In our experience, investors tend to focus too specifically on seeing a single investment in isolation, as opposed to the overall portfolio. They want to identify individual assets with high returns (and ideally low drawdowns as well): a complex we refer to as Herschel Walker Syndrome.
Herschel Walker was a formidable running back in the late 1980s and early 1990s. He was drafted and played the first part of his career at the Dallas Cowboys. He amassed 8,225 rushing yards and scored 61 rushing touchdowns throughout his career. At a time when few running backs were also receivers, he recorded 4,859 receiving yards which contributed to his reputation as a potentially game changing player.
In 1989, the Minnesota Vikings decided they had to have him. They believed he would be the final piece they needed to win a Super Bowl leading them to give up a total of eight draft picks, including three first-round picks and three second-round picks, along with five players.
However, Walker was never able to live up to those expectations in Minnesota and was gone from the team within three seasons.
The Cowboys used the wealth of draft picks they received to build a dynasty in the 1990s. They drafted future Hall of Famers Emmitt Smith and Darren Woodson, as well as several other key contributors to their championship teams. The Cowboys won three Super Bowls with those players in 1992, 1993, and 1995.
Minnesota was thinking about one amazing player. Dallas was thinking about the whole team. The trade became known as “The Great Train Robbery” because of how one-sided the outcome was in Dallas’s favor. It’s used as a prime example of how focusing on a single player rather than the whole team can be a colossal mistake.
This approach of seeing the team as a whole rather than individual superstars has become more common as sports as analytics have gotten better. Famously, the Michael Lewis book/movie Moneyball about the Oakland A’s baseball team showed how a team of seemingly mediocre individual players could actually succeed. Similar approaches have been adopted in basketball, football and other team sports.
As with every business, investors have limited time and resources. Especially for the individual investor or small institution, where are their resources best spent? In our experience, many investors tend to make the same type of mistake that the Minnessota Vikings made – they focus too much on the selection of individual assets (players) rather than on portfolio construction (the overall team).
One type of Herschel Walker trade was most famously exhibited by Long Term Capital Management which posted annualized returns (after fees) of around 21% in its first year, 43% in its second year and 41% in its third year before posting a -100% return in its fourth year. Often these strategies boil down vacuuming up nickels in front of a steamroller. They work well most of the time, in low volatility market environments, but then can blow up spectacularly when the market environment changes.
Another type of Herschel Walker that is often marketed as low volatility are private investments such as real estate, private equity and private credit. In my experience, many private investments have the same risk and return as publicly available equity or bond investments but have the advantage of not being marked to market and so appear “safer” or “less volatile.”
A private investment is worth whatever the manager marks it at until they are forced to sell it. Adopting a different accounting convention is not the same as reducing volatility.
This is not to say that skill at picking individual investments – be they stocks, private companies, or anything else – isn’t additive. It absolutely is. But, if your goal is long-term growth rather than something to brag about at cocktail parties, it matters what the context of the broader portfolio is. The Iron Law of Volatility Drag shows that a few big winners can still be dragged down by a few big losers. Rather than looking for the best player, Herschel Walker, we believe in thinking about how to put the best team on the field.
We believe most investors’ best opportunity to improve their long-term compounding is to look at how they can combine different asset classes and strategies into a portfolio (team) that works together. Once there is a framework in place for thinking about building a team, investors can focus on identifying the best assets within that framework. We’re not looking to pick the best player, we’re looking to build a championship team.
