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You’ve got rules that you follow and so do I.
Welcome to our latest issue of issue of ValueWalk’s hedge fund update. Below subscribers can find an excerpt in text and the full issue in PDF format. Please send us your feedback! Featuring hedge funds avoiding distressed china debt, growth in crypto fund launches, and the adapting venture capital industry. Q3 2021 hedge fund letters, Read More
The beauty and beast about investing is that it’s a moving target.
If you are static for too long and don’t try to better yourself, the market steps all over you.
Intelligence alone doesn’t cut it in the stock market. Proof being that most of the smartest managers still can’t beat the index. But as you’re above average, you can definitely outperform the averages.
One of my favorite speeches that I end up reading every year is by Mark Sellers speech at Harvard Business school.
He points out that the probability of being a great investor is in the low single digits. Think 2%.
But he goes on to point out 7 traits which I’ve converted into rules as opposed to calling them traits.
Traits are supposed to be ingrained – like how an old dog can’t learn new tricks. It makes it sound like you can’t become better. You are who you are.
But here’s my version of converting the traits to rules so that it can be applied by anyone.
The 7 Important Investing Traits and My Rules
Trait #1: is the ability to buy stocks while others are panicking and sell stocks while others are euphoric
Can’t argue with this. The most obvious thing is to buy low and sell high. But most people do the opposite as they base their decisions on emotions and fear of missing out.
My Rule Version #1: Don’t buy based on the fear of missing out. Don’t sell to end the feeling of losing money
It’s been 10 years since the last recession. I remember it well because it was the most fun I’ve had. My portfolio was bleeding each day, but each day I was excited to turn over as many stones to see what I could buy knowing full well that it was going to turn the other way.
Trait #2: Be obsessive about playing the game
To be a great fund manager, yes.
To be an above average investor. No.
My Rule Version #2: Invest with confidence in your area of obsessiveness
A sidekick to circle of competence.
You either have too much money or too much time. Rarely do you have a lot of both. And unless your job is being a fund manager where your time is to invest money, the majority of us are stuck in one of the two.
But if you are obsessed about something, like your job, hobby, toy or whatever, at least you have put in the time to know the ins and outs of it all. Just expand on it a little to find investments related to it.
With Old School Value being a software company, I’ve become obsessed with business and learning to run a great online business. So rather than trying to study every stock I come across, like I used to when I had lots of time and no money, I’ve focused betting on areas I am obsessed and confident in.
Trait #3: willingness to learn from past mistakes.
My Rule Version #3: Get back on the horse if you fall down.
A hard lesson I learned is to
- not over-analyze my past mistakes
- be less harsh on myself
The truth is that you are going to make mistakes no matter what. You can do what Ray Dalio did with Bridgewater and document every mistake and create a robo-algorithm out of it or accept that you aren’t perfect and the goal isn’t to be 100% accurate, but to make it big on the ones you are right on.
Another problem with trying to dig too much into an investment mistake is that the sample size is too small. Time also eliminates a lot of mistakes in the stock market.
Take a look at my last update on GRVY. I sold at a loss because I lost all trust in management. If I made the “mistake” of turning a blind eye and choosing to become ignorant, my “mistake” would actually be worth 500%. Now is that a good or bad thing?
The better rule is to make sure you don’t make the same mistake rather than trying to learn everything from your mistakes and paralyzing yourself.
Get back on that horse giddyup~
Trait #4: inherent sense of risk based on common sense.
Don’t blindly trust what media, computers, spreadsheets tell you.
My Rule Version #4: Use common sense
As a seller of investment software, it may be strange to say this, but don’t blindly trust our system or anyone else’s. Use common sense. Diversify to reduce risk if you have to. Don’t put 100% of your money on a coin flip investment. If something looks too good to be true, it probably is.
Trait #5: Great investors have confidence in their own convictions and stick with them, even when facing criticism
My Rule Version #5: Focus on profit, not on being a prophet
I don’t care whether I’m wrong. The goal is to profit and build wealth. If I’m right along the way, awesome. But I don’t need to be 100% correct. Even if I have a low hit rate, with proper allocations, it will yield excellent returns.
If you invest in 10 companies where 9 of them are duds which you sell quickly, but you have one huge winner, your hit rate is 10%, yet your investment returns will be thanking you.
Confidence is a very fine line that most people can’t distinguish.
- John Paulson
- Bill Ackman
- Eddie Lampert
Too early to call the books on these investors, but their confidence spilled over that fine line and they have reported dismal results year over year.
Don’t be afraid to call it a loss and move on to the next idea. See rule #1 and #3.
Trait #6: have both sides of your brain working
“As an investor, you need to perform calculations and have a logical investment thesis. This is your left brain working. But you also need to be able to do things such as judging a management team from subtle cues they give off. You need to be able to step back and take a big picture view of certain situations rather than analyzing them to death.”
My Rule Version #6: Every valuation and assumption must include a story
Calling it a story sounds fluffy duffy. But I learned this from Prof “King of Valuation” Aswath Damodaran.
E.g. The net net style of investing is a very numbers oriented type of investing. Outside of buying cigar butts, there has to be an underlying thesis to match the valuation.
- Think sales are going to go down as a patent is expiring and competitors will dilute the marketplace? Short the patent holder or buy the competitors.
- Believe electric and self-driving cars will ruin insurance companies? Short insurance or buy car manufacturers.
- Read that the city that claims Amazon’s 2nd HQ will pump huge amounts of money into building infrastructure? Buy Amazon or municipal bonds.
Discover the story that you think will unfold. Sometimes I’ll get a comment about investing or updating my thesis with anecdotal evidence, but if you’ve got extensive experience in a certain field, this anecdotal evidence is the difference maker.
Rarest trait #7: The ability to live through volatility without changing your investment thought process.
Sellers is talking about not giving up on your process because the market takes a dive or handling volatility.
My Rule Version #7: Zoom out and look at the big picture.
I did not live through the Great Depression or the market slide from 1929 to 1932. I don’t know how I would have handled that type of treacherous market that wiped out most investors. Likely, I would have kept averaging down, down…. all the way to nothing.
But in the end, the market recovered and the rest is history. The market has always come back.
Don’t panic because this too shall end.
But save #7 for another time because the bigger picture continues to show a very strong US economy.
- Resources: Mark Sellers speech
Article by Jae Jun, Old School Value