ChatGPT‘s Limited Knowledge of Financial History
“There can be few fields of human endeavor in which history counts for so little as in the world of finance. Past experience, to the extent that it is part of memory at all, is dismissed as the primitive refuge of those who do not have the insight to appreciate the incredible wonders of the present.”
John Kenneth Galbraith
Economist and Financial Historian
This newsletter is longer than usual, but I hope it is valuable. Andrew Mitchell, Founder of Ophir Asset Management, recently asked ChatGPT to name the top ten investors of all time. The software responded with the list below. Andrew then posted it on LinkedIn, and it prompted a lively discussion regarding who deserved the honor and who was overlooked.
ChatGPT’s List of the Greatest Investors
Warren Buffett
Peter Lynch
Benjamin Graham
George Soros
Ray Dalio
Jim Simons
Philip Fisher
John Paulson
Charlie Munger
Jesse Livermore
Having just finished the manuscript for Investing in U.S. Financial History, I was intrigued by the discussion. ChatGPT’s list was not terrible, but there were obvious biases that led to the inclusion of four individuals who were undeserving and the exclusion of several who were clearly worthy. The first problem stemmed from ChatGPT’s recency bias, as it only included investors with track records in the 20th and 21st century. The second problem was gender bias, as all ten individuals were men. The third was a nationality bias, as the list was limited to Americans. Finally, there was a lack of transparency as to what criteria ChatGPT used to identify the best investors. In fairness, this information was not requested, but it still presents a problem.
The absence of standard criteria got me thinking about what factors should be used to identify the greatest investors in history. The first criterion must be the strength of the individual’s track record. Given the ruthless and ever-increasing efficiency of securities markets, only investors whose track records persist for an extended period warrant consideration. Further, to ensure that their success was attributable to skill rather than luck, it must be based on many independent successes, rather than a few windfalls.
This initial screen disqualified Jesse Livermore, John Paulson, and Peter Lynch. Livermore was an easy elimination, as his career ended in bankruptcy in the wake of the Great Crash of 1929. John Paulson made billions in the Global Financial Crisis but has had a mixed career since then. Peter Lynch’s career lasted only 13 years and the market forces at the time provided a strong tailwind for his strategy. Finally, it is less clear-cut, but I also believe Philip Fisher should be deleted. My knowledge of his techniques is limited, but room had to be made for J. Pierpont Morgan. Fisher was the least compelling name that remained on this list. This may not be the best justification, but it was the rationale.
The Timeless Virtues of America’s Greatest Investors
So, why have the six individuals identified by ChatGPT earned their positions? And who should occupy the four open spots? It is impossible to answer this question definitively, but the remainder of this newsletter presents an argument. The first premise is that the only way for investors to outperform market averages and peers for an extended period is if they have a unique ability to discover facts that are true, material, and almost completely unknown to everybody else. Second, once these facts are known, these investors are often required to hold their positions for long periods of time before they can profit from them. Third, they must ensure that they can sustain their competitive advantages as markets evolve. Finally, the rarest talent of the greatest investors is extending their track record beyond their lifespan and pass their talents to the next generation.
The greatest investors in U.S. history all achieved the first three requirements, but even among this elite group, few have have achieved the fourth. The remainder of this newsletter explains 10 virtues of great investors and uses one of America’s best investors as an archetype to illustrate why each is critical. The important caveat is that my proposed revisions to ChatGPT’s list also suffer from biases. Most importantly, it is based only on U.S. history, and there are undoubtedly many great investors who operated beyond U.S. borders. There are also many biases (such as gender) that likely influenced my revisions. Nevertheless, I hope this list and the virtues that accompany it, help explain why truly exceptional investors are such a rarity.
1. Discovering Unknown Truths
The most under-appreciated principle of investing is the wisdom of crowds. This principle explains why securities markets are so ruthlessly efficient. It also explains why most investors are better off sticking with traditional asset classes and indexing most (if not all) of their portfolio. Nevertheless, there are some individuals who are capable of outperforming peers, and this ultimately stems from their ability to discover truths that are invisible to everybody else. The virtues that enable them to accomplish this objective include: skepticism, persistence, and creativity.
Charlie Munger (Skepticism)
“Invert, always invert: Turn a problem upside down. Look at it backwards.”
Charlie Munger
Vice Chairman of Berkshire Hathway
Discovering valuable, unknown facts is only possible when people constantly question the validity of conventional thinking. Charlie Munger possessed this virtue, and he elevated it to an art form by using the practice of inversion. To understand how this process works, I highly recommend reading his June 13, 1986 commencement speech at Harvard University (it appears in the suggested book below). Rather than advising the graduating class on how to achieve success, Munger advised them on the vices to embrace in order to live a miserable life. He then encouraged them to be unreliable in relationships, refuse to learn from the mistakes of others, and immediately give up when faced with adversity. Munger applied the same inversion techniques when evaluating investment opportunities. It enabled him to look at situations from an entirely different perspective, and he credits many of his successes to this tactic.
Recommended Reading: Poor Charlie’s Almanack by Charlie Munger
Ray Dalio (Persistence)
“There is always a good path that you just haven’t figured out yet, so look for it until you find it rather than settle for the choice that is then apparent to you.”
Ray Dalio
Founder of Bridgewater Associates
Ray Dalio, the former CIO of Bridgewater Associates, retired with an impressive track record that lasted nearly three decades. His returns are even more impressive when adjusted for risk and the hefty fees that accompanied them. At the core of Dalio’s success was his relentless (and often painful) pursuit of truth. This forced Bridgewater’s investment professionals to confront uncomfortable, but critical, realities about economies, markets, and themselves. In his bestselling book, Principles, Dalio explains how the search for truth enabled Bridgewater to identify and exploit rare mispricing opportunities and market dislocations. This type of commitment to understanding reality is both rare and essential, as most investors believe what they want to be true, rather than what is true.
Recommended Reading: Principles by Ray Dalio
Jim Simons (Creativity)
“I don’t know why the planets orbit the sun. That doesn’t mean I can’t predict them.”
Jim Simons
Founder of Renaissance Technologies
Jim Simons founded Renaissance Technologies in 1978. He is the archetype of creativity because he devised a way to profit from small market inefficiencies that exist in the plumbing of securities markets. The mathematicians at Renaissance Technologies created a complex, technological infrastructure to identify and exploit these inefficiencies, many of which exist for unknown reasons. The opportunity set is limited, and eventually Renaissance accumulated more capital than they could deploy. Its flagship Medallion Fund now consists largely of the fund’s own capital, and it functions more like a mint than an investment fund. As of 2018, the fund had returned an astounding 39.1% net of fees over a 30-year period. There are virtually no investors who can even dream of replicating Renaissance’s capabilities, which firmly establishes Jim Simons as the archetype of creativity.
Recommended Reading: The Man Who Solved the Market by Gregory Zuckerman
2. Holding Positions
In 1928, Charles E. Merrill, founder of Merrill Lynch, was concerned that U.S. stock valuations had become detached from reality. He encouraged his partners and clients to exit the market nearly a year before it peaked in the Fall of 1929. In the meantime, he suffered relentless ridicule and came to question his own sanity before seeking psychiatric treatment. The challenge for great investors is that, by definition, they are forced to hold unpopular positions that appear to be wrong – even foolish. The next set of virtues ensures that these investors maintain their positions despite the constant pressure to abandon them.
Warren Buffett (Patience)
“The stock market is a device for transferring money from the impatient to the patient.”
Warren Buffett
Chairman of Berkshire Hathaway
History’s greatest investors understood that successful investing is more like watching paint dry than hitting the jackpot on a slot machine. This is often because it takes time for the masses to accept the truths that they discovered. Undervalued assets often remain undervalued for years (even decades), while overvalued assets often become even more overvalued before collapsing. Warren Buffett has always appreciated the importance of patience. He cares little for the daily (or even annual) noise of the market, and patiently allows his investments to steadily increase in value.
Recommended Reading: The Essays of Warren Buffett by Lawrence Cunningham & Warren Buffett
Henrietta “Hetty” Green (Thrift)
“I smoke four-cent cigars and I like them. If I were to smoke better ones, I might lose my taste for the cheap ones that I now find quite satisfactory.”
Edward Robinson
Father of Hetty Green
Hetty Green was by far the most underrated and misunderstood investor in U.S. history. Not only does she deserve a place among the best, but she also deserves the top spot. Thrift was one of Hetty Green’s many virtues, but few of her contemporaries appreciated the role it played in her success. Hetty Green’s thriftiness was legendary. She spent most of her life renting modest rooms in boarding houses in Brooklyn and Hoboken, and her business headquarters consisted only of an unreserved rolltop desk at Chemical Bank. What her critics failed to appreciate was that her thrift enabled her to survive the frequent financial panics on Wall Street, which ruined many of her contemporaries. Thrift is an essential weapon of successful investors because it enables them to hold positions during times of financial distress. It also yields exceptional opportunities because those who practice thrift can deploy cash confidently when it is in short supply.
Recommended Reading: The Story of Hetty Green: America’s First Value Investor and Financial Grandmaster
George Soros (Resilience)
“If I had to sum up my practical skills, I would use one word: survival.”
George Soros
Founder of the Quantum Fund
George Soros is often viewed as a controversial political figure, but few question his investment prowess. Soros secured his place in the investment hall of fame in 1992 when he made a bold bet that the Bank of England lacked the foreign currency reserves to maintain the value of the Pound Sterling. This bet exposed him to painful losses if he was wrong. Many investors on this list avoid wagers at this scale, but those who make them are forced to test the depths of their resilience. Sound investments often produce early losses, and investors who lack resilience are prone to exit their positions prematurely. George Soros’s resilience was tested many times during his forays into currency markets, yet he refused to abandon his investments until he reaped the rewards.
Recommended Reading: The Vandals Crown by Gregory Millman
3. Preservation of Competitive Advantages
The irony of the investment industry is that the more an investor boasts about their talent, the less likely they are to have any. This is because when a true competitive advantage exists, it is best to keep it secret. If it is discovered and adopted by the masses, it is no longer valuable. This makes discretion a key virtue.
There are two other virtues, benevolence and integrity, which may seem like a strange fit under this header. Nevertheless, investors who care little for ethical standards and the well-being of others have a habit of failing – and when they do, they receive no assistance from those who could rescue them. For this reason, these virtues warrant inclusion.
Jay Gould (Discretion)
“Never tell anyone what you are going to do till you’ve done it.”
Cornelius “The Commodore” Vanderbilt
Owner, New York Central Railroad
Jay Gould is the most difficult addition to this list because his extraordinary skills were offset by a lack of character. In the late 1800s, there were few laws governing the behavior of stock operators and corporate owners. Jay Gould took advantage of the regulatory void and exploited loopholes to circumvent the few laws that existed. He routinely used deceit and treachery to orchestrate many of the most memorable conquests on Wall Street during the Gilded Age. He was also notoriously discrete. Most victims of his schemes had no clue that they were targets, much less that Gould was the one pulling the strings. Gould remains an enigma to this day because he rarely shared his thoughts with anybody. Although his vices were plenty, his extraordinary discretion during a time when boasting was expected on Wall Street earns him a place on the list.
Recommended Reading: Jay Gould, His Business Career by Julius Grodinsky
J. Pierpont Morgan (Integrity)
“The first thing is character. Before money or anything else. Money cannot buy it. A man I do not trust could not get money from me on all the bonds in Christendom.”
J. Pierpont Morgan
Founder, J.P. Morgan and Company
The Gilded Age was an era in which the volume of trading on Wall Street increased rapidly, but there were virtually no regulations to prevent bad behavior. The stock operators at the time routinely abused investors by engaging in elaborate market manipulation schemes and insider trading. J. Pierport Morgan restrained many of the worst abuses when he emerged as Wall Street’s de factor leader in the 1890s. Morgan had his flaws, but during desperate times, he consistently placed the interests of clients and country above his own. His integrity generated returns for his businesses, and trust in the Morgan name sustained his competitive advantage as an investor and financier.
Recommended Reading: The Panic of 1907 by Robert Bruner and Sean Carr
Benjamin Graham (Benevolence)
“The chief burden on my mind [during the Great Depression] was not so much the shrinkage of my fortune as the lengthy attrition…Add to this the realization that I was responsible for the fortunes of many relatives and friends…”
Benjamin Graham
Founder of the Value Investing Philosophy
Ben Graham is widely recognized as the father of value investing. He authored two classic books, Security Analysis and The Intelligent Investor, which documented his techniques. Graham’s investment accomplishments were exceptional, but his strong moral compass was even more impressive. During the early 1930s, Graham’s first investment fund nearly failed, but what disturbed him most was the thought of ruining the lives of his investors. To maintain dividend payments on which his investors relied, Graham used his own capital. The goodwill that Graham created with his investors enabled him to whether the storm and recover after the Depression subsided. Placing the interests of clients above one’s own self-interest is a discipline that many investment professionals abandon in difficult times — and even the best investors experience difficult times eventually. Graham’s refusal to compromise his principles demonstrated that it is both a moral virtue and strategic asset for the greatest investors.
Recommended Reading: The Memoirs of the Dean of Wall Street by Benjamin Graham
4. Perpetuating Success
In the late 1940s, the U.S. emerged from World War II with two-thirds of the world’s gold and the only intact industrial infrastructure. Over the next several decades, this enabled institutions to amass a substantial amount of wealth, and their trustees became influential allocators of capital. This created an entirely new challenge for investors. Pension funds, endowments, and foundations were expected to exist in perpetuity. This required competitive advantages to extend beyond the lifespan of the individuals who created them. The last of the ten greatest investors in U.S. history mastered this new requirement. David Swensen’s success is often erroneously attributed solely to his use of alternative asset classes, but his success at the Yale University Endowment was driven primarily by his extraordinary teaching and mentorship abilities, which are much more difficult for institutional investors to replicate.
David Swensen (Mentorship)
“I realize that the real secret ingredient was not just David’s conceptual framework for the investment endowment portfolios, but vitally, his extraordinary investment in people. The Yale Model needs highly intelligent, committed, and selfless team players to excel. David’s investment in people—that is the secret sauce!”
Dean Takahashi
Former Senior Director, Yale Investment Office
The Yale University Endowment is widely regarded as the gold standard of institutional investing. From 1987 to 2021, it returned approximately 13% per year, while the median endowment returned only 8.2%. Ever since David Swensen published his book, Pioneering Portfolio Management, institutional investors throughout the world have sought to replicate his performance, but few have come close. One reason is that few understand the true source of Yale’s competitive advantages, and instead, they assume that simply allocating to alternative asset classes, such as venture capital, buyout funds, and hedge funds, is all that is required. They overlook the factor at the heart of Yale’s success, which was Swensen’s talent for teaching and mentoring. Illustrating Swensen’s ability to mold great investors, in 2022, Dean Takahashi reviewed the performance of eight 10-year track records of CIOs with Yale pedigrees. All eight produced returns that rank in the top decile relative to other endowments. The odds of this occurring randomly are 1 in 100 million. It is a great feat to establish a lifetime track record of excellence, but perpetuating the talent beyond one’s life is the rarest of all gifts. That earns David Swensen a special place on the list of America’s greatest investors.
Recommended Reading: Yale University Endowment Report 2020
A Revised List of America’s Greatest Investors
So, the question remains: who are the greatest investors in U.S. history and how should they be ranked? The answer is, to some degree, in the eye of the beholder. But what is arguably more important is understanding the timeless virtues that made these investors great. If forced to vote for the absolute best, my vote would go to Hetty Green. Not only did she excel in exhibiting all 10 virtues, but she was the best in several categories. Her exceptional track record is also complete, while several on this list still have time to impair theirs. Finally, her achievements came during a period of history in which the deck was stacked heavily against her. I have relatively weak conviction in the precise ordering beyond the placement of Hetty Green at the top and Jay Gould at the bottom, but the table that follows offers my vote and ranking of the greatest investors in U.S. history.
Hetty Green (Thrift)
Warren Buffett (Patience)
Charlie Munger (Skepticism)
Jim Simons (Creativity)
David Swensen (Mentorship)
Benjamin Graham (Benevolence)
George Soros (Resilience)
J. Pierpont Morgan (Integrity)
Ray Dalio (Persistence)
Jay Gould (Discretion)
Excellent analysis as always.