Askeladden Q3 ’18: Five Counterintuitive Lessons from Five Years of Professional Investing

1) Our Q3 2018 investor letter (available to the public) – reflecting on lessons learned from five years of professional investing.
2) Our private, clients-only portfolio commentary – explaining what we own today and why.
We have separated the two to protect the value of our proprietary research IP, and plan to do so going forward, so as to provide more transparency to clients without giving away our trade secrets.  We kindly ask that you share only the public letter, but not the private commentary, with any interested friends and colleagues.

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You may be interested to know that I invested incremental additional capital of my own into Askeladden Capital Partners effective 10/1, as I viewed the portfolio, at that time, as meaningfully undervalued, with strong go-forward prospects.  Of course, underlining my fantastic history of market timing (that is sarcasm), the market proceeded to sell off meaningfully this month, making the portfolio even more undervalued than it was a few weeks ago.
I'm not concerned about it, as we, in aggregate, own high-quality businesses at extremely attractive valuations.  We've been through this before a half-dozen times since Askeladden's inception; I've taken the opportunity to deploy incremental capital at what I believe will be exceptional rates of return.
Thanks as always for your support.  I look forward to writing you again at year-end.

Mental Models Applied To Portfolio Management

Most investors are familiar with the concept of “circle of competence,” but don’t understand the underlying mental models thoroughly enough to apply it consistently - resulting in implicit or explicit utilization of non-trained intuition, which, as we have discussed, is inferior to cognition.

The most well-known example: managers with strong bottom-up stock-picking capabilities becoming overly influenced by their own (untrained, usually untrainable, and thus unhelpful) intuition on macroeconomic forecasting.

I’m careful not to go down that road.  My approach to staying within the limits of trained intuition - while still finding opportunities to train intuition - manifests itself in Askeladden’s process in several ways:

  1. It starts with keeping my eyes open and being receptive to the lessons the world offers to teach me.  Intuition can be trained; it just takes time and effort. (Five years of experience vs. one year of experience five times.)
  2. A concept I call “familiarity risk” (an interaction between cognition/intuition and trait adaptivity.)  When writing research documents and updates, I take the approach of always not only assessing the merits of an idea, but my own ability to handle it.  What’s my historical experience with this company - and broader categories which this situation would fit into, whether that’s dimensionalized by sector, business model, or type of investment setup?

    That’s an input into how aggressively I can underwrite a valuation or size a position, or how long I choose to watch and learn before becoming involved (if ever).  The lower the familiarity, the higher the risk, and the more cautious I need to be. The truth is that there are many great ideas other people have that I would never be able to handle - and there are many great ideas I have that other people would never be able to handle.

    I have a reputation for being a highly concentrated investor, which is something I’m willing to do, but there’s a difference between being concentrated and being stupid.  I’ll take big positions when there’s an overlap between a great idea and a great ability to handle it on my part, but I routinely take 100 - 300 bps starter positions, too - and, not uncommonly, they never get bigger than that for a variety of reasons.  It’s all a function of the risk factors on both sides of the table.

  3. Constant self-reflection on research techniques - setting aside companies, what’s working in my process and what’s not?  What are things I do that consistently fail to add value?  What are the things that add value consistently and how can I do more of them?  What are things I could’ve done that would’ve added value, but didn’t?

    (I’ve previously discussed this last one in the context of “management premiums” for really good management teams - I used to never assign them because I wasn’t confident in my ability to assess management teams, but as I’ve been able to train my intuition in this area, I’m more confident in letting this influence decisions modestly.)

    Moreover: look around.  What are the things other people do that add value and how can I emulate those?  I’ve enjoyed discussing and collaborating - at various levels of depth - with investors with profoundly different approaches from mine.

    This includes a deep-value manager (we’re very focused on business quality), a manager who uses extensive primary research (we rarely do so), and, of course, the research documentation process we shamelessly stole from our friend and mentor Zeke Ashton at Centaur Capital.

All of this may sound elementary.  It’s easier said than done. This isn’t about a simplistic, binary, black-and-white “I only invest in XYZ sector or ABC kind of company.”  It’s about assessing - with regards to everything from research techniques to trading decisions - whether I have any reason to believe that my intuition will be helpful.  If it is, I’ll make active decisions based on that intuition. If not, I’ll try my best to stick to whatever base rate is applicable, maximizing my statistical chance of success.

Takeaway: trained intuition is superior to cognition, which is superior to untrained intuition. It’s important to differentiate which is which - and to actively work on training intuition.