Eddy Elfenbein

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

Eddy Elfenbein spoke with George Pearkes on the Bespoke podcast. Articulate individual investors like Elfenbein provide a nice glimpse of markets and decision making.

Elfenbein and Pearkes are both fans of a multidisciplinary approach to understanding markets. “I liked the stock market,” said Elfenbein, “but I didn’t take a single business class as an undergrad.” Pearkes agreed with a liberal arts style approach  “It gives you a framework that will create a different impression about what’s going on rather than the lens of business, accounting, or economics.”

How so? Look at history, said Elfenbein, and you realize things are more complicated than they seem. “One thing you learn studying something- like the civil war or Vietnam – is that it is a lot more complicated than you realized.” This helps filter out the noise of the markets. “Investing is a minefield for the meta-narratives. You have to be very practical-minded and lose these absurd larger explanations and come at this without an ideological view.”

“This really comes in handy when you’re looking at the market and everyone has their little slogans.”  – Eddy Elfenbein

This is the same mindset Esther Duflo used when she studied non-investors, the world’s poor. Duflo wanted her research to be free from this is a supply side problem, no it’s a demand side problem squabble. That’s why both Duflo and Elfenbein take a research-focused approach.

Michael Mauboussin wrote about this approach: “you will be a better investor, executive, parent, friend, – person – if you approach problems from a multidisciplinary perspective.”

Morgan Housel agreed, “The most powerful concepts are those that span multiple disciplines.”

A multidisciplinary approach may also encourage life-long curiosity. Elfenbein said, “I’m a big believer in the liberal arts education, how it teaches you how to think and how it teaches you to teach yourself.” This book may be a good one to get you started.

Elfenbein wasn’t born this way. He grew into this mindset. His first job was terrible. Then he wrote a newsletter, mostly for fun. “It was fun to do, a very informative learning experience.” Jason Calacanis said almost this same thing about angel investing. You may not make money, but the connections and lessons may be more valuable. Writing the newsletter also gave Elfenbein, “a position I couldn’t have applied for.”

In 2005 he started Crossing Wall Street. His strategy? “There was no orderly plan. I just like to write what I thought about stocks. It’s what I enjoy.” Writing for Elfenbein is “thinking out loud.” Writing is often a form of thinking.

Interviewees like Adam Grant, David Gardner, and Bob Seawright recommend writing as a form of thinking.

This comes easier to people like Elfenbein because he likes what he does. “I like the movement and energy of the financial markets.” Verbs are easy to outsource. That means that the best will be those who enjoy it and are willing to do the (extra) work.

An interesting point in the podcast is when Pearkes brings up the fact that high tax companies have had low returns so far this year. It’s a hmm, that’s interesting moment. Why would a company with potentially favorable future conditions not have a price increase? Elfenbein guessed:

“The conventional wisdom is that retailers pay the highest taxes and technology companies pay the lowest. I’d imagine that the macro trends impacting both those industries is a tidal wave compared to anything that will be implemented in the tax code.”

This single quote shows depth. Elfenstein avoids the narrative bias, the easy answers, and simple solutions. He engages in what Howard Marks calls second level thinking. Later in the episode (45:00), he extends this type of thinking to Signature Bank ($SBNY) and AIG.

Elfenbein also reveals the secret sauce to good investments. Just find companies with strong returns on equity, good performance in their market, healthy margins, low debt, a comparative advantage at a good price. Or you can buy his ETF.

Remember though, numbers only lead to letters:

“Numbers can only tell us a nice story of what’s going on…If a company has strong cash flow and good numbers it means the product is good, the management is good. But why is the product good? Because it does something it’s competitors can’t. That’s the end result.”

Often good products are quasi-monopolies.

“I like to look for a company that does something another company can’t. It’s not technically a monopoly but is sort of a monopoly that no other company can do it.”

Harley Davidson is one example. A lemonade stand with a patent might be another. “A good way to see this,” Elfenbein said, “is to ask; ‘Who can raise their price?’ That’s the sort of business you want to own.” Along with Pat Dorsey and Connor Leonard, Elfenbein has some good ideas about moats.

Elfenbein reminds us that these moats are temporary. “Always be aware that these advantages are not permanent.” There’s alpha erosion. Daryl Morey sees it in basketball, Nate Silver saw it in online poker, Leigh Drogen sees it in data sets.

 

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