East Coast Asset Management letter to clients for the first quarter 2015 titled, “Mr. Market Revisited.”
To: East Coast Asset Management Clients and Interested Parties
From: Christopher M. Begg, CFA – CEO and Chief Investment Officer
Grizzly Research shared a presentation at our Contrarian Conference, hosted in partnership with Breakout Point and the Contrarian Investors Podcast. Grizzly's Siegfried Eggert talked about WELL Health Technologies (OTCMKTS:WLYYF) (TSE:WELL), which they believe to be a "toxic roll-up." The stock tumbled more than 4% on the Toronto Stock Exchange and almost 2% over the counter Read More
Date: June 17, 2015
Re: First Quarter 2015 Update – Mr. Market Revisited
In our first quarter letter you will find our portfolio update and general market observations. Each quarter we highlight one component of our investment process. This quarter, in the section titled Mr. Market Revisited, I will discuss how symmetrical thinking can improve decision-making and how a palindromic mindset could be applied to Benjamin Graham’s concept of Mr. Market. As is our standard practice, client reporting, including performance and positioning, has been sent under separate cover.
Investors rarely receive a plaintext message on what the future may hold for capital markets. In practice, it seems more like market information comes through as ciphered text, embedded in the noise of data are codes that, if deciphered, prove invaluable. While the deciphered messages are never perfectly clear, we are attempting to deduce a range of probable outcomes so we can intelligently allocate capital towards investments with merit.
Today the range of expected returns are not as attractive as they once were, yet the businesses we own represent compelling compounding attributes in both absolute and relative terms. Fixed-rate investments continue to prove enigmatic as the deflationary pressures of global deleveraging and technological productivity gains have kept interest rates at historic lows. A prolonged period of low and negative interest rates has perplexed even the most astute investor.
The Palindromic Mind:
Curiosity is often the genesis of human achievement. The desire to solve for the unknown is deeply embedded in our DNA – the engine driving evolution. This observation is a likely explanation for why humans love detective stories, are obsessed with puzzles, and are captivated by unsolved mysteries and the hunt for hidden treasures. In mental and physical feats, the human drive to do what was thought impossible by breaking the “code” is a daily quest. Since we are solving puzzles from our first breath to our last, continuously improving one’s ability to problem solve can have great utility.
I’ve always been interested in word puzzles. While reading the backstory about the code breakers of Bletchley Park, (whose efforts breaking the German Enigma and Lorenz ciphers helped shorten World War II by as much as two years and their story was brought to light recently in the movie The Imitation Game), I was fascinated to learn that one of their diversions between deciphering codes was to create palindromes. A palindrome is a word, phrase, number2 or other sequence3 of characters that reads the same backward or forward. For those who enjoy solving puzzles, creating an intelligible palindrome phrase is an intellectual feat. The code breakers at Bletchley Park created some of the most famous palindromes that exist to this day. Peter Hilton, one of their top code breakers, constructed the 51-letter palindrome, "Doc note, I dissent. A fast never prevents a fatness. I diet on cod.”
The more I thought about palindromes, the more the concept began to crystallize of just how valuable a palindromic mind is for decision-making. Thinking both backward and forward is not a common human skill possessed in symmetry. Looking backward we pull from our experiences and looking forward we are led emotionally by hopes, dreams and fears. Thus our backward and forward-looking biases instinctively skew our decision-making, leading us away from the golden medium of rational decision-making. Poor problem solving is often the result of how skewed information is processed and applied, not the lack of information. In a world populated by optimists and pessimists, how can we apply palindromic symmetry to enjoy the fruits of the realist?
An optimist will tell you the glass is half-full; the pessimist, half-empty; and the engineer [realist] will tell you the glass is twice the size it needs to be.
East Coast Asset Management - Where Do We Come From - Looking Backward
Thinking backward is quite intuitive. Backward thinking involves looking for patterns, making links between unconnected events and forming theories to influence forward-looking decisionmaking.
Backward thinking has a gravitational pull toward the experiential emotion in our past as well as giving more proportion to recent events.
In my opinion, the biggest error in looking backward is not going back far enough to solve to laws and principles that are invariable, or unchanging through time. The three largest data sets, which I have previously written and credited Peter Kaufman for first enlightening me about, are:
1. The inorganic systems around us, which are 13.7 billion years in age and contain all the laws of physics and mathematics,
2. Organic systems, or all the biology on earth, which are 3.5 billion years in age and,
3. 20,000 years of recorded human history.
We can use these invariable laws and principles for intelligent decision-making.
Where Are We Going - Looking Forward
Thinking forward employs a more mathematical process. The decision maker assesses variables collected in the backward-looking exercise and assigns weights and probabilities to arrive at an integrated forecast.
The pitfall with most forward-looking lenses, as with backward, is that they do not see beyond recent experiences. When we are focused on what just lies ahead, skewed by emotion, we lose the benefit of allowing the world to do the work for us. We do not harness the huge tailwind of laws and principles that have existed for billions of years. In my opinion, the proper time horizon is one that can look beyond the short-term and assess weights and probabilities based on what might be five or ten years out, and ideally even further. It is not about ignoring the here and now, but engaging the qualities that can be sustainable and enduring.
What [Where] Are We - Finding Symmetry
Symmetry is one of the most powerful principles that exists in the universe. I believe we can gain great insights by rightly applying the full time scale of both our backward and forward-looking lenses in symmetry, from beginning (alpha) to forever (omega). When we have arrived at true symmetry, we should be more present, and thus more realistic, about those decisions that are proportionately more certain than those that are less certain. Toward this end, I believe true wisdom is to understand where a range of probable outcomes is unsatisfactory and choose not to navigate in waters that are proportionately unknowable.
See full PDF below.