Patrick O’Shaughnessy was on the – just launched – Meb Faber podcast. The interview was good. Faber should have a good podcast, though if he gets too far into the weeds I’ll need to learn a few more things to follow along. O’Shaughnessy kept things easy and here’s what I noted.
1/ Where you start from matters. “We like to say that stocks are guilty until proven innocent. You shouldn’t start with market weights and move away, you should say ‘I want to built a reasonably diversified but highly active strategy based on factors like this.’”
Every position has a default. Have you thought about what it is?
For example, “No” is a great default for making choices. Mellody Hobson said that one of her analysts had a default of no. “Her process is one of elimination, she assumes she doesn’t want to own anything.” Michael Lombardi said something similar, “scouting is not about finding players, scouting is about eliminating players.”
2/ The Finish Line Fallacy. “If you’ve been a concentrated deep value investors over the long term you do really really well. If you checked your account every twenty years you’ve been doing great. But people don’t do that.”
You can’t try to wins someone else’s race, with someone else’s finish line. I do this when on the treadmill, always looking around at the speeds next to me. It doesn’t matter in the gym, and it doesn’t matter in your portfolio.
Charlie Munger said, “I don’t think it’s a tragedy that one competitor had a little better ratio one period…I don’t think we should worry about the fact that somebody else had a good quarter.” Tadas Viskanta said, “if you get someone in the market, you need to also get them out.” Josh Williams wrote that when he played someone else’s game it was the beginning of the end for his company.
Jason Fried took a wider, wiser, angle. When asked what success was to him, Fried said, “something you would like to do for many days in a row.” You fail to achieve this, he explained, if you try to finish someone else’s race. If you try to be Jeff Bezos.
“His success (Bezos) is one that’s very very hard to achieve…most likely you won’t get there…the odds are stacked against you…and if you think that’s the only way you’re going to be miserable.”
3/ Invert, always invert. “There’s tremendous value in studying short sellers. Most of the time the focus is on long investors who focus on the best companies to buy. I think it’s more interesting to look at guys like Jim Chanos and their methodology for identifying companies to short. That way we know what stocks we can avoid.”
Typically, it’s Charlie Munger who explains it best:
“For example, if you were hired by the World Bank to help India, it would be very helpful to determine the three best ways to increase the man-years of misery in India—and, then, turn around and avoid those ways. So think it through backward as well as forward. It is a trick that works in algebra and a trick that works in life.”
O’Shaughnessy will look at what Jim Chanos condsiders important, and avoid companies that exhibit similar symptons.
Terry Gross said this works for careers too, “you find out who you are by finding out who you’re not.”
Mohnish Pabrai explained that Coca-Cola succeeded thanks to inversion as thinking. “The first thing you don’t do is losing half the brand name.” Coca-Cola had a great brand and what would have happened if they let other people use the Cola part of it?
Inversion was the jumping off point of my book; 28 Lessons from Start-ups That Failed. I found out how technology start-ups made money, personal, and strategy mistakes. Things like expensive marketing, fast hiring/slow firing, and not knowing customers were consistent start-up maladies.
4/ History rhymes. “It’s really expensive exciting stuff ($TSLA, $AAPL) for young people, really boring cheap stuff for older people, and if history rhymes, which it often does, that older, more boring and stodgier portfolio is probably going to do better.”
We’ll call this idea pattern recognition. It’s why Marc Andreessen and David Chang suggest people read biographies. They want to see patterns in successful decision making. Andy Weissman said pattern recognition is his best skill:
“If we were good at starting companies, we would start companies. We’re not good at starting companies, so we don’t. We don’t want to be involved in the running of the business, we can provide a good level of service because we have seen lots of different types of business at lots of different types of stages and we have good pattern recognition that provide frameworks for how to support the decisions entrepreneurs need to make.”
Tren Griffin pointed out the advantage of pattern recognition, stories, and history. “Business school should be taught from more of a historical case format,” Charlie Munger believes, Griffin pointed out, “that you learn from pattern recognition and in order to learn from pattern recognition you have to see a lot of examples.”
The value of pattern recognition is that it saves time and money (two things that kills companies).
5/ Smart humans do dumb things. “The company pre-announces earnings for no known reasons and the stock goes directly back to the strike price and I end up eating bologna and mustard sandwiches for a year.” – Faber
If humans are playing the game, they will do dumb stuff. When Richard Thaler began research that would form behavior economics he actually kept a list of theories title, “dumb stuff people do.” Charlie Munger talked about this too:
6/ Incentives matter. “There’s a law in economics that says when a measure becomes a target, it ceases to be a good measure. For example, there was a rat infestation problem in colonial French Vietnam. Their solution was that they would offer a small bounty for each rat tail turned in. People started collecting bounties, but then officials went out in town and noticed rats running around without tails. People were cutting off the tails and letting the rats return to the sewers.”
Shane Parrish was disappointed in the higher education incentives of you scratch my back, I’ll scratch yours. John Nagl studied different incentives for miltary surrender to see that sometimes you needed a carrot, and sometimes a stick. Napoleon Bonaparte’s troops sent their spoils home and created the incentive to keep fighting.
When you know the existing incentives you can also avoid them (inversion!). Louis C.K. wanted to avoid traditional economic incentives when he made Horrace and Pete:
“I want to do this show for years I thought, but every time I took a big dramatic or tragic turn on the show, I thought, the only thing that keeps you from doing that in a sitcom or any series is that you need to stay within the margins so the show stays the same and so it can stay on the air. The decision to make big moves on a television show is economic.”
7/ Be there and eat your own cooking. “My advice is to be as hands on as possible, invest in this stuff yourself, eat your own cooking, live it yourself, talk to investors as much as you can – because investor psychology is everything.”
Wesley Gray said, “after being imbedded with the (Iraqi) people I started realize that culture matters.” You have to be there to best understand a situation. John Nagl found that the best military commanders were “smart enough to go out into the jungle.” Chris Dixon said places like NYC and LA are great because “with people in the arts and media and all kinds of different industries, and that creates a different creative dynamic.” Being there helps.
But, we can invert this idea too. Josh Koppelman said “there’s a real benefit to not being in the valley echo chamber….to see how the rest of the world views technology is really compelling.” He needs to see non-SF types use technology. Warren Buffett left NYC, said Jason Zweig, because too many people were whispering in his ear.
Tadas Viskanta put it best when he said, “you have to be much more of a conscious consumer.”
Thanks for reading, I’m @mikedariano on Twitter.