One framework for investing is the bathtub model. Individuals (but also managers of OPM like pension funds, endowments, etc.) aim to fill the tub as much as possible. An individual’s main stream is their salary. Maybe some salary first goes to an investment, and then pours in the tub. A rental property, a second job, a military retirement are inputs too.
But the tub doesn’t just fill up, it drains too. Losses in the market are like leaks in the tub, hopefully we can mop these up and dump them back in. The big four unexpected costs: health, house, job, spouse are major leaks. Retirement is the intentional draining of the reserves.
More water and more pressure is good. Fewer and less severe leaks are good. One way to add on net are uncorrelated assets. What flows faster as something leaks more? Real estate and gold are classic examples. Bitcoin too – kidding! ‘All weather’ and ‘cockroach’ are portfolios which blend assets for uncorrelated returns. The goal is to prevent major mop ups or total losses.
But the best and only uncorrelated asset is mindset.
A common mindset during drawdowns for investors who dollar cost average is that stocks are on sale. This attitude goes beyond investing. When something bad happens it’s a chance to get stronger. Another is, you’ll have a great trip or some really good stories.
The world is complex. There’s a lot going on, sure. But also ‘a butterfly flaps its wings in Kansas and causes a Tsunami in Guam’ complex. How does someone plan for just what’s happened since 2016?! How do investors (but also managers of OPM like pension funds, endowments, etc.) find that someone? Not only is our mindset the best and only uncorrelated assets, it’s ours to control. We can want less or more. We can view the obstacle as the way. We can match expectations to reality.
One trait of great business leaders (seems to be) a willingness to hear dissenting opinions. It takes a seed of humility that will sprout a culture where ‘arguing well’ can survive.
Michigan Dean, Scott DeRue told Sam Zell: “I’ve met a number of your employees and one of the things that’s universal when they talk about what it’s like to work with, and for, Sam is that it’s not always easy. You will challenge them but they know that you believe in them.” To which Zell replied:
“You don’t kill the messenger. As I say to my people all the time, take me on. I’m not afraid to defend my position and neither should you.”
This has been important, Zell explained, because he’s been “business agnostic.” Investments in twenty different industries (“it could have been forty”) means that Zell has to think on the fly. As such, “No one is quicker to admit they’re wrong than I am.”
Yet, as people this is hard. It’s difficult to separate I was dumb from That was dumb. In th wrong culture it’s impossible
As Zell put it, “I’m not afraid to defend my position and neither should you.” I think it was Kara Swisher who said that when she hears someone say, ‘I like to be challenged’ they really don’t. To her it’s a red flag. Partly because, good arguments are difficult to do well. Yet in the right place, it’s possible and as Zell proves, profitable, to argue well.
Other quotes from Zell:
On Risk, “If my watch has one moving part then it has a very small probability of not working. If my watch has fifty moving parts then there would be another forty-nine potential reasons it didn’t work.“
Risk, again. “I only want to be right seventy percent of the time. The real key is how wrong are you on the thirty percent.”
Leaving money on the table, “I think that a great deal of my financial success is directly related to the fact that we’ve been long-term players.”
Being different, “Look at everyone the Forbes 400 who didn’t inheret money. Everybody went left when conventional wisdom said to go right.” & “There are very few examples of high margin businesses that are done by everybody.”
Skill and luck, “I think ninety percent of success is accidental. Accidental in terms of the opportunity arising, not accidental in terms of people’s understanding and willingness to take it up.”
Action, “My advice to everyone is to become a profesional opportunist.”