Investing Nuggets

“The difficulty lies, not in the new ideas, but in escaping the old ones”  John Maynard Keynes

“If you don’t keep learning, other people will pass you by.  Temperament alone won’t do it – you need a lot of curiosity for a long, long time” Charlie Munger

“Read as many investment books as you can get your hands on. I’ve been able to learn something from almost every book I have read” Lee Ainslie

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Investing Nuggets
CC Investments Masters Class, used with permission

The world's greatest investors spend a lot of time reading and thinking.   The tutorials that form part of the Investment Masters Class teach the common threads within their thought processes.  In addition to these common threads, sometimes reading a specific book or interview highlights a novel way of looking at a company, analysing an investment or provides an insight that hadn't been considered before.  The accumulation of knowledge across a broad spectrum of topics helps to build wisdom.

I've found over the years, I've learnt something from almost every book I've read.  There is usually at least one or two "Investing Nuggets" to be picked up from reading.    Sometimes it reinforces a view, other times it changes a previously held view and occasionally it opens up a completely new way of thinking.

I've included four 'Investing Nuggets' below ...

The Alchemy of Finance [George Soros] - "escalator up, elevator down"

Mr Soros effectively defined his own theory for markets noting "existing theories about the behaviour of stock prices are remarkably inadequate.  They are of so little value to the practitioner that I am not even fully familiar with them.  The fact I could get by without them speaks for itself"

The Alchemy of Finance provides an alternative explanation for asset bubbles.  It helps explain why markets tend to drift higher yet decline rapidly, or as they say in the markets "Stocks take an escalator on the way up and an elevator on the way down".  Why should that be so?

Soros noted that markets can become irrational when participants no longer focus on the fundamentals... "those who are inclined to fight the trend are progressively eliminated and in the end only trend followers survive as active participants.  As speculation gains in importance, other factors lose their influence.  There is nothing to guide speculators but the market itself, and the market is dominated by trend followers."

As all trends eventually end..  "when a long term trend loses it's momentum, short term volatility tends to rise.  It is easy to see why that should be so: the trend-following crowd is disorientated"

It is then that the market can decline precipitously ...  "when a change in trend is recognised, the volume of speculative transactions is likely to undergo a dramatic, not to say catastrophic, increase.  While a trend persists, speculative flows are incremental; but a reversal involves not only the current flow but also the accumulated stock of speculative capital.  The longer the trend has persisted, the larger the accumulation"

In conclusion .. "speculation is progressively destabilising.  The destabilizing effect arises not because the speculative capital flows must be eventually reversed but exactly because they need not be reversed until much later.  If they had to be reversed in short order, capital transactions would provide a welcome cushion for making the adjustment process less painful.  If they need not be reversed, the participants get to depend on them so that eventually when the turn comes the adjustment becomes that much more painful"

Capital Returns [Marathon Asset Management] - "here comes the supply!"

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This recent book edited by Edward Chancellor contains a collection of investment letters from the UK's Marathon Asset Management.  The Global Equity Fund has delivered 9.7% pa since inception in 1986, outperforming the benchmark by almost 5% per annum.

The book is full of investing wisdom.  The key theme of the book is an industry's 'capital cycle' and how that cycle impacts investment returns.

The book contains Marathon Asset Management's prescient newsletters on global house prices, credit markets and the commodity super-cycle.  All of which resulted in significant investment losses for those investors oblivious to the capital cycle.   Other letters reflect on capital allocation, industry dynamics, company culture, corporate management, technological disruption and the associated themes of 'network effects' and 'winner takes all'.

So what is the capital cycle?....   "The first notion is that high returns tend to attract capital, just as low returns repel it.  The resulting ebb and flow of capital affects the competitive environment of industries in often predictable ways - what we like to call the capital cycle".

"The key to the 'capital cycle' approach is to understand how changes in the amount of capital employed within an industry are likely to impact upon future returns."

While most investors spend 90% of their time focussed on the demand side of the equation, which is subject to large forecasting errors, Marathon Asset Management spend the majority of their time focussed on supply which is far less uncertain.

By focussing on the magnitude of capital either entering or exiting an industry, an investor can develop an investment edge, aiding the discovery of potential investments and/or highlighting risks to an investment thesis.

Influence [Robert Cialdini]  - "why can't we change our minds?'

Charlie Munger has acknowledged Robert Cialdini's bestselling book 'Influence' as filling many of the gaps in his thought process.

The book tells the fascinating story of a small cult of 30 or so members of otherwise ordinary people - housewives, college students, a high school boy, a publisher, a doctor, a hardware-store clerk - which was infiltrated by two scientific researchers.

The story tells of how the leader of the cult informed the members that she had begun to receive messages from 'Guardians', spiritual beings located on other planets.   These transmissions gained significance when they began to foretell of an impending disaster - a flood that would eventually engulf the world.   Although the members were alarmed at first, further messages assured them that they would be saved.  Before the calamity, spacemen were to arrive on a specific date and carry off the members in flying saucers to a place of safety, presumably on another planet.

Two specific aspects of the member's behaviour was noted by the scientific researchers.  Firstly, the level of commitment to the cult's belief system was very high.   Evidence of such was the irrevocable steps many members had taken - quitting their jobs and giving away personal belonging ahead of the 'specific' date.  Secondly, the members did surprisingly little to spread the word and avoided publicity when a newspaper started investigations when they learned of the cult.

On the 'specific' date at the specified time, not surprisingly, no spaceship turned up.  The group seemed near dissolution.  As cracks emerged in the believers confidence, the researchers witnessed a pair of remarkable incidents.   The cult leader told the members she had received an urgent message from the Guardians stating the "little group had spread so much light that God had saved the world from destruction".  Having previously shunned publicity, the cult leader then at once called the newspaper, to spread urgent message.  The other members followed suit placing calls to media outlets.

Mr Cialdini noted the group members had gone too far, and given up too

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