Dylan Grice leaves in final research note

by finansakrobat


Dylan Grice at SocGen is leaving. He wrote this letter as a final, long winded good bye. He uses the term "cockroach" 31 times... 

The whole thing sans some charts:

All good things come to an end, sadly. So it is with my time here alongside Albert, Andy 

and the rest of the gang at SG. I’m signing off, checking out, moving on to pastures new. 

It’s been a wonderful time. But after three years of trying to sound clever it’s time for me to 

do something altogether more difficult, and actually be clever. So early next year, I will join 

a small but outstanding investment practice. Naturally, I hope it will be a great success. 

But what makes a great success? Since there are few more accomplished species on earth 

than the lowly cockroach where better to start looking for an answer?  

Cockroaches get a bad press. They’re pests. We don’t want them in our houses. Mainly, we 

want to kill them. If you call someone a cockroach, like Tony Montana did to Frank Lopez in 

Scarface, it’s not meant as a compliment. You might think that one of the most successful 

species in the long and colourful history of life on earth would enjoy more respect. But no…  

Of course, you have to be careful in how you define success. Cockroaches don’t have iPhones, 

space stations or edible underwear. They don’t have any of the nick-nacks we have that make 

us think we’re so clever. They’re not ingenious, like we think we are.  

But ingeniousness is over-rated. Cockroaches may not be able to build nuclear bombs, but they 

can withstand nuclear war. They survive. Don’t get me wrong. Thriving is great. Prospering isn’t 

bad either. But neither mean much if you’re unable to survive. To my mind, therefore, capacity to 

survive has to be the starting point when thinking about success. It’s all about robustness really, 

and on this metric cockroaches are tops.  

The oldest cockroach fossil is 350 million years old, which is quite remarkable when you think 

about it. We humans have been around for around for a mere fifty thousand years (so we’re one 

seven thousandth as successful as cockroaches). According to the record of the rocks, 

cockroaches first appeared just after the second of the earth’s five mass extinctions (defined as 

the loss of 75% of all species). In other words, that means they survived the third, fourth and fifth 

mass extinctions which followed, the last one being the Cretaceous event which wiped out the 

dinosaurs. They can go without air for 45 minutes, survive submerged underwater for half an 

hour, survive freezing temperatures and withstand fifteen times more radiation than humans. 

They eat pretty much anything, including the glue on the back of stamps. And when that runs 

out, they can last a month without anything at all before finally starving. 

But what I like best about cockroaches isn’t just their physical hardiness, it’s the simple 

algorithm they use to survive. According to Richard Bookstaber, that algorithm is  “singularly 

simple and seemingly suboptimal: it moves in the opposite direction of gusts of wind that might 

signal an approaching predator.” And that’s it. Simple, suboptimal, but spectacularly robust...

Cockroaches prove that what is optimal isn’t necessarily robust, that there is such a thing as 

being too clever, and that you can thrive with very simple underlying algorithms. As you can 

imagine, this is an inspiring and reassuring idea for someone as limited me. And it’s got me 

thinking about what a cockroach portfolio would look like. 

When I started work in 1997 equities were the only place to be. The mantra was that in the 

long run, you couldn’t lose money in stocks. The tech bubble was just beginning to inflate. 

Two financial writers, James Glassman and Kevin Hassett, were conceiving of a book called 

“Dow 36,000” which would be published a few years later, in 1999. This would be close to the 

peak of the bubble.  

In a sense it’s easy to see why. The following chart compares the real drawdowns (peak to 

trough movements adjusted for CPI inflation) of bonds and equities during the 1990s bull 

market. The maximum real drawdown was 17% in the equity market (in 1990) and 13% in the 

bond market (1994). These downsides weren’t a million miles away, but the returns on equities 

were much higher. So only idiots would own bonds. This all sounds quaint today. But it 

happened and it was real. Institutional investors, pension funds and insurance companies held 

about 85% of their assets in equities. They thought it was the prudent thing to do.

As the market rose to the heady valuation peak of the late 1990s, equity investors felt very 

pleased with themselves. They understood all the fancy new ideas like collapsing equity risk 

premia and productivity miracles. They marvelled at tantalizingly delphic central bankers, and 

on good days they thought they were nearly as clever. It would all have been lost on a lowly 

and limited cockroach …

Over a decade later, and we’re in a similar place today. Insurance companies have almost 

completely sold their equity holdings and they own large bond portfolios instead. The FT 

reports that UK pension funds also now own more bonds than equities. In real terms, equities 

have suffered real drawdowns of nearly 50% on two occasions in ten years while bonds have 

held firm (chart below). Worse, equity returns have been negative over that period.  

So .... now everyone knows that only an idiot would want to own equities. It’s true that bonds 

don’t offer much return with yields down here … “but at least you don’t lose your capital.”

They’ve had 10% maximum real drawdown, after all. They’re risk-free. Some economists even 

tell us that governments can’t go broke if they are in control of the printing press. “That your 

only risk with bonds is inflation, but let’s face it deflation is the risk here. Look around, we’re 

deleveraging! Central banks couldn’t create inflation even if they wanted to!! We’ll be lucky to 

emulate Japan!!!” … according to Nobel Prize winning clever-clogs. I happen to think the 

clever-clogs wrong. But I don’t really know. Maybe it’s me that’s wrong. What I do know is 

that it’s all beyond the lowly cockroach.  

Of course, if you’d been clever (or lucky) you’d have owned equities in the 1990s and bonds in 

the 2000s. You’d have switched out at the top. But how many did? Some managed to be right 

in timing as well as thought and so kept their jobs. But most didn’t. For the overwhelming 

majority, timing these events is a mug’s game. Yet today everyone asks what the trigger will 

be for a bond rout. They need to know so they know when to get out of bonds. It’s what 

they’re paid to do. Again though, it’s all beyond the lowly cockroach. 

A cockroach would avoid playing  the game in the first place. He’d accept that he wasn’t 

clever enough to know when to switch out of one asset class and into another. He’d probably 

do everything he could to avoid having to make such horrible decisions. He’d buy bonds and 

equities together, ensuring that each year he held them in equal proportion.  

The following chart shows what his returns would have looked like, using such a strategy from 

the 1990s onward. Not bad in fact.

But … how cockroach-like is this strategy really? If we go back to the 1970s and compare real 

drawdowns from then, we get a very different picture. We see that during that inflationary 

decade the bonds/equity combo didn’t really do much to mitigate the potential for capital loss.  

A real cockroach would survive the 1970s. It would be inflation resistant, deflation resistant, 

credit inflation resistant, credit deflation resistant  … despite having  “no view” on which 

scenario was more likely at any point in time. So let’s assume our cockroach has no view. It 

doesn’t know what’s around the corner so it doesn’t make any bets. It holds half of its capital 

in real assets, the other half in nominal. Of course, being a cockroach, it doesn’t know if 

capitalism is about to collapse or flourish. So it divides its nominal and real buckets further 

into productive and unproductive assets. It puts 25% of its portfolio in equities, 25% of its 

portfolio in gold, 25% of its portfolio in government bonds and 25% in cash. 

The following chart shows that such a portfolio offers some very real protection against the 

vagaries of an unknown future. Real drawdowns during each regime were significantly 

mitigated with the cockroach-like strategy of simplicity, agnosticism and robustness. 

In 1975 Charles D Ellis wrote about investment being a  “losers’ game.” He was using the 

distinction Simon Ramo drew in his book “Extraordinary Tennis for the Ordinary Tennis Player”

who observed that the game of tennis was in fact, two games. After extensive statistical 

analysis, he concluded that professional players  win points, while amateurs  lose them. 

Professional players put the ball wherever they like, at whatever pace they like, with a 

precision and consistency which the overwhelming majority of players could never hope for. 

The winner of a professional tennis match is the one who makes the most winning shots.  

For most tennis players the game is different. Each player tries to make those special shots. 

They try to win points. But in doing so they double-fault, miss the baseline, hit the net … In 

other words, they lose points because they keep trying to hit winning points they’re not 

capable of. The winner of the losers’ game is the one who loses the least points.  

I like Ellis’ categorisation of investment as a losers’ game. We spend so much time and energy 

trying to be clever: what the Fed will do next; what it should do next; where oil prices will go; 

what the effect will be on the economy; when the recovery will come; if the recovery will come; 

will China see a revolution; will Russia revolt against ‘Tsar’ Putin; et cetera, et cetera. It may be 

better to focus instead on not being dumb. How good are we at making these predictions? Of 

course there is a time for going on the offensive, and the occasional opportunity to play 

winning shots. In moving to an investment practice I guess I’m trying to make one now. Time 

will tell on how sound my judgement is. But I think the principle is a sound one.   

So … it’s an odd feeling to be drawing the curtain on my time here with Albert and Andy at 

SG. The three years have flown and it’s been both educational and entertaining working with 

them. But I’ve known them both for years and been close friends with them for years. So while 

I’ll miss the day-to-day contact, we won’t stop being close friends.  

But I’m going to miss SG too. I know it’s customary to thank everyone everywhere when you 

leave, but in all sincerity, my time at SG has also been memorable because of SG. It’s not 

been an easy time for banks. Eurozone banks have had a particularly rough time and SG has 

copped its fair share of the flak. But I’ve met some fine and honourable people here who will 

be life-long friends.  

I’ve come across wonderful people outside of the bank too: readers, clients, journalists. But 

the most common question I’ve been asked in my time here has been “how do you get away 

with writing what you write, while working inside a bank?” Lurking beneath the question is the 

implicit understanding that other banks don’t allow their analysts freedom of thought and 

expression. Yet SG has given us exactly that freedom, along with trust that we won’t abuse it. 

Such trust is unusual indeed in this industry and without it I wouldn’t have had the fun, the 

personal growth, the readership, or relationships that the readership has fostered over time. I 

am truly grateful and I will always be very fond of this place.  

When I resurface on the buy side early next year I will continue to write from my new perch. 

Before then I will be presenting at Albert and Andy’s January conferences in London and 

Edinburgh. Hopefully I’ll get to catch up with some of you personally then. In the meantime, 

anyone who’s corresponded with me, met me, or even just enjoyed reading the odd Popular 

Delusions and would like to stay in touch, feel free to drop me a line here. To the rest of you, 

thank you and farewell!