We make decisions all the time. As investors, it’s more than just the underlying trading decisions but also the type of investments, and even, the flavor of investments. Are we a value investor or a growth investor? How often have we turned over the decision? To what extent have we reviewed the decision based on outcomes rather than process?
A useful exercise
What was your best decision of the last year? Go with your gut, the first thing that comes to mind. Describe the decision.
What was your worst decision of the last year? Again, go with the first thing that comes to mind. Describe the decision.
Did your best decision end up turning out well?
Did your worst decision end up turning out poorly?
Like most people, if you answered yes to both, your description of the decision was more a description of the outcome of the decision rather than the process itself.
This exercise comes from Annie Duke’s recent book “How to Decide”. Before turning to writing, Annie spent 20 years as a top poker player, winning the World Series of Poker tournament of champions in 2004. “How to decide” is available below (we don’t receive referral commissions)
Value investors or growth investors
Some people think this is an important decision when deciding how to allocate their capital, either to managers or to doing it themselves. This is a false dichotomy.
The more important question is whether we’d rather have cabbage for our minds or for food. At least one Melvin here loves to eat cabbage! The point is we should adopt what works rather than be fixated on the philosophy.
Avoid intense ideologies
Charlie Munger put it best with this comment.
“Another thing I think should be avoided is extremely intense ideology, because it cabbages up one’s mind. You’ve seen that. … … And if you’re young it’s easy to drift into loyalties and when you announce that you’re a loyal member and you start shouting the orthodox ideology out what you’re doing is pounding it in, pounding it in, and you’re gradually ruining your mind. So you want to be very careful with this ideology. It’s a big danger.”
The hesitancy we have with writing too much about our positions is exactly this point. By pounding in the the idea, are we getting too fixated with the stock. And indeed, by repeatedly spouting the idea that statistically cheap stocks do well… … do we end up missing out on the multi-baggers that are sitting in front of us?
Strong opinions, loosely held
“Strong opinions loosely held” came from Marc Andreessen. He’s better known for founding Netscape and the venture capital firm Andreessen Horowitz. In Marc’s own words (transcript from his interview with Tim Ferriss here),
“It’s a mentality of how to invest for sure… … a lot of people in the Valley have very strong theories. And then, the problem is they carry them too far… … And the way the world works kind of in business and investing and other places is just when you think you have everything figured that everything changes.
… …And so what do you do when the world changes? And there what you just see everywhere, I think, in the world and everywhere in business, everywhere investing are people just hate changing their minds. “
People just hate changing their minds
Marc continues “You see it in politics all the time as well. People just get locked into a point of view on things. If you talk to the world’s best hedge fund managers, they’re the exact opposite. They love changing their mind.”
Cabbage minds or Cabbage for food
The fixation on statistically cheap stocks has dearly cost investors in the past 2 decades. It’s also becoming increasingly clear that the fixation on growth stocks has started to lead to cabbage type behavior in some segments of the market. We’ve so far managed this by remaining disciplined and focussed on cash flow generation as a market of business quality. We’re also cautious about being too caught up in doing the “Long the future, Short/avoid the past” trade that a lot of recent fund managers are locked in on. We believe in being “make money” investors.
We’ll end here with a quote from John Maynard Keynes “When the facts change, I change my mind. What do you do, sir?” Adopt what works and constantly adapt.