Grow or Shrink

The value of a business can be zero. Price can join it there. Now or later. Analysts will attempt to calculate their view of the intrinsic value of a business, and then compare it to the price. Value is dynamic, relative, and personal, and so no estimate of intrinsic value is the “correct” price. 

It is possible to get caught in valuation no man’s land. Seduced by a model of what you think reality should be. Seduced by the impenetrable complexity of your perspective, and how smart that makes you feel. 

Instead, calculating intrinsic value is like doing due diligence on a company you plan to work for. It’s not just about the quality of the job offer. It then matters what work gets done. 

Investors with a quality mindset, will seek out businesses at a reasonable price, but what they are really looking for is what is being done. We tend to undervalue the future, and so it is profitable finding companies that sustainably do something of value and reinvest, creating wealth through a process. 

A good idea is not enough. Those investors will very much consider the strength of the balance sheet of these companies, and the container (barriers to entry) in which value is created. Understanding the barriers that allow winners to keep on winning. 

You don’t have to know what is going to happen in the future. If you don’t pay an excessive price, then the focus shifts to the quality of work being done, and the habit of reinvestment. It is not about outperforming others, or even looking at what they are doing. Not gambling. Not chance. 

If a business creates and reinvests, with a resilient container, it will grow. If it consumes capital, it will shrink.

No Man's Land

Flander's Field, Belgium (1919)

Choosing Decision Makers

To outsource your decision-making, you need to develop trust. I like to believe in a world where we can have open conversations. The reality is that you can’t just decide to be honest, and vomit truth on someone. Truth needs unpacking. Trust is built. Both need time. It is dangerous to outsource decision-making, in part because we attach responsibility to the decision-maker. We attach identity to the decision-maker. We attach respect and blame. To outsource decisions, you need trust and confidence. Trust that the other decision-maker has your best interests at heart. Confidence that they have the competence to do what it is that they claim they will do. The decision about who to hand over responsibility to, is as important as the actual skill and knowledge required to make the relevant choice. Evaluating decision-makers is a skill in and of itself. Badly evaluating decision-makers allows you to pass on responsibility, and have a target to pin blame on should things go wrong. It does not solve the problem. 

"The Scapegoat"

William Holman Hunt (1854)

 

I See You

Fundamental Investing is the “Sawubona” of investment philosophies. “I see you” is the aim. What you see is not all there is. A business is not just about an idea. It is about what gets done over a significant helping of time. Meritocracy is caveated by the ideas of competitive advantage and barriers to entry. Any idea, whatever its quality, requires Capital to protect it from the waves of chaos, and to feed its growth. Any idea, whatever its quality, exists in an ecosystem of stakeholders (regulators, suppliers, customers, competitors, employees, investors) that force its existence into constant existential evaluation. Resources are limited. We don’t get to do everything. There are tradeoffs. Fundamental Investing is about seeing the potential through the noise of the conspicuous. It is about looking at support structures. It is about doing due diligence on how something exists, not just that it exists.

compound eye of an antartic krill

 

Creating Platforms

How we see the world is path-dependent and cumulative. We are partly conscious of how the incoming waves of information get processed. Other things have soaked so deep they are just a part of who we are till we return to the dust. My own path started in a place where I believed in wrestling with the truth until I got it. One path that I just had to understand. Then my path crossed that of Yoga, where there is a belief that no one can understand, and we all have our own chosen Ishvara (the closest we can get to understanding). A path of tolerance. The paradox is how much do you tolerate intolerance? Put differently, how do you balance creating space for many paths with boundaries and red flags? Raising alarm when you see danger? Saying no firmly. Popping dangerous illusions. Allowing and empowering people to make their own decisions, and their own mistakes, while recognising that we all affect each other? Being agnostic about other views, but still supporting the viewer and learning from them. Creating and being a part of platforms for empowerment.

Basement of metamorphic rock

 

Taste Test

Investing is a lot like cooking. You can do it just as well yourself if you are passionate about it. I am far from a foodie, but my understanding is that why the French are known for their love of food is they let the ingredients do the heavy lifting. Simple and delicious from source. A challenge is we all need to eat, so there are plenty of people willing to help (and charge). How can you trust, and what should you choose, if you haven’t grown up at the knee of an olive oil and salt-stained apron? Once you have bought into the idea that Capital changes the game. Once you have realised that hand-to-mouth living is not sustainable. Once you have found work that pays more than you need to spend to survive. Those are the fundamental keys to build space to breathe, and an engine to finance ideas that aren’t constrained by the box needed to make money. You don’t have to cook yourself. There are people willing to help. What you will need to do, is learn to ask the right questions. To taste test. Develop the ability to tell if something is off. 

Learning to Taste 

(as a young Trev when I last worked for Old Mutual)

 

Diving to Understand

Merit is only one factor in wealth creation. Like risk and return, it is also not something you can simply reduce to a number for comparison and ranking. Like risk and return, it should come with the standard regulatory disclosure, “past performance is no guarantee of future success”. To “see Merit”, you need to look. What we see, unfortunately, depends on what we have seen. We understand by deep soaking. Through repetition, context, and recognition. Through networks of connecting dots that build a picture we can make sense of. To see Merit, you need to do more than just superficial due diligence. You need to repeatedly ask questions about people, process, performance, philosophy, and what it means for you. Merit means nothing without a win-win relationship between the one that has merit, and those they interact with. To see merit, you need to do a deep dive due diligence, and we only have limited capacity to do that. Which means what we see is path dependent, and we often see what we want to see. Looking to confirm that we are on the right path. What we see is not all there is.

"My Octopus Teacher"

Diving to Understand

Tuning Fork

Ruin is the thing that we fear most. Being able to confront waves of anxiety is important. When you make a decision, you know there are a variety of possible outcomes. What is hard to identify is the risk of ruin. That means that there is not going to be a next day. Sometimes that risk is hidden. Lying in the invisible tail of alternative possibilities that have never happened. Unlikely events with significant impacts. The building pressure of bad choices with delayed consequences. We cannot live in paralysed fear, because of these unknowns. We can build buffers to survive the unknown. Reflect. Unpack. Interrogate.

For most of our decisions, we are not unique snowflakes. Other people have made similar choices in resonating forks scattered liberally around the world. You can do the due diligence. You can research how other people have handled reflections of your situation. Their perspective will not be identical, but there can be similar flavour. The same ingredients in infinite combinations. You can put in the work to make better decisions. Reflect, decide, and put into practice.

Listen

Plot Twist

Be wary of averages and extremes. When making decisions about a path to go on, it is important to “think in distributions” and to think about what is not there. The range of outcomes, and what happens if it does not work out. The past (especially long histories) is incredibly helpful. Including similar histories, with slightly different contexts. Same, but different. There but for the grace of. The starting point for wealth creation is an income. A source. Researching how others have done it is key, but make sure you do not just look at the ones who have done well. Especially if you are the product. If someone is teaching you to make money like they did, but in reality they are making money by teaching you… that is just a Ponzi Scheme. Layers of teachers teaching teachers to teach teachers till all the teachers are taught. Talk to people doing what you want to do about the challenges. Lots of people. Not just the ones you are paying. Talk to the bitter and twisted. Do not take their word as the truth, but be aware. How can it go wrong? How can it go right? Build the capacity to cope with plot twists.

Basic Questions

It is true that the world is always changing. But it is not changing so fast that you don’t get a lot of information by asking simple questions like

(1)    What skills and knowledge does doing your job involve?

(2)    Where did you develop those skills and acquire that knowledge?

(3)    What are the entrance requirements?

(4)    What would the obstacles be to me being trained?

(5)    Do you enjoy your job?

(6)    Are you financially secure?

(7)    Any questions you wish you had asked before embarking on your path?

You have to assume that there will be significant obstacles to any path that is well remunerated. Either that, or the job itself is not very pleasant. There has to be some reason why the supply of people willing and able to do that job doesn’t exceed the demand. There are 7.8 Billion people on the planet, half of those people earn less than $3,000 (Gallup 2013), and we are consuming more than the planet can handle. Part of designing your path to financial freedom is accepting some hard truths, and making some difficult choices. About your goals. About your values. About your willingness to do what it takes.

Prepare

Due Dilligence

Due Diligence is the reasonable steps required to gather information before entering into an agreement or taking action. Looking before you cross the road. Price is not value. Price is a signal of supply and demand. If something is incredibly valuable to lots of people, but is abundant, its price will be low. Whether your skills and knowledge are valuable is not in question. Meritocracy is not based on ranking skills and knowledge, it is based on barriers to entry. A competitive advantage is not what you are good at. It is why others cannot do what you are doing, which keeps it in short supply. Choices have consequences. We do not live in isolation. When it comes to money, you have to do your due diligence. You make money through the conscious construction of a container. It is not about respect or worth. That is your personal practice of conquering the demons in your head and heart. Money making is solving problems for decision makers with money. It is not about you. It is doing what you have to do, so you can do what you want to do.

Look before you cross the road

Click Song

Best Practice is the method that is generally accepted as better than the alternatives, because it produces better results. Due Diligence is a comprehensive study with reasonable steps taken before making a decision. With 7.8 Billion people on the planet, we have collectively had a lot of practice. Many (most) of the conversations we have, have been had before. The paths we are considering have been walked before. Not in exactly the same way. That path is yours alone. Lots of the information that is freely available is only accessible to those who learn the skill of deep soaking in other people’s stories. Delaying forming opinions till you can tell the differences between words. Till you can share words. Training your ear. Training your tongue. Delaying criticism till you can see the intelligence in a grammar that is not yours. Like driving on the other side of the road, you can not learn from the mistakes and successes of others if you insist on reapplying everything you know to every other lesson.

It's the "Click Song" till you 

train your tongue to say

Qongqothwane

Beware the Tail

Always throw half the CVs of applicants away without reading them. You don’t want to hire someone who is unlucky. There is an existential problem with investing if your goal is to outperform a benchmark. There is always the risk of massive underperformance wiping out even the best of track records. Tail Risks are high impact, low probability events. They can carry the only information that matters, and if you miss them… you didn’t add any value. Two of the most intelligent, clearest thinking, stock pickers I know don’t pick stocks anymore because of mistakes carved into their souls. That lifts them in my esteem. I also know unextraordinary stock pickers with the gift of the gab and political skill. Confidence sells. Wisdom often stays silent. I don’t believe in Gods of investing. I think you make sensible choices and let the cards fall. Manage the risks and do something else that inherently adds value in and of itself. Take ideas like Meritocracy with a pinch of salt. There is normally too little information to see clearly, or so much that it is stale. Our lives, and particularly our working careers, are just blips in the time scales of long-term wealth creation. The key is custodianship, not immortality.

Staying Rooted

If we were all farmers, delegation would be easier. The person giving the task, and the person accepting the task would understand each other clearly. Developed over the thousands of years since we learned to tame the land, our words would probably mean the same thing. The tasks would be well understood, even if seasons and the weather had the final say. We are not all farmers. Our words don’t mean the same thing. We often end up having to delegate tasks in areas we do not understand, so we can focus on our own slice (which we understand better than others, maybe). Due Diligence is the process of taking reasonable steps of oversight. Kicking the tires to check for defects or poor quality. Trust but verify. It’s worth collecting good questions. Knowing what to ask. What to look for. My preference is for as little abstraction as possible. I want to know what the Jam is. The product. How it is made. Who makes it. The process. Too many layers, and I’ll pass. We may not be farmers, but staying rooted still matters.

Not Farmers

Uncontrollable

I have always envied Hole Diggers. Someone whose job it is to dig 6 holes. They dig 8, drop the mic, and leave work early. The ask and offer is incredibly clear. I used to love Maths at school. Yes, Mrs Chick used to tease me about going via Cape Town to a solution, but it was either right or wrong. And she could show me the short cuts. Mr Lichkus and I would go head to head in epic battles in the Art Room. I had to lean into chaos. I once let my classmates have an hour to do whatever they wanted to my piece. Flames and burnt plastic followed. As I coughed and sneezed black stuff from my nose during the next period in English class (similarly ambiguous), I did have a break through on reflection. Much harder won. In the Investment world people pretend it’s maths. That their track record points to their success. Except when that track record disappears. Then it is church, or art class, or English. Anything with wiggle room. Ambiguity provides space for BS. It also provides space for beauty. In the eye of the beholder, and in the control of the beholden.

Fire and Earth

Worth It

How will you feel in the morning? How will you feel on Monday? I like to buy Democratic Goods. Those where the price is low enough that everyone who wants them can mostly afford them. Dividends of being Cultural Billionaires, sharing in societies compounded cumulative skills and knowledge. Price is relative. Just because the price is high tells you very little about its relationship to value. But a low absolute price does reduce the amount of Due Diligence you need to do. The bigger the number and the less you know, the more research is required. The bigger the number, the fewer other people (also researching) are likely also buying. Bigger number, smaller market. In tiny markets, the story becomes more important. It becomes easier for there to be different knowledge on the part of the buyer and seller, and smoke and mirrors in between. The bigger the absolute price, the more dangerous the epiphany, “I am worth it”. Of course, you are worth it. That doesn’t mean people won’t try sell you a story to get a chunk of that worth. “Is everyone else worth it too?” is a good follow up question.

Is everyone else worth it too?

Ponzi Scheme

A Ponzi Scheme lures new investors and pays (/redirects) profits (/new money) to early investors with funds from recent investors. Until the music stops. Then someone is left without a chair. Nothing is created. There is no substance. It is simply a redistribution. Normally Ponzi Schemes are dressed up in such a way that many (even most) of the true believers don’t know they are being taken advantage of, or are setting the scene to hurt someone else. Ponzi Schemes rely on the illusion of sustainability. To avoid them, you need to look at the fundamentals of what is going on. To ask the question, how does this end? To do Due Diligence. Ponzi Schemes normally require an initial investment, and then promise above average returns. In most cases, “too good to be true” is a good sign that it is not true. Real wealth creation is normally not outside the box. It is real problems being solved. Then reinvestment in new real problems being solved. Sustainable growth plus time.

Charles Ponzi

Something Useful

Once the penny has dropped that money can earn a living if you don’t kill it, the question of what job to get it remains. Quality Financial Advice costs at least as much as a good therapist, because they are very similar. The advisor’s key job is to understand you, your goals, your skills, and your quirks. Generic advice is cheaper or free, but then you take full responsibility. Get your money a job. Don’t chase your tail. Stick to the plan. Two big risks are Churn (the grass is always greener) and Complexity (tax and legal structures to “optimise”). My preference is to keep it simple. There are no Gods of investing. Just pick someone who is doing something you understand. There are fact sheets, commentaries, and websites. The 4Ps of Due Diligence on Funds are People, Process, Performance, and Price. You are looking for consistency, reliability, stability, and trustworthiness. Stay curious and dig a little when something concerns you. Mostly, the advantage of building an Engine is that the key ingredient is time. Crack on with what it is that really floats your boat, and let your money build value. The most important thing is the simplest. Is your money doing something useful?

Keep it Simple

Due Diligence

Once you have bought into the idea of building an Engine, and you have tamed your expenses to the point where you are reasonably in control, the next question is “How?”. Treat your money like you treated your first productive asset (you). Get it some work. Know what that work is. There will be plenty of people trying to convince you they can manage your money. Make sure you do Due Diligence. That means asking good questions, and avoiding people who only promise upside. Be especially careful of the word “Guaranteed” and anyone promising high returns. Sustainable growth is the key. Charts of past performance don’t show the others who tried the same thing, but failed. I am a Soutie. One foot in South Africa & one in the UK. SA is blessed with many great asset managers, and I don’t believe any are touched by the Gods. I invest in Global Equity Funds with the two companies I worked at, and then have an Interactive Brokers account where I have a portfolio of about 20 companies where I have got my money jobs. Don’t invest with anyone just because you think they are smart or cunning. Invest when you understand what work it is your money is doing.

What work is your money doing?