By Investment Master Class
Creative challenges are something we all face from an early age. Whether its learning to colour-in between the lines, or discovering that art work belongs on paper rather than on your parents’ walls, being creative as a kid allows us to develop our skills at the same time as having fun.
Gates Capital Management's ECF Value Funds have a fantastic track record. The funds (full-name Excess Cash Flow Value Funds), which invest in an event-driven equity and credit strategy, have produced a 12.6% annualised return over the past 26 years. The funds added 7.7% overall in the second half of 2022, outperforming the 3.4% return for Read More
One of the first real creative challenges we face as children is the Connect the Dots exercise. This is the first time we are forced to integrate a number of concepts at the same time - visual, numerical and conceptual. We are required to follow a numerical sequence, draw straight lines with a degree of accuracy and skill and somehow also believe that once complete we will have created something we would never have been able to draw on our own. "Look at me dad! I drew a bird!"
As we get older, our need to integrate different disciplines simultaneously becomes more common in our daily lives, and never more so than in Investment. Often we are faced with disparate information, incomplete data, only parts of the puzzle rather than the whole, or hints and innuendo rather than verifiable fact, and then are required to make important investment decisions where the downside if we get it wrong can be quite painful.
"Investing invariable requires making judgements with incomplete or often inaccurate data" Michael Steinhardt
"The stock market is a game of imperfect information and even resembles bridge in that both have their deceptions" Ed Thorp
Even the great Investment Masters see this as one of the most important attributes for success. The ability to gather a wide range of abstract informational pieces, and then string them together to identify a trend or investment opportunity is invaluable if you want to remain ahead of the game.
"Over the years I have spent a great deal of time pouring a lot of stuff into my head. It is all part of a big, three-dimensional puzzle that is always changing." Jim Rogers
I find that quite often my best ideas, or the most valuable opportunities I can identify, come from a variety of sources which I need to integrate. It could be things I have read, heard, listened to or saw; all of it is important when gathering context for my investing. I read extensively; even Warren Buffett digests over 500 pages of information a day. As human beings we can't know it all, and only through a constant thirst for information and learning can we achieve something valuable in this arena.
"Look, my job is essentially just corralling more and more and more facts and information, and occasionally seeing whether that leads to some action" Warren Buffett
"I combine lots of information coming at me from all directions" Steve Cohen
"It is important to know that idea generation comes from having a consistent understanding of the world and synchronizing it will all the information you have accumulated. It is a disciplined process, and the sooner you begin this exercise, the more prepared you will be when opportunities arise. Ideas are not generated simply by waking up one day and saying, "Let's look for an idea!" They require the accumulation of investment experience and the desire to learn over time." Francisco Garcia Parames
“Tremendous insight is built from intense curiosity and study for your whole life.” Li Lu
As I have said before, rarely will the information be presented in a form which is easily understandable. All the pieces are abstract, and taken by themselves mean very little. It only makes sense when they are corralled in a manner which allows you to truly see.
"As Thoreau said, "It's not what you look at that matters, it's what you see." Warren Buffett
"Visionaries are not people who see things that are not there, but who see things that others do not. As Einstein quipped, "Why do some people see the unseen?" Bennett Goodspeed
"You really have to keep your eyes open" Peter Lynch
I look at the market as a great big puzzle, and every day I try to solve another aspect of it to make a difference and add value to my investment activities. Others look at it in similar fashion, but all agree its not something that can be easily understood - it needs research and analysis and curiosity before we get to the solutions.
"For me, market analysis is like a tremendous multi-dimensional chess board. The pleasure is purely intellectual." Bruce Kovner
“I tried to understand the market as it was a puzzle, not with a presupposition of 'this is what it is.” John Burbank
"The money game is played in the third and fourth dimension." Barton Biggs
"I enjoyed using mathematics to solve certain interesting puzzles, which I found first in the world of gambling, then in the world of investing. Making money confirmed my theories by showing that they worked in the real world." Ed Thorp
"We view investments as puzzles. There are a few things you can know but they are not the most important things as everybody knows them. The most important thing is what is it you can infer and how good you are at assessing a possible range of outcomes, either the known unknowns and the unknown unknowns and how you can construct that into a portfolio." David Einhorn
Information has become more readily available these days, and one of the issues with that is that everyone has access to the same material. So how do you differentiate? How do you take that same information and turn it into investment gold? Through curiousity and imagination. First by being interested enough to look for the information, and then imaginative enough to turn it into something so different that its valuable.
“The biggest challenge in today’s world is that knowledge has increasingly become a commodity. How do you find that kernel of information, that anomaly that enables you to generate alpha? When I began in the business, a Quotron provided market quotes on screen as opposed to the ‘tape,’ and enabled the aggregation of portfolios. These were advantages. Bloomberg has very deep analytical tools available. Today most people have a smartphone and can access masses of information and analysis. The key is to be able to place knowledge in context and to have imagination and judgement to gain insight. Clearly, you then need to construct an investment, trade it and then risk manage it.” Michael Hintze
"I believe that being a stock market investor is a lifestyle. A capitalist’s antennas must always be tuned and receptive. Being interested and passionate about the business world provides a continuous source of new ideas, while staying in front of your computer or a Bloomberg Terminal is not enough. You learn much more in movie houses, in restaurants, in shopping centres and even by going to a library." Francois Rochon
And ideas are hard to come by. Even though information is readily available, those great ideas remain like hens' teeth to most of us. Most of the ideas that the Investment Masters come up with spring from sometimes unexpected sources. Constant searching, reading, learning, talking and listening are all invaluable for providing the springboard to innovation and imagination.
“You can never tell from where an idea will spring, whether from an ancient historian, an art critic, an economist, a journalist or even a politician.” Leon Levy
“Ideas come to me from all sources, principally from reading and talking. I don’t discriminate how they come, as long as they are good ideas. You can recognize good ideas by reading a great deal and also by studying a lot of companies and constantly learning from intelligent people – hopefully more intelligent than you, especially in their field. I try to read as much as I can.” Li Lu
"Our game is to recognise a big idea when it comes along, when one doesn't come along very often. Opportunity comes to the prepared mind." Charlie Munger
"Our ideas come from reading newspapers, books, magazines, analyst reports, and even our competitors' investment holdings. We also frequently brainstorm with people from different industries." Francisco Garcia Parames
"The way you find things to buy low and sell high is to look for unrecognised or undiscovered concepts or changes" Jim Rogers
"The further you look for ideas the greater the chance you will see a unique idea.” Jim Chanos
Like Buffett and Munger, and Da Vinci before them, being versatile in your knowledge and thinking disciplines create more opportunities.
True creativity and imagination is very rare, which is why the world is full of mediocre investors, while only a few truly great Investment Masters exist. It is vital to seek information, and to continue to seek it, and then integrate that knowledge using multi-disciplinary skills. Its not enough to know a lot about finance and investment; you need to know about the businesses and industries you are investing in as well. Having a variety of sources that provide you with information on a regular basis is important, too, as is the imagination to pull it all together. Only then will you be connecting the dots and revealing your truly creative potential.