Outside View vs. Inside View

We’re taking a break this week from our recommended reading to provide a Zoom interview we conducted yesterday with one of the bright young minds in finance today. Patrick O’Shaughnessy is the CEO of O’Shaughnessy Asset Management, host of the Invest Like the Best podcast (one of Wall Street Journal’s 5 must listen podcasts), and author of the bestselling book Millennial Money.

Both Stokes Family Office and O’Shaughnessy Asset Management have 2nd generation leadership. Patrick’s dad Jim founded the firm 30 years ago with a foundation in evidence-based and data-driven investment decisions. Jim O’Shaughnessy is considered one of the pioneers of quantitative investment management. Their investment philosophy of using data and evidence to drive decisions parallels the Stokes Family Office framework.

Patrick and Doug talked about several topics which were pertinent to today’s market environment. Patrick’s discussion on the “Outside View” versus the “Inside View” as it related to baseball and, specifically, Michael Lewis’ book Moneyball particularly piqued my interest as I am a believer in using data over gut feeling or emotion. I’m also a huge fan of Moneyball.

As I thought more about it and relate many of my personal experiences – no personal interaction with my 4 kids, 7 grandkids, friends or clients – over the last five weeks while watching and reading so much disheartening news about the virus. This gloomy perspective has become my “inside view” and I’m sure many of you are having the same experience.

The outside view is based on statistics. It’s the Moneyball approach. Looking at this from a larger lens, America has been through far worse situations (World Wars, Spanish Flu, etc.) and persevered to continue its growth trajectory. As per Patrick’s comments, bear markets, on average, experience a 35% drop from peak-to-trough – almost exactly the drop we experienced last month. Additionally, the US markets have recovered from each previous contraction in an average of a couple of months to several years.

From a business and investment stance, it’s important to take the outside view as much as possible. Historical data allows us to make decisions based on evidence ahead of emotion. This discipline has been key in previous market and economic contractions, as the American economy and markets have proven resilient time and again.

We don’t know what the future holds. How long before we get a viable treatment or vaccine? How deep and prolonged will the recession be? Will fiscal or monetary stimulus be too much or too little? No one knows the answers to these questions. Historical data and evidence drive our decision making. We remain committed to the outside view.

Enjoy this 20-minute conversation between Doug and Patrick. Have a safe weekend.