Charley Ellis

Supported by Greenhaven Road Capital, finding value off the beaten path.

Charley Ellis had a short, but valuable interview with John Authers of the Financial Times.  What I liked most about the interview was how many human elements were involved. How you feel. What you believe. Why do something you know is bad for you. 

One analogy for life is that it’s like sitting at a blackjack table. You have your cards. You have a strategy. You know the odds of when to hit and stay. You also have three college students, free drinks, and that guy next to you that hits at 15.

Ready?

1/ How to beat the market.  It helps if your competition isn’t very good.  “The secret to great success in business is to choose competition that’s not very good. The same thing works in sports, it works in lots of different things.”

An easy way to do this is to find places with no competition. Instagram did this when they became a photo app rather than a check-in app.

Ellis had competition but it was “doctors and lawyers and Indian chiefs with much more important things on their mind. This was a recreational sideline.”

They were competing with Ellis said, “(I would) finish reading a 50,60, 70 page study that told you quite a great deal about what was going on in the past, currently, and what was likely to happen in the future. It was an unfair competitive advantage and we took advantage of it.”

Investors and entrepreneurs have little time for hobbies or coaching youth soccer. If you’re going to spend that much time doing something you better love it. Gary Vaynerchuk loves it.  Joel Greenblatt wrote, “if you’re not going to enjoy the ‘game,’ don’t bother: there are far more productive uses for your time.” The chase should be fun (see #3).

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2/ Habits and urges.  “There’s a huge argument for not smoking under any circumstances, but there are still some people doing it.” “We know that gambling is designed to entertain people enough so they won’t  mind losing ten or twenty percent  of their money every wheel turn.” “They’re not actually gambling, they’re gradually losing money.”

Did you eat any cookies over holidays? (Be honest). Diet, much like smoking and gambling is one of those things where our habits and immediate satisfaction trump our goals and long-term rewards. It’s hard, but we can do better.

• Jocko Willink suggests more discipline in your life. “Discipline equals freedom,” Willink says.

• Tadas Viskanta and James Osborne proposed planning as a way around pitfalls. If you think something will cause problems; create a substitute or avoid that situation.

• Jon Stein told Patrick O’Shaugnessy that the Betterment service will display potential tax costs associated with trades. This extra bit of information stops three out of four people.

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3/ Do it for the love of the game.When Ellis is asked what would happen to the investing world if you cut everyone’s pay in half he said:

“They wouldn’t leave. They’d still want to play because it’s fascinating, it’s really interesting, it’s very enjoyable and you don’t have to stop at 35…I know a couple of people over 100 who are still involved in active management…The rewards are really quite substantial.”

It’s fun. It’s enjoyable. People like the challenge.

There’s something enjoyable about the process that keeps people around. It’s kept Anson Dorrance in soccer. It’s kept Warren Buffett looking for investments. It’s kept Casey Neistat making videos.

Angela Duckworth wrote in Grit:

“Why were the highly accomplished so dogged in their pursuits?…They were satisfied being unsatisfied…It was the chase as much as the capture that was gratifying.”

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4/ Effort != Results.  “We all learned in school that if you studied harder you could get better grades, then we learn in our jobs if we do more work for the employer we get more promotions. Trying harder works in many, many places. It doesn’t work in straight jackets, Chinese finger puzzles…. and it doesn’t work in investment management.”

Seth Klarman gives similar advice in Margin of Safety:

“Investment returns are not a direct function of how long or hard you work or how much you wish to earn.”

Humans (you, me and Bobby McGee) tend to see things linearly. Non-linear instances, like when, unit of work != unit of result, is tougher.