a mental frame. The idea of one person on their own who has to, you know, find fire and water and food and and all the rest of shelter. But we use this as a frame to say there used to be a show in in The UK called on BBC called Desert Island Discs. So what are the five record albums you would take with you if you had to listen to them over and over again for the rest of your life on a desert island? So we took that concept and applied it to investing.
Eddie Perkin:We said, what if there if you could only own one stock? You know, Warren Buffett talks about having a a punch ticket where you can only punch 20 names over the course of your lifetime. So it's that concept. Like let's really identify the very, very best companies, the stocks that have those competitive advantages, the moat. They and if you're on a desert island, you can't trade the position.
Eddie Perkin:You're just stuck with it. The only thing you've got on your side is time. Then, you know, five, six, seven years from now when you're rescued, you have a high degree of that company will be more valuable than it was when you left due to compound so long term compounding. And it was something we used in 2008 during the financial crisis to keep us out of, heavily leveraged, you know, value traps that were abundant during that time to get refocused on the long term winners.
Mike Walberg:So it pardon me. This reminds me. I had a conversation earlier in the summer here with Neeraj Kamalani. He former president of CBS News. He wrote a book called The Coffee Can Investor, which was a great conversation with him and Matt, the fellow that had been sort of his go to source for stories at sixty Minutes and other things over the years for finance stories.
Mike Walberg:Yeah. So they they followed this idea, they they took it to the as a they took a purist approach to it, really, and said, you know, everything that I'm going to own in this is going to be stuff I'm going own for thirty years. I'm hoping it's going to be a 100 bagger. How did you when you were constructing portfolios at at Eaton Vance and and GSAM, were you how did you treat these kind like, because it did you try to own some that were gonna be kind of four year trades or in others that you thought were gonna own forever? Or or how do you or did you revisit every thesis every year and say this is this continues to be a long term long term compounder?
Mike Walberg:How did you set about putting together a portfolio? Because you it's pretty hard. You know, you you would have to have probably a relatively concentrated portfolio of like 10 or 15 stocks that you thought were really true 100 baggers, and then there are other ones that will are a little bit less compelling but still, you know, had valuation dislocations or a cloud over them for the time being. Like, how did you go about setting up putting together a portfolio in that from that lens?
Eddie Perkin:We'd all love to own 100 baggers, and there are some out there that are going to tend to be smaller cap companies, and I think increasingly, they're going to be private companies because of how late in their life cycle a lot of companies come public. I've always had the view that when you own an equity security, you are owning the perpetuity. So you can't just look at earnings for the next year or two. You need to look at the long term profile of the company. Now that doesn't mean you've got an earnings estimate twenty five years out, but you are ultimately that is part of the value of the, of the stock that you're buying.
Eddie Perkin:And so we entered every position thinking about the long term viability and future and growth potential of each of the companies we own. Whether or not you retain it for an extended period of time is gonna be a function of what happens to that stock, what else you learn about it, what the price action is. One thing that was part of my process was to constantly be probing the portfolio. And maybe you could argue that leads to excessive activity if you're constantly re underwriting your own work, but I think it keeps you out of a lot of problem, problems as well. And so I guess the one play one thing that comes to mind is there was an we at Eaton Vance Eaton Vance had a a brand and reputation for, managing for after tax returns.
Eddie Perkin:So we had some funds that were dedicated tax managed strategies. And part of that means, you're holding for long term capital gains under The US tax code and also you're trying to minimize the gains you take because in a neutral fund structure, those have to be distributed to your shareholders. And so we would have for example, we had a large large cap value strategy and a tax managed large cap value strategy that theoretically had the same underlying model, but due to the tax considerations over time, they drifted apart. And there were there was a stock that was in the tax managed strategy that had gone up tenfold and we just never wanted to take our medicine and pay our taxes. And what was interesting was that particular stock, it was the healthcare stock, continued to rise in value and outperform and we never owned it in the in the non tax managed version.
Eddie Perkin:It was a was a lesson to me that sometimes being patient, sticking with it, and not being overly active can lead to better performance. And so even we even though we had the constraint of tax considerations, which in theory, the unconstrained strategy should perform better than the one that has a constraint, it performed over time about 25 basis points per year better as a result of having that extra discipline, that extra friction that kept some of the long term winners in the fun.
Mike Walberg:That's interesting. It kind of makes his point about letting it ride, right? Yep. A mess with
Eddie Perkin:Find the right stocks, for sure. Yeah.
Mike Walberg:So I want to circle back to talk bit more about how to manage these biases within a team setting. So let's maybe move to the example of the astronaut Mark Kelly, how he dealt with the decision of what to do when his wife, Congresswoman Gabby Giffords, needed life saving surgery. What what does that tell you? What did that tell you about how to have make sure the voices were heard and and how to sort of operate at a maximum communication level, I guess, across the team?
Eddie Perkin:Yeah. I had the opportunity to hear Mark Kelly speak at Goldman Sachs conference, over a decade ago now, and he's now gone on to become the senator one of the two senators from the state of Arizona, potential presidential candidate. And he told the story in the speech of of his the experience of of Gabby Giffords, his wife, being being shot and the emergency surgery. He was in Houston, that's where NASA is, and was called to come to Tucson and meet with the doctors, and they there was an emergency surgery that needed to be done, and there were kind of two ways to go about it. And he, to his credit, recognized in himself that he was not in a position to make a good decision.
Eddie Perkin:He said, I hadn't slept in forty eight hours. I'm emotionally distraught at what's happened. I have no particular medical expertise. So this is not a combination that's gonna So lead to good he gathered all the doctors, and I recall him saying there were about 20 doctors working on the case, and he pulled them into a small break room. And he looked around the room, and remembering the experience from NASA where groupthink had led to the Challenger disaster, he said, I don't want everyone deferring to the senior most doctor in the room.
Eddie Perkin:So he looked around and found the a young woman resident who looked like she was probably the most junior person on the case. And she said he said to her, tell me what you would do. And don't tell me what you're you think your boss wants you to say. You give me your best objective or opinion, independent opinion. And he went around the room in reverse order of hierarchy to get 20 independent opinions because it's so often when we're in that setting when there's hierarchy in the room, everyone just falls in line, and that's where where you get groupthink.
Eddie Perkin:And, you know, NASA, he he referenced the mistakes that had been made at NASA where people the information on the the Challenger and the Columbia space shuttle disasters was in the organization. They knew that there was a potential problem. It didn't surface. It didn't reach the top because people self muted. And so having that and I you know, we did the same thing in our investment meetings.
Eddie Perkin:We would make sure we went around the table and everyone got a chance. We'd either use a blind vote or we'd start with the junior most person. And as the if I was the one running the meeting as the most senior investor in the room, I was very careful not to tip-off which way I was leaning on a stock because I wanted to hear independent points of view before making a decision.
Mike Walberg:Yeah, that's great. It's so important to create that space for them, especially for junior folks that are maybe more timid to speak earlier in their career. Yeah. Don't think I would want to have been that resident doctor being asked to speak first in that environment, but good good good good for him for for asking for her for for giving the advice. Obviously, that it it all turned out well.
Eddie Perkin:It did. Yep.
Mike Walberg:So so you talked about red team, blue team, kind of the the devil's advocate, having folks speak first. More what what other tactics do you advocate for for making making sure that, I guess, all voices are heard and that you're able to make best decisions?
Eddie Perkin:I think for All Voices, we talked about a couple of them already. I like blind votes. Another well, in another area where you where this comes up is in interviewing. So if you're interviewing and this doesn't have to be investing. It could be any organization that's interviewing someone.
Eddie Perkin:Usually, you'll have several people meet with the candidate. And what naturally happens is everyone wants to compare notes. So they all come together in a room and start saying what they think of the other per of this person. And if there is someone who has reservations, they're and everyone else likes the person, they're they're less likely to speak up. And so we always collected feedback from interviewers independently through an HR person or or what have you.
Eddie Perkin:Another a lot of this a lot of these ideas are ideas of anonymity. So the blind vote, the collecting feedback independently. Another one along those lines is when we had a stock presented, we would ask everyone on the team to read the materials. The the materials were always sent out three days ahead of time, and then submit two questions through one of our administrative assistants who would collect the questions, collate them, but not attribute them to anybody. And the presenter would receive those questions ahead of time.
Eddie Perkin:They knew the questions that were coming. They didn't know who to ask them. And people are willing to, ask tougher questions when their name's not attached to them. Yeah. And you get better debate.
Eddie Perkin:People are more prepared. So that was another, giving people the cover of anonymity to ask their questions without necessarily having it attributed to them.
Mike Walberg:Yeah. That's that's that's great. One of the things we do, we're I work for an asset management firm as well, and one of the things that the team uses a lot is Slack, so it allows for for dialogue to happen where folks have the opportunity to think through their questions or their responses or their thoughts, post stuff on Slack. It's not anonymous in that setting, but it allows the more junior folks, I think, to come up with a thesis and produce and defend it without having to deal with the stress of being in a in a in a in a team setting, I guess, at first.
Eddie Perkin:Yeah, I like that.
Mike Walberg:Yeah. I actually wanted to ask you a question about hiring because one of the things you talk about is that you want to test for the ability to engage in productive conflict when you're hiring people. How do you do that in an interview setting?
Eddie Perkin:I think you can challenge people. So we used to do a, what we called a 10 ks test or p test, where a person would be given an annual report. They'd go through it, and in ninety minutes, they were expected to fill questions and have a preliminary view on the stock. And, when you push people, you test them. You know, they'll make a statement, and you challenge them.
Eddie Perkin:Do they back down, or do they come come back at you, you know, with with their own point of view? You can sort of get a feel for, are they someone that's easy to push around, or are they argumentative and combative in a hopefully professional way? I think I also look you know, I saw that I think there was an article in the Wall Street Journal about this the other day about, how resumes all go through AI now. You know, hundreds of resumes come through and you're lucky if a human being looks at your resume. And so one one way people are differentiating themselves is with the personal interests and hobbies section of their resume.
Eddie Perkin:So they if they have truly unusual private pursuits, they'll put them on there just so they get noticed and and identify themselves as a little different. So we used to look for people with differentiated backgrounds that were maybe, you know, if someone's tried an unusual hobby or done something that the crowd didn't do, there's a good chance that they think independently and maybe operate differently.
Mike Walberg:Interesting. And just staying with teams for one more one more question here, if I may. You suggest as well that the best teams are sort of in the three to seven person range. How how did you land on that range, and and what happens above or below that? I I can guess with below, you just don't have the capacity, but above that, what happens?
Eddie Perkin:Yeah. And the teams I ran probably violated this. We were a little larger than that range, but the research, as I've looked into it, the there's something about you know, there's a there's a trade off, as you indicated, between having a breadth of expertise and having more you know, it's how many cooks do you want in the kitchen. It's basically, are your two heads are better than one, but too many cooks boil the broth. So how do you find that optimal medium?
Eddie Perkin:And a lot of research suggests something known as the dinner party problem. So if you were to have let's say you're hosting a dinner party at your house and you want everyone to have one conversation. You're not looking for people to splinter off into groups. What is the number of people you can have where you maintain a single conversation around the table? And I think the research suggests it's a pretty small number on the order of six people.
Eddie Perkin:If it goes to eight or 10, then there's something about the neuroscience of our ability to maintain focus, be it, you know, we want to participate ourselves in the conversation. If they're 10 people, you're only speaking 10% of the time. It's human nature and it naturally splinters above a certain level. So if you want to have that benefit of that focus, but enough enough diversity of opinion and thought, the research as I've seen it suggests three to five is the number.
Mike Walberg:So unfortunately, here Eddie, believe it or not, we're we're getting to the end of our time. I have a two part question I'd like to ask guests on the show, which is what was your first job in the industry? And if you could go back and take yourself for coffee on your first day, what key piece of advice would you offer yourself?
Eddie Perkin:I love it. I it depends how you what you define as the industry. I I'll take it as asset management. And, I worked for Mario Cabelli during business school. He was a I went to Columbia Business School.
Eddie Perkin:He was a Columbia grad himself. And so his offices were, short train ride away, and, he was happy to take one day a week interns. And, so I got an internship with Mario Gabelli. So that was that was good. That got me a good start.
Eddie Perkin:If I had coffee with that person, what would I say? I I think I would say I wouldn't change too much. I'm pretty happy with how my career went. I think one thing I feel very fortunate about is that I'm a naturally argumentative person and I happen to find myself in environments where that personality trait was rewarded rather than punished. And so I think, my advice to myself would be, don't change who you are.
Eddie Perkin:Find the right place that celebrates your personal attributes and, find a way to add value through who you are rather than trying to be someone different.
Mike Walberg:I've been speaking today with Eddie Perkin, former CIO of Eaton Vance and GSAM, and author of the book Running Against the Herd, available in fine bookstores everywhere. Eddie, thanks for sharing your insights with us today.
Eddie Perkin:Thank you, Mike. I enjoyed
Mike Walberg:it. I'm Mike Walberg, and this is Beam, the Enterprising Investor.