Critiquing John Hempton’s “Comments on investment philosophy” by The Long Short Trader
“There are plenty of people out there who call themselves Buffett acolytes – and as far as I can see they are all phoneys. Every last one of them.” – John Hempton circa Anno Domini 2016
I read John Hempton’s Comments on investment philosophy – part one of hopefully a few… and felt inspired to write a few disparate (potentially related) thoughts:
Michael Mauboussin: Here’s what active managers can do
- Investment Beliefs are Useless – Zen Master Linji: “If you meet the Buddha, kill the Buddha.” The Bible: “You shall have no other gods before Me.” Let the professional bullshitters worship false investment gods. I say: Investment beliefs are useless, if not worse than useless, unless you’re in the business of sounding smart, selling books, newsletters, etc. If you want to BE smart: Innovate or perish.
- “If you know the enemy and know yourself, you need not fear the result of a hundred battles” – Like John Hempton, I read Warren Buffett’s letters when I was starting out in the investment business. Over time, I came to realize I learned far more by becoming self aware of my own tendencies, biases, mistakes, victories, good luck, bad luck, etc. rather than reading “how to invest” books. Self examination, over time, has been, and remains, a critical part of what I do… as well as observing others. Learning who I am – a short seller – changed everything. Study self, study others.
- Poker & Transparency – I believe that the word “transparency” is frequently (i.e. more so than not) misused and abused, when used in a business and/or financial markets context. When you play poker, do you reveal your cards? Do you (intentionally) seek to reveal your emotions? No and no. In fact, it is morally and ethically correct, within the context of Poker, NOT to reveal one’s cards, nor one’s emotions. I’m a strong believer and proponent of truth and honesty. Some people mistake the word ‘transparency’ for truth and honesty. They are not the same thing, as the poker analogy demonstrates.
- Applied Epistemology – Deep down, I am a very lazy human being. I like to do as little work as possible while achieving superb results. And so I am constantly asking myself: “Am I wasting my time? Given investment opportunity x, should I be spending my time on x? If yes, how much more time? Am I wasting my time?”
- Pair Trade: Short Credentials, Long Skills/Character/Attitude
- Am I or Am I not Behaving like a Capital Compounding Machine? – I try to think about this daily/weekly. Is my capital and/or time dedicated to capital compounding activities or not? If not, better off just having a good time…resting/leisure time are necessary.
- The Asset Gatherer versus the Capital Compounder – I see the Asset Gatherers as my natural enemies, my natural prey…in fact, I see it as my goal to slaughter and devour them into extinction (aside from the passive Vanguards of the world, who are NOT my enemy) . I began this business – semi-traditionally, and semi-unconventionally – as a pure capital compounder. That remains the case. When I see investment managers whose primary instinct is to be an asset gatherer, and would not be investors if it weren’t for external capital, I see tasty prey…my meat.
Specific Commentary (Hempton’s quotes are in bold, while my commentary is not in bold):
- “Phoney Buffett-style value-investing is dangerous” – Not only do I believe that this is a true statement, it has been one of the main mandates of my twitter account – to ridicule and expose the Buffett idol worshippers who effectively practice this phoney buffett-style value-pretending.
- “There are plenty of people out there who call themselves Buffett acolytes – and as far as I can see they are all phoneys.” – This is an inconvenient truth…probably offensive to some, but nevertheless true. Buffett acolytes represent a religious/cultural phenomena. In fact, let me take this one step further: today’s Buffett acolytes are probably the de facto counterparties of a young Warren Buffett.
- “There are psychological feedback mechanisms that stop you meeting the twenty punch-card test. Firstly it is really hard to be that patient.” – I tend not to struggle with patience… I do struggle with boredom (yes, there is a difference!). How do you bide your time, while waiting for the fat pitch? Fortunately, I think I have found a few solutions.
- “Somewhere along the line I realised that did not have the temperament to be a true 20 punch-card investor.” – This is of cardinal importance, i.e., to know thyself.
- “And when you are wrong like that it is scarring. It makes you less willing to pull the trigger in quantity when something does meet the twenty punch-card test.” – I don’t believe this is an objectively true claim; it seems subjectively true. I personally know people who have and/or can bounce back from 20%-40% declines, without an impaired ability to ‘pull the trigger’ in quantity.
- “So in the midst of under-performance a client might ask me what I did last year and I would say something like”
- a) I read 57 books
b) I read about 200 sets of financial accounts
c) I talked to about 70 management teams and
d) I visited Italy, the UK, Germany, France, Japan, the USA and Canada” –
- two friends of mine – (they do not know each other) strongly advise I should spend a good % of my time away from “computer screens” – go to the beach, go on vacation, etc. They advise doing this, independent of investment performance. Given my naturally lazy tendencies, I will probably heed their advice.
- a) I read 57 books
- “Real twenty-punch-card investing is impossible to sell to clients” – unless the clients themselves have experience enduring/overcoming drawdowns
- “Some of them have tricks I do not understand (I put David Tepper in this camp – I simply don’t get how he does it and hence can’t emulate it*)” – I like to study and/or interact with people like these, even if their activities do not resemble my own. I am a firm believer in “cross-pollination”
- “Portfolio managers I admire” – I’ve tended to learn more about active portfolio/risk management from macro managers than L/S ones. I’ve tended to learn more about investment research from L/S managers.