And I mean that in the nicest way possible.
No joke, Levitt will even be the first to admit that he doesn’t know anything about stocks, markets or general economic patterns. “If you ask me about whether the stock market's going to go up or down, if you ask me whether the economy's going to grow or shrink, if you ask me whether deflation's good or bad, if you ask me about taxes-I mean, it would be total fakery if I said I knew anything about any of those things" he says in the foreword to Freakonomics.
What then prompted him to go out of his way to criticize Collins’ book is beyond me. But it doesn’t stop me from defending a book I find to be very insightful.
Levitt has misunderstood the basic premise of the book since he thinks the book is about companies that made “the transition from good to great, but they also had the sorts of characteristics which made them “built to last” (which is the title of Collins’s earlier book).”
Although he is right about the part that Collins’ earlier book was called “Built to Last” the book’s stated theme is not as he writes. “Good to Great” is simply about companies who were good (part of the S&P 500) and became Great (beating the average market return three times over a 15-year period). It is about the strategies that these companies utilized and what sets them apart from other companies. The book describes periods of different companies and what they did during a particular 15-year period of their history. Nowhere in the book does it guarantee that these companies are going to keep giving continued above-average returns.
Levitt has noted that Good to Great companies don’t guarantee perpetual above-average returns, but his message “Overall, a portfolio of the “good to great” companies looks like it would have underperformed the S&P 500” only proves that he doesn’t know anything about investing. Timing is the essential art of investing. If Levitt read the book thinking he was going to find the magic formula for getting continuous risk-adjusted returns above the mean he’d be wrong. There’s no secret formula for finding companies that will always get you returns above the S&P 500. If there was a secret formula by the time the book came out the market would have adjusted prices to predict such future returns.
The fact that Levitt hasn’t even taken the time to research if the companies stuck to the strategies that helped them make the leap from Good to Great further accentuates that his blog should not be taken that seriously.
But the timing of the blog post is curious at least. As published on July 28th 2007 Levitt ends up looking like one of the last passengers on the Titanic saying that the course of this ship is not safe. Only a few months later the whole market crashed (including the Good to Great companies) and no one could predict who would outperform the S&P 500.
The fact that the accompanying graphs to Levitt’s blog post show the intra-day movements of 3 Good to Great-companies once again proves that the Freakonomics-team isn’t in the investment business. Only Day Traders pay any attention to intra-day price changes. And Day Traders don’t read Jim Collins.
To quote the honorable Jay-Z:
“Audemars that's losing time, hidden behind all these big rocks
(Ball so hard) I'm shocked too, I'm supposed to be locked up too”
Unfortunately, that’s not really a cool way to finish off this post. Especially because I haven’t expressed my deep respect for Levitt and most of his writing. “Freakonomics” and “Super Freakonomics” were hugely inspirational reads for me. But in those books he and Dubner wrote about subjects where they’d done the necessary research to make bold statements. The same can’t be said about his ramblings about “Good to Great” where he in a hastily-put-together blog contradicts a researcher whose team has spent the equivalent of more than ten person-years researching for the book.
To quote Jay-Z from the song “U Don’t Know”
“The coke prices up and down like it's Wall Street, holmes.
But this is worse than the Dow Jones, your brains are now blown”
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