#206: New Format, Investing Mistakes, Assets vs. Emotions, Dune, Price in Life....
"Go to bed smarter than when you woke up." - Charlie Munger
Hello all,
It seems the newsletter has reverted back to the original format a few years ago when I started writing weekly about my journey of trying to figure out how to build a career of “building utopias.” It has indeed been a mix of idealism, hope, and exploration.
The newsletter has evolved from being called “This Week I Learned” to “Today I Thought About….” and the only constant has been a focus on what I’m trying to do.
The updated format for the newsletter is that it will be weekly. It will also be long and include various essays under the following three categories:
Business & Investing
Psychology, Systems & Work
Introspection, Habits & Improving the Self
Hopefully, this will let you pick and choose what you’d like to read. Most importantly, it allows me to explore the kinds of topics I’m interested in without guilt.
I’m also exploring whether to move my newsletter over from Mailchimp to Substack as I contemplate introducing a premium newsletter in addition to this free one. I’ll come back to you with updates as progress is made.
Until then, please enjoy my thoughts and learnings over the past few weeks on my exploration of human performance and fulfillment in the pursuit of being healthy, wealthy, and wise.
Business & Investing
Hallmark checklist items for an investment.
"A dreamy business offering has at least four characteristics. Customers love it, it can grow to very large size, it has strong returns on capital, and it's durable in time -- with the potential to endure for decades. When you find one of these, don't just swipe right, get married.” - Jeff Bezos
Trimming Portfolio Winners
There comes a time, happily so...I might add, when an investment does well and a thought formulates: this is ~25% of my portfolio...should I trim? I’ve started to wonder, dare I say ‘worry’, because the market cap has risen faster…much faster….than the business’s fundamentals. Much of 2020 and 2021 has seen this happen to various businesses but when I see the price trading at some 50x gross profit…I worry.
This struggle was well enlightened by Sanjay Bakshi’s outline of the paradox of one’s mentality as a buyer vs. holder of an investment through something a trader had told him:
“…..holding on to a position is the functional equivalent of selling it and immediately buying it back (ignoring transaction costs and taxes). And so if you’re not a buyer anymore of a position you own, then you should be a seller.”
This does seem too binary and to the shades of grey that surround investing, Bakshi's reference to Ben Franklin seemed appropriate.
“Keep your eyes wide open before marriage, half shut afterwards.” - Benjamin Franklin
But is it right to turn a ‘blind eye’ for some things? Maybe it’s an attitude towards being patient with the management team one is investing in or maybe it’s a view of compromise one adopts from learning more and more about the company from owning it over the years. After all, if one is owning a business over a long time, one should get more and more familiar with its strengths and weaknesses.
Here is the odd part. Divorces are messy. But selling a stock is not. It’s one of the advantages of being in the private markets vs. public markets. The ability to change one’s mind and act on it. This doesn’t mean that one fault by an investment should mean immediate axing. Everything is a case-by-case basis. But, if the overall premise is to think of investing in a business as a marriage and that means letting things go….I don’t think that is sound for a particularly concentrated bet. I could see it being a model to adopt for a 100+ position portfolio like Peter Lynch’s and Phil Fisher’s (he advocated less than 20 in his book but I think he had hundreds in his portfolio by the time he died).
And therein lies the dance with conviction, fear, and everything else in between. I’ll borrow from what Bakshi recorded from his conversation with Charlie Munger:
"Psychologically, I don’t mind holding a company I like and admire and I trust and know that it will be stronger than now after many years. And if the valuation gets a little silly, I just ignore it. So, I own assets that I would never buy at their current prices but I am quite comfortable holding them.”
Munger has historically advocated for a concentrated portfolio of 2-5 on various occasions. Buffett advocated something similar too for small investors. Now, I can’t say that such low single-digit concentration is the key to great stock returns. Folks have achieved great returns with dozens of stocks in their portfolio. Rather, the rule is that there are a small number of investments that can provide phenomenal returns over a long time and that is correlated with investors identifying them, investing in them, and holding them over such durations. It sounds ridiculously hard….because it is.
Therein lies a dance in the portfolio. The tradeoffs of opportunity costs, conviction masking some arrogance, and inability to identify the fool within the self. The dance that might see a 5 stock portfolio become 25 or the other way around. To each their own, but I’ve lately been asking myself if I should take my cost basis out of investments that have had great runs. I should emphasize that this is a scenario for companies that I think have a long runway with stellar management but there is the opportunity cost I consider with short-term price run-ups where I can probably find more enticing opportunities. The argument might be ‘oh then should you not sell your existing position?’ To which I say ’no’ because that indicates a general form of market timing that seems rather difficult and a more difficult mental hurdle of not being able to buy back in at a much higher price in case I am wrong.
Taking profit off the table might actually let my mind relax and prepare for any right tail events. That’s my thinking. It’s like when I play blackjack and once I’ve made my principal back, I hold that off and only play with my winnings. It might be sub-optimal but it lets me play on with the money I have. Such a method of continuously selling half whenever a stock doubles might actually let me ignore it and let it run. To let me keep my eyes ‘half shut’. This might be how I limit permanent impairment of capital whilst preserving the upside via right tail events for the companies that I truly think have a long runway.
Now, could such a diversified fund truly deliver outsized returns? It’ll be hard and it’s also true that there really aren’t that many wonderful businesses out there. But this might be the approach the lets a person like me continuously look for new ideas while letting past ideas run along. The point of the diligence might be to let the company come into the portfolio fold and so that I have enough conviction to hold on for at least a double before taking profits and letting the rest move up. The question is then: how big should the initial bet be? At the moment, I don’t know.
Some awful investing mistakes.
The above thought ties in well with three errors of commission I made over the year. In the late March/early April sell-off, I invested in $SHOP.TO @ ~$488/share, $W @ ~$44/share and $TPL @ ~$425/share. Each position was about 2.5% of my portfolio and it was a frantic moment of trying to figure out how to handle my first major bear market (can I even call it that ?) as my entire portfolio collapsed 30%+.
The initial idea at the time was to invest in a basket of companies. I had the aerospace bucket, oil plays, e-commerce, FAANG…just all the things that got crushed. The crash also revealed how ill-prepared I was to take advantage of it. Therein lies the first fundamental error to why I subsequently sold $SHOP.TO for some ~20% gain, $W for ~15% and TPL for ~60% within a short time frame. If I held em, they would be 4-6x today.
Now, with each situation the cases were different. For Shopify, I look real stupid because it’s a company I had studied before and I’ve long respected Tobi and the culture he built but….I just freaked out. Everything just seemed crazy and I guess I lacked a certain future view =_=…
As for Wayfair, I think the business still needs to prove more but I completely overlooked people staying home and renovating their place. I honestly thought COVID would end by June….oh how wrong I was. But I think the play with Wayfair was seeing how the large ownership by the investors (non-ETFs) would end up setting a backstop for the company’s valuation. There was no way they would’ve let the market cap stay low for long.
For Texas Pacific Land Trust….that was a simple royalty play on the Permian Basin with water rights kickers and the company possibly becoming a C-corp. I didn’t have much faith in the trustees involved but if shit went well… it would be a cash gusher and it was a high CF business. Guess I was impatient again here.
The immediate learning is to not trade. If a thesis makes sense, just leave it. Probably being part of the market volatility didn’t help either. This was a situation where price mattered and if I had selected good businesses, then just let them be.
Fully invested at all times.
"The best time to invest is when you have money. This is because history suggests it is not timing which matters, but time.” - John Templeton
Because you never know for certain where you are but can be certain of things to improve in the long run.
Psychology, Systems & Work
Focusing on Assets vs. Emotions.
As Dan Ariely pointed out, humans are Predictably Irrational. I used to think this generalization made sense but that only exists in a realm where rationality is seen as black and white. A view I disagree with. My rational might be another’s irrational.
But this doesn’t mean people are always rational either. Many economic models assumed people to be rational actors but much of history has shown that to not be the case.
“History doesn’t repeat itself, but human nature remains the same.” - Ken Burns
As much as we can’t assume people will always be irrational, we can’t assume people to always be rational. But is it possible to predict the constant of human nature?
This further begs the question of how one would define human nature. Is it as simple as making decisions on self-interest? Possibly through the guidance of the great sins like lust, greed, envy, etc…?
Bezos has famously noted that customers will always want things cheaper, to have more options, and delivered faster. I think he was right in believing such behaviours to persist over decades. In some ways, he was able to predict a constant of human nature.
But I wonder if such constance is bound to change. Just as much as an irrational behaviour could persist for a long time and one might deduce it to be obvious by saying it's human nature. Until it stops and reverts.
“Markets can remain irrational longer than you can remain solvent.” - John Maynard Keynes
So even if exuberance, driven by….let’s say greed, persists and makes something like the stock market appear to behave irrationally, it would be dangerous to conclude this will persist because greed is a core part of human nature. It very well might persist but one cannot know when tides may shift, as they inevitably do. Greed might be constant but it can come out in many forms of behaviour.
The stock market is one such place where human nature is on full display daily. A place where emotions run high. Even if algorithms are involved the folks writing it are fallible humans. A few seem able to feel the winds of change of human nature in the markets like a skilled sailor. I’d love to be one too but I don’t quite have the data to confirm I am such a figure.
If an arena of gauging emotions is not my place, then another possible arena might be one of assets. Assets in the form of businesses. Businesses that can collectively capture the predictability of human nature, quite like Bezos was able to with Amazon.
The way this may manifest is through investment in owners per Anthony Deden. The inclination for investors is to “make money” so it’s natural to be drawn to the realm of emotions to take advantage of perceived arbitrage in human nature. But owners focus entirely on the asset they own because a business’s operations are not impacted by the daily whims of capital markets (usually the ones run by mercenary CEOs are).
Now, this might sound like a blind approach where one ignores price to bet on great owners. If only it were so easy. But price makes a big difference to returns and that requires some thoughts about the emotions that have set present prices. Rather, maybe it’s about being so strict on the criteria of what qualifies individuals to be great owners that it too helps form the margin of safety inherent in the price. All to try and limit the amount of judgment I have to make on what emotions are running amok in the markets now. The practice of trying to cultivate an owner’s mindset by investing in owners.
My first sci-fi novel: Dune.
You know that scene in Friends when a pregnant Phoebe, a vegetarian, has a craving for meat? Let’s say you do and that you have watched an unhealthy amount of it like yours truly. In the scene, Phoebe decides to break her rule as a vegetarian to fit the triplets she is carrying for her brother…by eating salami and some other sandwich meats. Thankfully, Joey steps in to stop her and….let me paraphrase here….tell her to ‘do it right’ as he pulls out a couple pack of steaks.
That’s what it felt like as I popped my sci-fi novel cherry by reading Dune. I love watching TV. It’s an addiction I inherited from my father but when a book can break that, I take notice. That’s what Dune was like for me. I’m not going to spoil the book. Rather, it’s about what I learned from reading a good novel. An actually good novel. As I read each page and paragraph, there were countless moments when I had to put the book down and think to myself…holy fuck how did Frank Herbert fucking write this?
What was also fascinating was how I could tie much of the societal concepts in the book to human history. This isn’t to say that Herbert predicted 2021 when he wrote the book back in 1965 but the possible roots of human imagination. The worlds he imagined have roots in what was probably relevant during his era. There is also the quaint feeling that human nature rarely changes because what is applicable in a sci-fi world is applicable today and it was applicable some 50+ years ago.
Ultimately, what I’ve learned to appreciate is that really good fiction has a magical way of teaching the reader as much as any non-fiction about the topic of: People. After all, isn’t the root of most non-fiction telling stories about people? It’s actually made me think seriously about adding more classic fiction to my repertoire.
Next in Fashion
This week’s binge victim was Netflix’s Next in Fashion. I never would’ve watched it without my girlfriend turning it on in bed. But I proceeded to watch three episodes straight while my girlfriend lay unconscious within the first 10 minutes of the show. Other than a short documentary I watched on Karl Lagerfeld’s Chanel Couture, this was the longest look I had into what fashion designers did and a glimpse into their lives/personas.
Quick summary, the show is a 10 episode design challenge amongst 18 fashion designers from various countries in Asia, North America, South America and Europe where one winner is selected by rotating fashion judges. It’s not a world I’m familiar with other than the brand names themselves. Most guest judges that were made to sound like a big deal went completely over my head because I had no idea who they were. But, this made me look them up to understand why they were a ‘big deal’.
The common stereotype in my head was that fashion folks would be too eccentric, loud and it would be another terrible U.S reality show that screamed unnecessary excess. I’ve never seen the Kardashians but I imagine that’s what it would be like. Surprisingly, it was a great show. I finished a show gaining a greater appreciation for what fashion designers did, learning more about the industry and a positive impression of how supportive fashion designers are with each other. It reminded me of the finance industry. I think the common stereotype is that fund managers are assholes but most of the great ones in the industry are actually really great people and the assholes are ones that aren’t even good.
Introspection, Habits & Improving the Self
Comparison of Price
The game of how much you make and how much your ’things’ cost. When someone has a branded ’thing’. Could be a watch, bag, or jacket. Often, someone will ask “whoa, how much was it?” Whether this is indeed the correct thing to ask or not, whether it’s rude or not, inherent in such a question is the acknowledgment that “I see what you are carrying and I acknowledge that it’s expensive because we as a society have placed collective importance on the brand and bestowed the same reverence for the people who drown themselves in such brands.”
Sometimes, people won’t know and not ask and so the owner will go out of their way to make it extremely prominent. I can’t imagine there is any other purpose for a shirt that has LV plastered on it for a hundred repetitions or a jacket that appears as if Hugo Boss threw up on it. It’s loud. It screams “look at this. Don’t you want to know?!”
Now, by knowing prices, we know how much things cost and how much it cost the owner. Instead of assuming that this is merely a difference of philosophy on placing value on things, we commonly resort to the individual’s wealth and corresponding place in society.
The same could be said for jobs too. Specifically job titles. This is inherent in the question of “what do you do?” One can tell if it’s a genuine question of curiosity or not by whether there are constant follow-ups digging into the role. Lack thereof indicates it was merely a proxy to rank you in the questioner’s hierarchy of individual worth.
These individuals might not admit it but there are plenty of people who will proudly tell you they are venture capitalists, investment bankers, investors, management consultants, lawyers, software engineers at Google, etc… If in the 60s and 70s this didn’t really matter because people roughly made similar amounts (a construction worker, accountant, banker, taxi driver, they all made good livings for their families), now…one hears the title and $$ figures might as well come attached to the person like a price tag for handbags. That’s why you are selling with the job title.
Over time, it has become a thing of comparison. Now, what’s funny is how inequality has grown but how much people want it. I’m going to say something that might sound controversial, when it isn’t, and that is that no one wants equality. Specifically, people want inequality where they are in the winning minority and if they had to choose a side... they will be compelled to take the side that has everything if it means they can attain it.
That’s why we ask prices. That’s why we ask for job titles. It’s not because we are genuinely curious about how much a jacket cost or what someone does for a living. No one asks the price of a no-name bag that a friend has. They might ask “where’d you get this?” first before asking for a price because they genuinely want to see if something is in their budget. But most times, the “how much?” hits first for well-known brands.
The mere act of asking and looking to make dollar figure comparisons prompts the desire to be on top. If they bought something you can’t afford, envy comes alive. Then you want it or you want to chime in and tell them about something expensive you have stowed away that you couldn’t bear yourself to wear outside. The same can be said for telling people how much your house costs or how much you pay in rent.
Instead of confessing poor fiscal decisions, it is intended to be a brag about one’s status. There is hope of overlaying this to create further inequality among one’s peers. This isn’t to say that every question of how much something costs or what someone does or sharing how much one spends on XYZ is to play the comparison game. Unlike the virtuous and smart who don’t think this, I am yet flawed and have done much of this comparison. I still do it inadvertently and if I’m somewhere along the average spectrum, I wager many are like me.
Narcissim of Similars & Distances.
The more one is similar to something the more one is critical. Simply, it can be applied to race where a Korean is more critical of Japanese or Chinese culture than of British. It’s easier to fault the things that are only slightly different.
This distance in psychological similarity is applicable in physical as well. Plainly, the person living closest to work will arrive late the most…same for restaurants as well.
Representation
Why do people think they are representing someone? Who picked you? You see it in TV shows all the time or some kind of media where someone is from some minority group from some part of their society. You see a homosexual, an Asian, African-American, transexual, rubrics-cube lover, etc… who will say how they are representing their ‘group’.
When I see some Asian guy on a TV show saying he is representing Asians, I think….”Who told you to represent Asians?” Sometimes the guy isn’t even Korean and I think, “Why do you think you can represent me? Why would you bucket other Asian cultures as one?"
It’s so conceited. To think that because you are a minority somewhere that you represent something or someone else. No. That’s not true, at least I don’t want you representing me. Even political figures who were literally voted in to represent a group still get rejected by their constituents…even if they win!
Why can’t it be accepted that if you are playing a sport or in any competitive realm where you are a minority, you are doing it for yourself. If you are in some TV show or some contest that you are doing it for yourself. It’s not wrong to be selfish and do something for the self. There’s too much “I’m doing this for other people” going on when it’s merely shrouding a lack of awareness for the self. I’ve got to remind myself there is no shame in being selfish….and it might be more effective long run than to say I’m doing things for the benefit of others.