The Gods Envy Us

One of the challenges with investing is when to admit you were wrong. If your goal as a stock picker is to do better than just investing blindly in everything on offer (an index). History is, at least, compelling enough to know that outperforming in 60% of your decisions will raise you to the status of demigod if people give you the credit. But if you underperform more than 50% of the time? If you underperform the benchmark over an extended period? How long is long enough to take the blame? Performance is noisy, which gives lots of space to hide. Going to Zero ends the discussion, but lots of companies stutter along. Max Plank reminds us that Science progresses one funeral at a time. Death is a feature, not a glitch. So how do we know when it is time to let go of beliefs? How do we ensure that we are not so tied to our stories, that we serve them, rather than them serving us? How do you maintain a sell discipline?

"They envy us because we're mortal, because any moment may be our last. Everything is more beautiful because we're doomed."

Part Owner

If you love chocolate, and eat too much, it is easier to not have chocolate in the house. The danger as an investor in the Stock Market is that you can always sell. The price is a quote of what someone will pay you if you do. It’s the chocolate. It is not what the ownership is worth. As a Fundamental Investor, you are a Part Owner. Viewing yourself as an owner, who believes in the product, believes in the management, and believes in the business, changes the way you think about the dips in price. Unless something fundamental has changed, ownership gives you a vested interest in the venture and stakeholders surviving and thriving. Even if something has changed, if a genuine problem is being solved and the business has the capacity to continue solving it, you remain an owner in something of value. It makes bumps and dips part of the texture of life. Perhaps the biggest part of being an investor is self-awareness. Self-analysis. Self-correction. Even though your behaviour and the business are separate. If you have a fundamental belief in what it is you are building, it is easier to see through immediate noise. To keep your head even when instant gratification is always available.

NeverEnding Story

Bottom-up Stock Picking is equivalent to seeing people as individuals and communities rather than abstract prejudices. It’s easier to simplify people and businesses into races, nations, and asset classes. It’s lazy. A bottom-up stock picker has a universe of thousands of public businesses from around the world to choose from. For most, you can afford to put them in the “Too Hard Pile”. You don’t have to have an opinion on everything, and you can admit ignorance on the vast majority of hard questions. You can gradually build an opinion on the endurance, resilience, and creativity of enough businesses to allow a margin of error. The first question is always, “what if I am wrong?”. Fundamental Investing isn’t about predicting the future. It is about creating an environment for sustainable growth in a world that is complex, ambiguous, and random. The key is time. You buy yourself time through consistent investing in strength, flexibility, and control. The peaks and troughs become the inevitable and predictable chapters in a much longer story of staying alive, and making a contribution to the conversation.

Yeeeaaah!

Behaviour Penalty

If something is free, you are not the client. You are the product. The same is true with the Stock Market. You don’t “play” the Stock Market. It is not a game. It is true that Traders can trade anything with a pulse with no regard to what it refers to. The “fundamentals are free”, because the product is the other people who are trading. If you are “playing”, you are playing against some of the most sophisticated and resourced poker players alive. Investing is different. There, the fundamentals matter. You are buying a slice of ownership in an underlying business. You can’t get played if you have a long-term horizon. Then what matters is the quality of the offering, culture, management, and people in delivering their problem solving. What matters is the strength of the company to endure through difficult times. To emerge. In a dynamic world where they have to respond to a changing environment. You don’t have to respond. You can sit on your hands. The “Investor Behaviour Penalty” is a well-studied phenomenon where the average investor underperforms the thing they are invested in, by second guessing and buying in and selling out at the wrong times. Sometimes, the best thing to do is nothing.

Don't let the smile fool you

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?

Leech

An underlying assumption of my attempt to live off an Engine rather than work for money, is that the Engine can do productive work. If I was just living off hoarded cash like a blood-sucking leech, the money would run out. I would have (Money Pile)/(Spending per Year) years till I had to get a job like everybody else. I like to talk about my money having a job and being the breadwinner, so I can be the homemaker. Not all work is paid work. Ask your parents. But my money doesn’t get a salary. It is invested in real businesses listed on stock exchanges. I have slices of ownership. Owners don’t get salaries, unless they are also Managers. I do nothing for the stocks I own other than deciding whether to own them or not. In any given year, my money can be paid nothing. It can also shrink. Meaning smaller “Money Pile”. Meaning fewer years of homebuilding if my assumptions are wrong for a long enough period. Underlying my theory is the belief that creative people can solve real-world problems if allocated capital, support, and time.