Stupidity Tax

Conspicuous Consumption is a stupidity tax. As is hoarding. The image of Scrooge McDuck is not one of someone who is good with money. 

People who are good with money are constantly putting it back to work. Lazy assets get eaten away by inflation and fees. Lazy spending is firing money. Even though someone with capital is building reserves, those reserves are working. 

If you are a fundamental investor, that work is something tangible you can understand and explain. That capital is connected to other people and providing something we collectively want or need. It provides breathing capacity for the owner by working for others. 

We do need the layer of what is now called responsible investing, impact investing, or the inclusion of ESG (Environment, Social, Governance) issues in decision making. The importance of including qualitative issues in decisions that are normally driven by numbers. Recognising circles of competence with people who understand money, but may be less conscious of unintended consequences of broader societal impacts. Making sure that good business ideas are also good ideas that are consistent with our ethics and values. 

It is not just the conspicuous that matters when it comes to endurance. It is also behaviours, patterns, and things as basic as sleep. Understanding the processes and science behind sleep. Where the direct connection to “productivity” isn’t obvious. Understanding how unconscious learning gets processed and connections get made. Where what we are aware of and unaware of gets connected and pushed into our subconscious if we are sleeping, eating, relaxing, breathing, exercising, and looking after our mental health properly.

Blunt Tool

Money-making is not driven by fixed and knowable value and worth. Value and worth are deeply personal. We use money to communicate our conspicuous needs bluntly through supply and demand of resources. 

The price will be highest where the demand for those resources is not being met. Price (for solving) and cost (to solve) are signals attracting and repelling focus of those who are looking to identify quantifiable, measurable, rankable, prioritizable, manageable, solveable (monetizable) problems. 

Separate your identity (who you are at the core), and how you measure value, from the market. Create space. Use the market as a tool to internalize value it knows nothing about. Transform what you create into what you value. Use the strengths of the market to power where it is weak. To take the energy that can fire your endurance, and build your resilience, in the way you work with the market. Do not take it too seriously. You are the one creating meaning in the way you want to create meaning. 

See beyond the superficial. What we do matters. Actions have consequences. Fundamental investing is about looking beyond the smoke and mirrors to get a sense of what is really being done. What problems are being solved? Is the problem being solved scarce and worth focusing on in the monetary world? A deep acceptance of the problems others are communicating, so that you can free your attention for the things that are more qualitative and important to you.

Use and develop the tools available

Decision-Making not God-Making

Profit is not the point. Efficiency is not the point. If you are profitable and efficient, but live hand-to-mouth consuming everything you create, you still expose yourself to shocks and stress. Good ideas are not enough. What you see is not all there is. 

The point is also not seeing the future and every possibility. It is not gambling. You can build endurance and resilience, for whatever outcomes occur. It is not about maybe doing well, maybe doing badly. Create space. Reinvest. Gradually have more capacity because more of your money is being put to work. 

It is not a case of if others do well, you do badly, or vice versa. Fundamental investing is not a zero-sum game, where wealth is extracted. It is not a competition against other people. If you spend your entire career judging yourself relative to other people, it is more likely than not that by your own measure, you will have added no value. 

The point is not to find your place on Mount Olympus and prove to other people that you are awesome. Building capital allows you to free yourself from that judgement. To make decisions based on the unseen. To make decisions based on what you know to be true, for you. 

Money is made by solving known communicable problems for decision-makers with money. If you have money, you can, by your own choice, finance the wordless, shapeless, problems and non-problems you wrestle or sit with.

Don't make Gods, make decisions

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)

Building Value

We understand things better if we are directly involved. We all have to live somewhere, and so houses are the default big asset we think of people deciding to buy/own. We know our home. A roof over your head is a very easy problem to communicate. 

If someone offers to buy your house, and suggests a price that is less than what you think it is worth... it is easy to say no. Especially if you didn’t even want to sell. A reluctant yes may squeak out if you have no option but to sell, and no one else but that cheeky person to sell to. 

With investments, when the price falls, there is panic! All a price is, is a quote. The last agreed number for which a share changed hands. The lack of real-time knowledge of price (noise) for houses brings some calm. 

The best tool for long-term investing is the ability to choose what to pay attention to. To place your attention consciously in alignment with little actions that add up. 

Fundamental investing is when you get your money a job. Your money becomes a mini version of you (with more flexibility) that can earn on your behalf. “The actions that add up” is the real work the money is doing. 

Why is it making money? What problem is being solved? What is the ask? What is the offer? What is the container? Or the hardest problem of the lot in making money... “How do you get paid?”. Fundamental questions about building value.

Brick Making

Place to Sleep

It is not a mystery why there is not enough affordable housing. We have not built enough houses. There has been a multiple decade-long process of urbanization and population growth. There are not enough houses in the cities. 

More specifically, there are not enough houses close to the quality jobs and quality schools. Houses get smaller. Prices go up. Borrowing is provided to people to buy (if they can prove they have an income to support interest payments) which means more money chasing the same physical buildings. Interest rates are lowered so that borrowers are subsidized, and savers are penalized. 

Those holding cash have a wasting asset, being paid almost nothing for their savings, so that those borrowing that cash can inflate the cost of housing. The idea of borrowing to buy with 30-year paybacks matching our working lives, and tied to earnings, is as natural as breathing. We lend to people who can prove they don’t explicitly need the money. We lend as front loading of work-for-pay income. 

People who have bought property have seen “growth” for such a long time, we collectively think of homes as “safe as houses” investment. We are all forced buyers of somewhere to sleep. Whether we rent or buy. We can see the bricks and mortar. So the cycle continues. If we want to bring down the cost of housing, there need to be more houses. 

That would bring down the price of those with houses as investments.

Sleep

Solution or Problem

The magic of fundamental investing is reinvestment and compounding. Where what is being produced has the space and time to reproduce. It is not about consumption. It is not about predicting the future. It is not about relative performance. 

It is about doing work. Solving problems. Allocating capital to good business ideas. Ideas that meet, and excel within, specific constraints of numbers-based endurance, resilience, and creativity... generating enough to support a different form of values-based endurance, resilience, and creativity. Financing good ideas that would otherwise get mangled when forced through the filters needed to fit money-making boxes. 

Property could be a productive asset in the sense that you get rent from it and then invest that in something else. Residential property doesn’t sit well with me as an investment in that sense, because “affordable housing” is a problem we want to solve. Housing as an investment, and housing as an expense, are in direct competition. 

We want spending problems to go away. We want investments to grow. We all sleep for eight(ish) hours (ideally). In one bed. It doesn’t matter how many rooms you have or how rich you are, when you close your eyes (if you are safe and warm). Is the goal for the same house to rise in price? It is important for us to ask ourselves if we are even trying to solve the problems we know we have. 

Or would a solution be a problem?

Tutankhamun's Gilded Bed

More Jam

There is a constant wrestle between price (a number) and value (qualitative and dynamic). Not everything that has value can be counted, and yet we are trying to build and grow. 

We measure ourselves through change. Often we rely on change to bring awareness of value. Change gives us a sense of direction. Adding contrast. Allowing us to tell ourselves a story. Of the past, and of the future, and how they differ. 

Why does a Jam Factory make money? Because it makes Jam. If you reinvest some of the difference between how much you sold the Jam for, and how much it cost to make, you can make more Jam next year. Expand the factory. Count more jars of Jam. Buy bigger machines. Hire more people. Use more supplies. Then it makes sense if in 20 years time the Jam factory is worth more. It produces countably more Jam. That is fundamental investing. 

What happens with speculation is the same thing has a higher price. Not because of any countable growth. Often just because of supply and demand. The same house may cost more, simply because we are not building enough houses, we are lending people money to buy houses, and more people want houses. 

You cannot treat homes as an “investment”, *and* something you want to become more affordable over time.

Patterns and Work

Trading is sensing the patterns. It is like poker where you are playing against another person. Attempting to go with the momentum when the price is going up, and not be exposed when it is going down. Playing off the rhythms. The natural feast and famine cycle. 

If you have got a sense that there is a long-term, stable price, then you get an understanding of how buyers and sellers move around that. You are juggling supply and demand, and playing both sides. Good or bad, this too will pass. "Buy when the price is low and sell when the price is high". Be a supplier when there is scarcity, and store up when there is abundance. 

You have to have a sense that there is a long-term price, but you don't really care what the thing is. You are making money by playing off the relationship between price and long-term value. 

If you are really brave, you can trade something where the long-term price is zero. Where there is no value, there are just people willing to buy. Until there aren’t. Trading musical chairs. 

With investing, you are not dependent on a buyer of the vehicle until/unless you sell... you are dependent on what work the vehicle does. Trading is about the patterns, investing is about the work.

Natural Rhythms

Building Value

Fundamental investing is the idea that what money does matters. Money is abstract. It is not a thing. It is a tool. It is a way we communicate with each other. Money can get quite confusing, because there can be a lot of smoke and mirrors. 

You can put a price on anything. That is why it is a useful communication tool. Because even if you have completely different worldviews, you have this point of connection that is price. You do not need to understand each other. 

Computers are not sentient, but a string of ones and zeros can convey information that can lead to action. The computers do not understand the ones and zeros, but they know what to do. 

Price is similar. Price itself literally does not care. It is a tool between two people who (may) care very much. All a price must do, is be a catalyst for exchange. 

There is a difference between trading and investing. Trading can be speculative. If a price has a pulse, you can trade it. It doesn't actually matter what is underneath. 

Investing does care what the thing is. It is not just about the price. You are not just trying to outperform. Your performance is not relative to other people. With investing it matters that you are creating something of value. 

Investing is putting money to work to build value.

"Women Mending Nets" Van Gogh

Couch Potato

You can view stock markets as sport or you can view them as work. You can “trade” anything with a pulse and a price. If someone else will give you money for it, it has a price. For something to be an investment, what is under the price matters. 

The truism about “time in the market, not timing the market” connects to the fact that fundamental investing is work, not sport. If you sit in cash for long periods of time to “avoid market risk”, then your money does no work. 

Cash is an important part of financial planning to create buffers for the unexpected. Emergency Funds of 3-6 months of your spending needs mean you don’t have to harass your investments when the unexpected pops up. Beyond that, the money is more couch potato than a Springbok World Cup-winning bomb squad. 

To “time the market” you need to pick both the highs and the lows, not just once... but every time you spin the dice. Investing on the other hand, grows because of the work the real businesses are doing, the real problems being solved, and the real customers being served.

No Work, No Pay

Solved Problem

Investing is a solved problem. As Seth Klarman points out, “the real secret to investing is that there is no secret to investing”. The unsolved problem is that most people don’t do it. Most people still live hand-to-mouth. A lot of people are stuck in debt traps which is “reverse investing”. Like the underworld of Stranger Things, you work to pay for past consumption or misfortune. Three key factors in investing are (1) competence, (2) relationships, and (3) beliefs. I don’t believe in Gods of investing. I do look out for red competence flags. You have to do your due diligence. Like romantic relationships – we form connections with people. The grass isn’t always greener. Improving our investing habits starts where we are. Our beliefs are path dependent. There is an element of this in the “how” of investing. You have to choose a path that resonates for you so you can stick to it. The basics are pretty simple. Find a way to earn. Spend less than you earn. Get the difference a job. 

too many live hand-to-mouth

 

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

 

I am not Playing

I don’t like the term “playing the markets”, but even I have to admit that it is possible to hype it up and play it as a game. Throw in some American Football Style commentary and every bump and drop can be dramatized. It is true that you can trade anything with a pulse. It is also true, that while some people believe it is 50/50 whether an active investor making conscious decisions can beat the market (pre fees), it is far far easier to lose money than it is to make money. It is incredibly easy to make stupid decisions and lose money fast. The equivalent of going on tilt in poker. Which normally means trying too hard to make money too fast. That is “playing the markets”. The best way to play that game is to be patient, and avoid being stupid. Feed off the mistakes of others. Investing is different. Investing is slow. Investing is getting your money a job, and reinvesting its salary rather than spending it. Investing is the win-win daily practice of creating mutually positive futures. Investing is channeling resources to the solving of problems.

Investing isn't Win-Lose

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)

 

Do Good Work

There is nothing more Free Market than failure. Bail-outs etc. are “third way” interventions where Government steps in. Particularly bad if they only step in when there is failure, and do not share in the up-side. A danger of basing your investment philosophy on a dance around what something is worth, rather than what it does, is that price and value can disconnect massively. It is particularly dangerous if you “bet” more than 100%, or are naked (have a position in something you do not own). You can trade anything with a pulse, the underlying thing does not matter as much as the person (legal or real) you are buying/selling from/to. You can leverage up a horrible asset to make great profits (until things go wrong). Investment is different. A basic principle of fundamental investing is that what you do matters. It is not gambling. It is capital allocation and problem solving. Shifting resources to where they are doing good work, and continuing to do good work over long periods of time. No one can force you to sell if the business is strong enough to carry on doing its work.

What You Do Next

Imagine if we could wave a wand and there was a level playing field for everyone to work. Not that everyone would do the same, or be rewarded the same. But that you were rewarded based on what you did. Fundamentally. The thing that mattered most was not what you had done in the past, but what you did next. That is mostly how we treat money on the stock market. If you look at the long-term history of a share price, there is noise, but there is also a reasonable explanation for why the capital has grown. Yes, it compounds. Its own type of privilege. But in public markets, anyone can buy and sell the shares. The money itself is welcomed without question. Privilege is “cashed in” through a sale. Sometimes that privilege is overvalued, and sometimes that privilege is undervalued, but over the long term the thing that determines whether the capital grows, or shrinks, is what work the money does.

"Three Figures" Van Gogh

Hubris Factory

“The real secret to investing is that there is no secret to investing. Every important element of value investing has been made available to the public many times over, beginning in 1934 with the first edition of Security Analysis.” Investing is enticingly easy to monetise. You get cost centres (need money) and profit centres (make money). A good business is one where you have something that is easy to count and communicate. “I’ll grow your money” fits the bill. Pricing is also easy with, “I’ll take a percentage”. The two key elements are good capital allocation (what work the money does) and reversion to mean (prices typically overreact and true normal is less noisy). The downside of all this simplicity is that investing is a hubris factory. The real work gets done by the underlying businesses, but investors often think it is an extension of classroom exam results (which also oversimplify the process of ranking people). An Investor’s entire career of being a rock star can come tumbling down with factual evidence that they have done no better than average. They’ internalise the good times and excuse the bad. The real secret of investing and good businesses is that it is not about you. It is about putting money to work, and reinvesting. Custodianship, not proof of worth.

Wealth Creation is not Betting

“The markets can stay irrational longer than you can stay solvent” was a warning given by John Maynard Keynes. The reason the “Martingale Strategy” does not work in betting is eventually reality kicks in. The idea (popular in 18^th century France) is that in a Head/Tales style win/lose game, you double the bet every time you lose. So, the first win will cover all the previous losses. The false idea being that the gambler with infinite wealth will eventually win. Reality is not infinite, so the gambler will one day experience catastrophe if they continue playing in this way. Truth catching out a strategy with no value. Unable to place another bet. With the house’s edge, the gambler remains a mathematical loser every time they bet. I believe this is the reason those who see investment simply as a game of betting against others are existentially doomed. It is not merely a case of buying things for less than they are worth from the irrational. Waiting for normal to return. What the thing you buy does, matters. What you do, matters. Fundamentally. You need to build enough capital to survive whether the market is rational or not. Then carry on doing things that matter. Win/lose is wealth extraction. Win/win is wealth creation.

Investing is not Gambling

Thriving Too

I view investing as getting my money a job. When things are complicated, we simplify them into stories (based on what we already understand) to make sense of it all. To provide a way to make decisions. I started by investing in the funds that I was studying. Which, unsurprisingly, were the funds of the companies I worked at. Which, unsurprisingly, were companies that recognised the qualifications and studies I had done. Then I got an Interactive Brokers account, and started by getting my money four jobs. Gradually over a couple of years, I got my money more jobs until I had a portfolio of 20. Unlike my current personal job hunt, my money did not get interviewed. It did not have to find vacancies in roles that fit my profile. Money does not specialise. Money does not make decisions that limit its world view. Money does not have confirmation bias that looks to explain away its inadequacies in comfortable, but false, fairy tales. Money does not define itself by the work it does. It works, and either it grows or shrinks. The secret of nature, David Attenborough says, is that “a species can only thrive when everything around it thrives too”. Making money is not a win-lose ego competition. It is win-win capital allocation.

Rain Forest

Full of  Sustainable Growth