SpreZZaturian
Likes
236
Antal inlägg
221
Följare
67
Medaljer
0
Stad
Stockholm
Om användaren
Före detta hedgefondförvaltare, partner och VD på Futuris som utsågs till Årtiondets hedgefond i Europa för perioden 2000-2009
Kontakt email

RSS

RSS feed
17 april 2017

How to relevantly use (relative) valuation gauges

Topic: Valuation multiples and how you should use them

Summary: the word of the day is relative; relative valuation - both in scope and in time

Nota Bene: This is just a short reflection on valuation multiples and their use. You can emphatically not rely on valuation multiples for investing in stocks - not even the triangulation of a multitude of them.


-Whose E?

That was my superior and mentor speaking back in the year 2000.

I had just suggested a company was cheap or expensive based on its P/E multiple. I had kind of taken for granted that the average of sell side analysts' earnings estimate was the default and final place to go to for calculating P/E ratios. Not just 'kind of'. I did take that for granted.

Silly me.

Whose E? Whose earnings estimate? That question has been my mantra in the stock market ever since. I've just reformulated it as "Trust no one"


Absolute multiples are hard

Start with a valuation multiple you like, e.g., the Price to Earnings Ratio, or P/E.

First you have to decide which E to use, and not least whose E. It could be the most recently published and reviewed quarterly earnings number, or the last 4 quarters, or the last full year. It could even be a projection of next year's earnings (remember though that forecasts are fickle creatures, and often not to be relied upon). By, the way is it your forecast, or some unknown third party's, or an average of some kind of trustworthy group of pundits? Is it based on reported numbers straight up, or adjusted to avoid comparing apples and pears?

That got complicated fast, so lets get back to just assuming we actually have some kind of uncontroversial and relevant earnings number, as well as a resulting P/E multiple.

Let's say your stock has a P/E of 15. Now is 15 cheap or expensive from an absolute perspective?

That's really hard to say, and if you actually could do that at all, investing would almost be easy (except for that annoying business with determining the E, past or projected)

Lesson: The E is very difficult to determine: which period, past or projected, whose projection, is the chosen period representative of the full future lifetime of the company? Likewise, determining whether a certain P/E multiple is attractive or not from an absolute perspective is at least as difficult. If it only were a cash flow multiple, and not just based on the accounting invention of earnings*... Anyway, moving on.

* complicated and obfuscated by varying taxes, deductions, one-offs, goodwill, acquisitions, employee stock options, accounting standards etc.


Why relative valuations matter

The chosen multiple needs to be compared to the history of the company. If it has typically traded between 10 and 15 for a very long time, then 15 is pretty expensive for that particular stock (unless something material has changed in terms of its business)

Another way of gauging whether 15 is high or low is to compare it to other companies in the same industry*. If their average is, e.g., 17, then 15 suddenly looks pretty attractive. Or, if the general market is trading at 20, then 15 might start to look quite cheap.

However, let's not get carried away. The important thing to consider is whether the relative valuation is deviating from its standard. If your company usually trades 5 points below the industry* average, then 15 vs 17 isn't cheap anymore. We would need to see a multiple of 12 to be at all enticed - and that would still just be a meh valuation. Further, if the market premium usually is around 8 points, then that's a second confirmation of a 15 multiple (vs. the market's 20x) not being terribly cheap, but actually some ways on the rich side.

* 'industry' in this context means any single stock or group of companies you consider relevant

Lesson: compare the chosen multiple of your company to the industry's current average, to the market average and to the company's own history. Also remember to take the historical valuation spread vs. the industry and the market into account as well.


There are other relativities to consider such as the point in the cycle

As a final note, industry spreads vs. the market average tend to change during the economic cycle. After a long bull market, like right now, the typical valuation spread might be bigger or smaller than average. Even if the average spread vs the industry is 5 points, it might be just 1 point in aging bull markets. If that's the case 15 vs. 17 might look interesting again and warrant further research.

A word of warning: Do not rely purely on valuation or valuation multiples for short term investments (less than 5 years horizon), in particular not notoriously unreliable ones like the P/E multiple. The least thing you should do is triangulate between several measures, such as Price to Cash Flow, Price to Sales and Price to DCF.

That's of course still not enough, since it might be more instructive to check various technical gauges, such as trends and market breadth, not to mention signals from other asset classes.

And then there is that problem again, with pinpointing a relevant earnings number, cash flow or sales estimate that's representative of the future 25 years. Check out my other articles on investing and valuation under Investments here.


Summary

Fools rush in

P/E-ratios and other valuation multiples are almost useless, but if you are going to use them anyway. make sure you investigate relative ratios in scope and in time before jumping on the "Oh, it's trading at just 10x P/E, it's the cheapest stock in the index" train.

The market doesn't 'weigh' stocks based on their fundamental merits*, it's a beauty competition where you need to figure out what other people are currently thinking, or might soon be thinking - perhaps what they're thinking you're thinking they're thinking, or might come around to think.

* at least not on time scales that are relevant to most mentally healthy individuals.

If you're Swedish, I made a 1-minute video on the topic the other day. Check it out on YouTube here.

If not, I've started making short videos in English as well, e.g., hereherehere and here.


NEW here? Check out my free e-book on investing, as well as free newsletter (weekly-ish)

Taggar (blogg): 
23 mars 2017

What if the new new things were slightly delayed

The bull has many legs
3D printing, AI, robotics, automation, CRISPR/Cas9, millennials, cheap and clean energy... there are lots of reasons for a great bull market. Maybe a bull market to eclipse all previous bull markets.

-In 2025, that is (well, starting before, but really booming by then).

 
But...
  • Until then, perhaps Trump's rule won't be that smooth (which president's is?)
  • Perhaps retiring baby boomers mean less umph in the economy and stock markets (selling stocks to finance retirement, less borrowing, less consumption, scaling down home ownership, car churn...).
  • Perhaps interest rates won't keep falling. Perhaps debts won't keep rising.
  • Perhaps the highest median valuations in the history of stock markets won't rise further. Perhaps record high profit margins won't either.
  • Perhaps after Trump's honeymoon months, the typical new-president-after-a-2-termer correction ensues. Perhaps, as per usual, the 7-8th years of the decade show "a bit" of turbulence (like 1987, 1997-8, 2007-8 [and, yes, it goes back further]). 
  • Perhaps Variant capital's idea of surplus capital being eaten up by capex and rising inflation means less stock market strength. 
  • Perhaps China/Russia/US won't be as fast friends as they been the last quarter century.

What if all those things converged and happen at the same time? What if Trump's honeymoon came to an end in the 7-8th year of the decade? What if interest rates bottomed out? What if inflation came back and ate up surplus capital coincident with higher capex and a resurgence for commodities? What if the baby boomers born 1945-50 started retiring and consuming less around the same time, while millennials lived with their parents a while longer?

What if those things reinforced each other and caused falling margins and falling valuation multiples at the same time as slower sales and negative sentiment and negative cycle phenomena? What if increased innovation means faster churn of companies, i.e. fiercer competition, and consequently productivity surplus increasingly going to consumers again?

Perhaps then the great bull market would have to wait a few years and let a bear market clear out some cobwebs left over from the ongoing bull market first.

Perhaps we won't see two bull markets in a row. Perhaps ever rising stock markets aren't a human right. Perhaps things aren't different this time

Perhaps.

Taggar (forum): 
Taggar (blogg): 
23 mars 2017

The Art Of Sprezzatura investing

Have a plan

Do the math

Wait

Be unemotional


Over the course of the last three weeks I have published 12 articles covering what I consider the most important traits of an investor. You can find them through these links: 

StrategyPatienceResilienceEnduranceZealZenAgilityTemperatenessUnbiasednessResolutenessAdequateness, and Self-analysis.


My overarching message is that the psychology of investing is much more important than the numbers. Sure, you still have to do the math, using actual facts not opinions. And you still have to assess the competitiveness and endurance of the companies you are researching, or other fundamentals that are relevant to your style of trading or investing.

Most of all, however, you need to keep yourself in check:

Stay calm, discard good deals and wait for great ones, don't let others rush or deter you - investing is absolute, not relative; avoid trading on emotion; use check lists to counter psychological biases...

Investing is an evolutionary mismatch and thus potentially a source of both great misfortune and opportunity. If you master your own psychology and manage to avoid easy but very human mistakes, you will find yourself leagues ahead of most market participants. It's easy. But hard. It's...


The Art Of Sprezzatura

What follows is an attempt at condensing 12 long articles, and even more years in the hedge fund business, into one single short article about how to become a good investor. If you haven't already I suggest you go back and read all twelve, before or after finishing the below.

Start by forming a strategy that has a logical underpinning, as well as is a good fit with both financial history and your own temperament. I prefer a value oriented style, grounded in the microeconomic business logic of single enterprises, and supported by a macro backdrop of longer economic and stock market trends and cycles. Further, I don't like single large bets or frequent trading, instead focusing on long term investments with geographical, industry and asset class diversification.

Practice patience both in and out of markets. I myself am patient to a fault not seldom venturing into the swamp of denial.

Keep track of your decisions and trades, your entry and exit points, your logical thinking and your feelings around those decisions. The aim is to make sure your learn something from every loss, from every gain - making you a stronger investor with every trade, no matter the result. That is the meaning of resilience. I for one could definitely do better in this area, as I occasionally exhibit unbecoming streaks of ad hoc thinking, laziness, complacency and hubris.

The screwest thing you can do

is think you’re a master of the universe

We’re all just little cogs,

and the universe will go on without us

We have to fit into it and adapt to it.

-Howard Marks

It's easy to advise against going all-in, but harder in practice. Sometimes certain opportunities just seem so good greed gets the better of you. It might help considering that if an investment is that great, you don't have to put very much in to make a killing. In any case the risk reward is much better that way than risk getting killed altogether. Not least, make sure the deal really is as good as you first think, rather than relying on your own track record and superiority. Talk to other people with other opinions and complementary knowledge; triangulate valuations and market positions from various vantage points

Finally, strive for a growth mindset, always learning, always improving. Analyze your hits as well as your misses in order to identify which traits were in play, which traits can be improved and how.


Money is nothing but a gauge of your progress

toward self-actualization and freedom

Investing is a lot more than just money

----

Investing for me means building, growing, learning

and acquiring tools for

continuous learning and improvement


Summary

The 12 traits of an investor, The Art Of Sprezzatura, can be grouped together in 4 themes, where several traits often fit in the intersection between two different themes:

Patient: Wait for the right opportunity, in accordance with your plan and math

Analytical: Do the math. Track. Improve.

Unemotional: Avoid herding, hubris, greed and fear. Hope is not a strategy. Stick to the plan.

Strategic: Have a plan, a good, well-founded, one; one you can trust.


More than anything else,

what differentiates people who live up to their potential

from those who don't

is a willingness to look at themselves and others objectively.

-Ray Dalio


 

Subscribe

Occasionally, I will offer subscriber-only material in my newsletter. Please sign up (it's free, and it includes my book about hedge fund investing), if you want to make sure you don't miss out on freebies, offers and subscriber-only discounts on special products.

Taggar (blogg): 
23 mars 2017

Self-analysis creates a feedback loop of improvement for all TAOS components

Supercharging the engine

Okay, I know nothing about engines, but I think there is a way to increase the efficiency and effect by feeding some of the exhaust fumes back into the carburetor - or something like that.

A positive feedback loop works in a similar way, with your introspection insights strengthening the other facets of your game.

In practice self-analysis means you should track and study various aspects of your investment process as well as the results.

Why did you gain or lose money in a certain investment? Did you adhere to the other 11 TAOS guidelines?

Did you follow your strategy, was the strategy well-founded? Did you wait patiently for the right entry and exit points? Did you size your position responsibly? Did you go the extra mile, doing the math yourself rather than trusting an authority? Did you keep your calm and rationality? Did you explore other sides of the story or did you fall prey to availability bias and selective perception? Did you become cocky, thinking "I've got this"? Did you follow your best practices and other procedures to discover and neutralize dangerous and biased tendencies? Did you stick firmly to your own conclusions or were you swayed by clever salesmen or the cozy feeling of belonging to the herd?

For every TAOS trait, an intellectually honest analysis can reveal mistakes and weaknesses as well as strengths and strokes of genius. Feed back whatever you learn from both your winners and losers about the way you handle the other eleven TAOS traits of a great investor. Maintaining a habit of introspection can refine and enhance both psychological, technical and and mental aspects of your method. Thus cutting out unwanted aspects, creating boosters and brakes, checks and balances that make you perform more consistently on the markets. 

The naked ape

Desmond Morris studied humans from the perspective of a zoologist, as if humans were just one more primate. Do that with yourself. Make an impartial FBI serial killer profile on yourself, as you would any other portfolio manager. What is your style really? How do you actually take decisions, follow up on your trades etc. Try to categorize if your actual investment decisions are value based, trading oriented, impatient, emotional, ... and so on. How do you actually behave and how would you want to behave? What's been the difference between your game plan and your actions or failure to act?

Please notice that there are at least two aspects to this. One is identifying your strategy. The other is mapping out your psychological profile in order to gradually modify your temperament.


Scrutinize your own Modus Operandi


Remember that both successes and failures need to be analyzed

It's easy to only pick apart your bad trades, but don't forget about the winners. Sometimes they were the result of a good procedure, sometimes luck. Sometimes you made a lot of mistakes, being impatient, reckless and emotional but got a good result for other reasons. So, take a good, hard look in the mirror, whether your bank account just got fatter or thinner.


Inspect

your successes

and failures

thoroughly


Preemptive strikes

We are all burdened by biases, by homeostasis, by laziness, by greed and fear. By identifying which ones are your worst, you can put systems in place beforehand, e.g., best practices check lists and filters, that preempt unnecessary mistakes. Counter your cons and boost your fortes with clever routines and habits, based on your commonplace notes and self-analysis.


Identify your irrational tendencies, biases, inclinations and flaws

without preconception

Preempt your own reflexes and emotions,

and control them with bespoke tactics and strategies


In my book about 15 years at the best performing hedge fund in Europe over a decade, I list 50 rules of investing.

This post is one in a line of articles detailing and explaining some of my most important insights from that time. Taken together I believe they will make for a useful and inspirational reminder for evolving and consistently improving your investment habits.

Whenever having a bad experience in the markets, or exhibiting signs of hubris after a lucky streak, refer back to these twelve ideas, thus combining your own experience with mine to maximize your investment wisdom.


Strengthen your strengths


Self-analysis means realizing your investments are prone to human error.

It's not enough to gather numbers and pictures, you have to actively fight against and try to shrink your blind spots of cognitive biases. Sure, knowing Apple's strategy, numbers and image is a good start. But if you don't keep your own human irrationalities under close guard, or forget to constantly improve and evolve your method and execution, you'll find yourself on the losing side sooner or later.

Know yourself. Keep track of yourself. Analyze yourself. Implement brake systems for your worst psychological biases, and reward your strokes of insight. Allow yourself to consistently improve by feeding back lessons about yourself, fully owning both your strengths and your weaknesses.


Your investments are made in the interface

between you and the world

You need to know both to get it right 


Self-analysis is the twelfth and final article in my 12-part series of TAOS - The Art Of Sprezzatura. If you missed the previous eleven articles you can find them here: StrategyPatienceResilienceEnduranceZealZenAgilityTemperatenessUnbiasednessResoluteness and Adequateness.

Did you like the series? Do you know somebody that should read it? Tell them about it; share this post with them. If you please.


Subscribe

Occasionally I will offer subscriber-only material in my newsletter. Please sign up (it's free, and it includes my book about hedge fund investing), if you want to make sure you don't miss out on freebies, offers and subscriber-only discounts on special products.

Taggar (blogg): 
21 mars 2017

Adequateness - being pragmatic, analytical; guided by empirical evidence

There is no such thing as supernatural beings

That is an indisputable fact; since everything in nature is natural, and given nature is defined as everything. So. I'm sorry to break it to you, there are no werevolves (for context, see last week's article on Vampires, Werewolves and Resoluteness). Well, unless werewolves are natural of course.

Which they might be; it's just that the probability for humans living on Earth in the 21st century ever coming across a true shape shifting werewolf is so close to zero there really are no reasons to take the possibility into account. However, should one happen fall into your lap... 

 

Facts, facts, facts

(Nope, that's not the opening scene in "Four weddings and a funeral")

That's the gist of Adequateness right there:

1) Reality is what it is. A is A, and all that

2) Be curious in investigate reality; just don't get ridiculous regarding probability weights*

3) Be open to exactly what reality entails, what the empirical evidence actually tells you

* The probability of the existence of God, a tea kettle orbiting the sun or a spaghetti monster - or intelligent design for that matter - is for all practical purposes zero (at least down to the hundredth decimal place), whereas, e.g., the principles of evolution and the natural law of quantum mechanics have been confirmed in a multitude of clever experiments (and never refuted). There is nothing "50/50" or "You have your view and I mine" about it.


It's all good and well having a great strategy, being patient enough to wait for the right moment, learning from mistakes, never going all in, being thorough and calm, exploring unexpected vantage points, avoiding hubris and biases, not to mention being rationally resolute.

However, if you fall prey to superstition or start assuming instead of investigating all your hard work will be for naught. It's the facts that count. It doesn't matter how great your model is if your input is garbage. You need all your zeal and agility to collect the facts, and all the other psychological facets of TAOS to implement the facts and execute the investment. But first of all you need the facts.


Shit in

Strategy, Patience, Resilience, Endurance, Zeal, Zen, Agility, Temperateness, Unbiasedness, Resoluteness

Shit out


What facts?

I am not a rigid financials and economics professor type, claiming only cash flow and interest rates count as facts. Perhaps a bit surprising, I'm quite open to any kind of empirical evidence of relevant causal correlations in reproducible research; be it HFT trading algorithms mined by machine learning systems, or more down to earth value based methods using publicly available financial reports - or a combination.

I don't care what kind of facts you use, as long as they are facts - and you are open to those "facts" being wrong, misinterpreted or evolving.

 

Oil facts?

Maybe the Cushing oil inventory level at one point was a relevant variable for the price of oil. Maybe OPEC production quotas and their communication once was important information. Maybe open speculative interest was. But now or later, maybe they aren't. Maybe new flexible storage capacity, new exploration technology, new pipelines or zero funding costs are changing the "facts".

Maybe even the very underlying fundamentals of production, demand, storage, transportation, energy substitutes and human speculation, aren't that important for a prolonged period of time due to tens of trillions of dollars having been conjured from nothing over the last decade. Perhaps the machines have thrown everything out of whack and are running circles around us mere humans laughing at our feeble attempts to participate in the game.

Perhaps. Perhaps not.

 


Watch carefully where you are going

Investigate and analyze

the actual evidence; don't assume


Stop, collaborate and listen

Whether the AI scenario above is relevant yet or not isn't the issue. My message is that it's up to you to research the relevant data for your investment style to find facts that hold water, rather than assuming heavy objects fall faster than light ones, or that high density objects fall faster even if there is no air.

If you want to pour a ton of liquid steel, you'd want to check the metallurgical facts thoroughly first. Treat large investments the same way - research what needs to be researched for your style, sizing and risk level.

Sometimes the truth hurts, but better sooner than later, better the ego than the wallet. Or in the above case, better stand corrected before than a statue after.

So, if things don't evolve as expected, take pause to take stock of the evidence. Listen to your "adversaries" and cooperate if possible to establish the truth. Then you can apply whatever different models and methods you prefer to massage those facts into investment decisions. Your ego, your assumptions, your self-image, your status are all irrelevant to your investment prowess. The only thing that counts is the facts of your entry point and your exit point. To get those things right you have to stand back to reality, be interested in and love reality. It's there, no matter if you want to or not. 


Reality is what it is

Be curious and pragmatic


In my book about 15 years at the best performing hedge fund in Europe over a decade, I list 50 rules of investing.

This post is one in a line of articles detailing and explaining some of my most important insights from that time. Taken together I believe they will make for a useful and inspirational reminder for evolving and consistently improving your investment habits.

Whenever having a bad experience in the markets, or exhibiting signs of hubris after a lucky streak, refer back to these twelve ideas, thus combining your own experience with mine to maximize your investment wisdom.


Don't be stubborn;

Look for and allow new empirical data

to change your investment thesis


Adequateness means establishing facts and truths, ruthlessly discarding obsolete heuristics, misconceptions and prejudices.

Adequateness means conforming to reality, analyzing what is actually there, rather than what you'd like it to be. You can't close your eyes to reality. Well, you can, but that won't stop the train/lion/stock.

If you actively pursue and accept the facts you can analyze them rationally and take action accordingly. But if you stay in the denial phase for too long, panic will sooner or later hamper your ability to do anything about the fact of the hammer hitting you on the head. Hope is not a strategy based on adequateness.


Be analytical while you still can

Ignoring the facts won't mitigate

the extent of the eventual losses one iota 


Adequateness is the eleventh article in my 12-part series of TAOS - The Art Of Sprezzatura. If you missed the previous ten articles you can find them here: StrategyPatienceResilienceEnduranceZealZenAgilityTemperatenessUnbiasedness and Resoluteness. One final installment is coming tomorrow.

Do you like the series? Do you know somebody that should read it? Tell them about it; share this post with them. 


Subscribe

Occasionally I will offer subscriber-only material in my newsletter. Please sign up (it's free, and it includes my book about hedge fund investing), if you want to make sure you don't miss out on freebies, offers and subscriber-only discounts on special products.

Taggar (blogg): 
21 mars 2017

Resoluteness - how to foster the rational conviction to swim undeterred against the stream

The resolve of vampires and werevolves

There is an ongoing battle since time immemorial between two seemingly immortal clans of mythic creatures. One sucks its sustenance daily (or nightly), while the other comes out once in a (blue) moon to feast on the weak.

I'm referring to respectively Buy And Hold investors on the one hand and Value investors on the other. The former just keep sucking away at cheap and expensive markets alike, whereas the latter wait for the lure of the full moon before making the effort to attack weak and abandoned companies trading below fair value.

Superstition aside, both investment models have nice track records. They have performed more or less equally well over the last 100 years.

The thing, however, is that even if they are comparable over longer time periods, their performance can differ significantly over half-cycles of, e.g., 5-10 years. An investor lacking the right conviction and resolve could be forgiven for switching from a Value Investing based strategy to Buy And Hold after a long bull market (such as today, in March 2017). He's in good company. Well, in numerous company at least.

 

The curse of always being too early

Value investors typically buy too early on the way down and sell too early on the way up. VI investors thus miss out on the last run-up of a bull market, in particular any kind of manias. Thanks to avoiding large parts of downturns, a well calibrated VI system still captures a similar return over time as a BAH:er; with significantly less volatility and draw downs (in theory opening up for leverage).

To get the full benefit of either the VI or BAH style the investor needs to stick to the chosen model. The worst time to switch, by the way, is when your model has performed relatively poorly over several years. If both models are to keep producing the same long term returns, periods of underperformance are followed by overperformance.

At the peak of a bull market, valuations are too high for value investors, whereas BAH:ers couldn't care less. Right when switching from the poorly performing VI model to the obviously better performing BAH model is the most appetizing, that's when the timing is worst and your resolve is the only thing standing between you and a market timing disaster. BAH:ers on the other hand could get lucky if they unexpectedly decide to abandon their gleaming ship for the apparently decrepit VI system. Further, adherents of BAH shouldn't switch half-way through a bull market, persuaded by the VI Cassandras's cries of (were)wolf (too high P/E ratios) right when the real bull market party is about to get going. 

 

Resoluteness: choosing a method and sticking to it

There are of course many other ways of investing. The point I'm trying to make is simply that, after some length of lean times it takes a certain kind of inner strength and tenacity even to stick to a system you "know" works. Making use of some of my earlier investment principles help in reinforcing that resolve.

 

Fear and greed should only happen to other people

 


Sticktoitiveness demands rational conviction

If you don't know how your system works; if you don't know why you're using a certain method; if you don't base your strategy on a logical and rational solid foundation, any conviction you started out with is both unwarranted and likely to be subject to erosion under pressure. The reason model based hedge funds don't second guess their models during losing streaks is they trust whatever work they put in to create those models. Their conviction and resolve is rational, and they know it.

That kind of solid base is a prerequisite for lasting psychological strength in the face of financial and verbal insults. 


Trust your well-defined and back tested method

enough to base your decisions on sound reasoning

and cold calculation

in pressing times

without second-guessing

-Trade only as scheduled 


In my book about 15 years at the best performing hedge fund in Europe over a decade, I list 50 rules of investing.

This post is one in a line of articles detailing and explaining some of my most important insights from that time. Taken together I believe they will make for a useful and inspirational reminder for evolving and consistently improving your investment habits.

Whenever having a bad experience in the markets, or exhibiting signs of hubris after a lucky streak, refer back to these twelve ideas, thus combining your own experience with mine to maximize your investment wisdom.


Resoluteness means staying the course when the times get tough, when your funds are shrinking and you are being ridiculed by fair weather traders.

Resoluteness means swimming undeterred against the stream, secure in the conviction you have a strong strategy that works over time, the right risk management and patience to wait out temporary setbacks. In short, you have a system that insulates from biases, herding and sudden whims; and thus have the rationally based psychological strength that is a prerequisite for independent and successful investing.


A good strategy

is like

a cage for your reptile brain 


Resoluteness is the tenth article in my 12-part series of TAOS - The Art Of Sprezzatura. If you missed the previous nine articles you can find them here: StrategyPatienceResilienceEnduranceZealZenAgilityTemperateness and Unbiasedness. Two more are coming over the course of the next two weekdays.

Do you like the series? Do you know somebody that should read it? Tell them about it; share this post with them. 


Subscribe

Occasionally I will offer subscriber-only material in my newsletter. Please sign up (it's free, and it includes my book about hedge fund investing), if you want to make sure you don't miss out on freebies, offers and subscriber-only discounts on special products.

Taggar (blogg): 
21 mars 2017

Unbiasedness - making sure nuanced facts rule opinions and wishes

Investing with biases is like playing tennis using your weak side

In investing there are two major groups of enemies:

1) other people

2) yourself

Unbiasedness means focusing on the actual data and established causal relationships, while actively avoiding other people's power of persuasion, and mitigating adverse affects and cognitive blindness due to psychological biases.

Focus on facts not opinions

With unbiasedness I mean not caring about how and why you came into a holding, only what its future return characteristics are. With unbiasedness I mean not letting your investment process be unduly affected by history, by friendships, by juicy sales pitches, by half-truths, by wishful thinking, by group-think and reluctance to speak up.

With unbiasedness I mean both freedom from external pressure and irrelevant information, and systems for managing your own cognitive biases such as herding/social proof, availability, anchoring, confirmation, hindsight bias etc.


Unbiasedness - the holy grail of investing

I admit I often label traits being of paramount importance or indispensable. Unbiasedness is no exception. If your investment process is biased rather than founded on reality, you inevitably will make worse decisions. Most likely that will in turn lead to lower or even negative returns.

If you let yourself be swayed by charismatic snake oil salesmen, online stock forum "friends", brokers or incumbent owners you're more likely than not to be positively biased and paying too much. Sure, you can get lucky, but you can also end up buying IT companies at the peak of the 1999-2000 technology bubble; or mortgage brokers, house builders and banks in 2007.

Similarly, your own biases can play tricks on you. Since you want to be rich, since you want stocks to rise, since you only have limited research resources you hope whatever stocks you investigate will rise. You invest in the first companies you come across and then adjust your models until the stock is a strong buy. You keep adjusting if the price surpasses your initial target...

Unbiasedness is the holy grail of investing, since it's so difficult to attain. And maintain.

Your mind keeps blinding you, fooling you with plausible narratives, telling you to conserve energy (preserving your homeostasis), encouraging you to pursue the path of least resistance, of following the herd, of always being contrarian, of simply confirming what you already think, of hiding news to the contrary from your attention. Unless you have the right infrastructure in place you won't even suspect you're biased. That's part of the very definition of bias. Even if you do pay lip service to unbiasedness by superficially entertaining the opposite side, you're most likely to just pat yourself on the back with a congratulatory "I checked so at least I'm not biased"

 

Carefully weigh all facts and arguments against each other

Form your investment opinion with a minimum of external influences

Make decisions and take action with freedom of mind.

Stand up to yourself your ideas

as long as the data support them

but not longer

 


In my book about 15 years at the best performing hedge fund in Europe over a decade, I list 50 rules of investing.

This post is one in a line of articles detailing and explaining some of my most important insights from that time. Taken together I believe they will make for a useful and inspirational reminder for evolving and consistently improving your investment habits.

Whenever having a bad experience in the markets, or exhibiting signs of hubris after a lucky streak, refer back to these twelve ideas, thus combining your own experience with mine to maximize your investment wisdom.


Unbiasedness means focusing on facts, actively subduing any psychological biases, using check lists and best practices to counter greed and wishful thinking.

Unbiasedness also means shunning group think, decision by committee and dangerous exposure to biased people with agendas. Unbiasedness means being independent, even of yourself through the use of best practices including checks and balances of yourself.


Be truly independent

Neither a crowd follower

Nor a die-hard contrarian 


Unbiasedness is the ninth article in my 12-part series of TAOS - The Art Of Sprezzatura. If you missed the previous eight articles you can find them here: StrategyPatienceResilienceEnduranceZealZenAgility and Temperateness. Three more are coming over the course of the next three weekdays.


Subscribe

Occasionally I will offer subscriber-only material in my newsletter. Please sign up (it's free, and it includes my book about hedge fund investing), if you want to make sure you don't miss out on freebies, offers and subscriber-only discounts on special products.

Taggar (blogg): 
21 mars 2017

Temperateness - avoiding hubris and believing your own hype

There's a difference between celebration and hubris

Quite a difference.

I cringed when I heard the opening line this morning in one of Sweden's largest podcasts, Framgångspodden [Best of 2016, part 2, episode '105']: "Mikael Syding, one of the greatest investors of all time".

It's a good thing I don't believe my own hype. If I did, I would be reckless, thinking whatever the hedge fund manager of the decade does must be the right course of action.

The reason people like Buffett, Dalio and Soros keep outperforming decade after decade is that they take the task seriously, they exert themselves, they make sure they do all they can rather than relying on past success.

To be perfectly honest, I don't understand how they do it. I myself have more or less regularly been struck by hubris several times over my career.

The first and possibly worst was recommending a 3D VR/AR company back in 1997-1998. It went bust not long after in the worst bankruptcy for a publicly listed company in Sweden in a long time.

I fooled myself with (half-assed it turned out) channel checks, calling or e-mailing reference clients (guess if the company supplied me with those references and if they were part-owned by the company and most likely complicit in the shady accounting practices that inflated reported sales and profits) in order to verify the company's exponential growth and profits.

And when the warning signs appeared I ignored them, constantly looking for facts and arguments supporting my view of the company, defending my position instead of questioning it. It wasn't consciously but I thought that since I was the one recommending the company, I was the one analyzing it, I was also the only one truly understanding its potential.

I was delusional: "I'm top ranked, I was the IPO moderator, I've made several successful recommendations over the last few years...". At that point, I was a bull market 'genius' - especially regarding that specific company.

As I detail in "50 lessons I keep forgetting", there was a regularity to my periods of hubris and recklessness:

Hard work sooner or later produced good results. The habit of working hard combined with stronger confidence and some luck often led to great results.

Great results made me slack off a little while earlier investment decisions, luck and trends kept producing gains, consequently giving me a God complex - that I couldn't do anything wrong, that I was somehow suddenly superior.

Hubris led to not only less thoroughness it also made me increase the risk level, perhaps not at first, but if an investment went against me. Sooner or later, laziness, complacency and high risk caused losses, denial, anger, bargaining, depression and eventually acceptance so the cycle could start over with hard work and tight stop losses. 


Temperateness

Just like bull markets, booms, manias and bubbles have sound beginnings, so does hubris. Hard, diligent work isn't only on occasion rewarded with success. Exceptional results also tend to gradually boost your confidence, sometimes to the point of delusion of grandeur.

You are right to be confident, right to be happy and enjoy your winnings, but you are terribly wrong in thinking you can stop fighting for it.

 

Avoid hubris at all cost

Don't allow yourself to become complacent after a lucky streak

Big wins are always part luck

and big losses often stem from overconfidence and gambling/speculation

You aren't as good as you think

You still have to work hard for continued success

 


In my book about 15 years at the best performing hedge fund in Europe over a decade, I list 50 rules of investing.

This post is one in a line of articles detailing and explaining some of my most important insights from that time. Taken together I believe they will make for a useful and inspirational reminder for evolving and consistently improving your investment habits.

Whenever having a bad experience in the markets, or exhibiting signs of hubris after a lucky streak, refer back to these twelve ideas, thus combining your own experience with mine to maximize your investment wisdom.


Temperateness means never being cocky; understanding a lucky streak is a lucky streak and not a permanent stroke of genius. It's exactly because good decisions and good outcomes aren't perfectly correlated on the stock market the adage "Everyone's a genius in a bull market" exists.

For many, one aim of investing is to become financially independent, living off of the capital or at least passive income. One interpretation of that scenario is allowing oneself to relax, to slack off and "enjoy life", often meaning "not working hard on the stock market"

Since that's the endgame, relaxing 'a little' on the way there, in particular after a few wins, can seem warranted and well-deserved. And why not? You 'obviously' have a strong game, right?

Wrong.

The world's fastest man needs to run at a 100% of capacity to win his races, and he still won't be certain to win all of them. Just one per cent slower, i.e., at 99% of capacity he'll be 10 hundreds of a second slower over the race, and could easily miss the silver and the bronze as well.

Even a good investor has as many losing trades as winning ones. Hence the margin of safety is typically quite thin. Consequently there is no significant room for complacency based on self-aggrandizement. By all means, take a pause to celebrate and reflect, but make it a real pause with zero investments - not a period of half-assedness and mediocrity.


Hubris and complacency

are any investor's ultimate weaknesses 


Temperateness is the eighth article in my 12-part series of TAOS - The Art Of Sprezzatura. If you missed the previous seven articles you can find them here: StrategyPatienceResilienceEnduranceZealZen and Agility. Four more are coming over the course of the next four weekdays.


Subscribe

Occasionally I will offer subscriber-only material in my newsletter. Please sign up (it's free, and it includes my book about hedge fund investing), if you want to make sure you don't miss out on freebies, offers and subscriber-only discounts on special products.

Taggar (blogg): 
15 mars 2017

Agility of mind is a required skill in the dynamic and complex system of investing

It's complicated

The master of risk, the great Howard Marks of "Memos from the chairman" and Oaktree Capital stardom, not to mention his must read book "The Most Important Thing", once clarified: "I didn't write a book about investing methods, or tried to convey an easy way of investing. I deliberately wrote a book about mindsets and psychology"

He went on to explain how investing isn't easy at all, quite the opposite.

As Marks say, reasoning about financial markets and investments has a way of turning back on itself. Valuation, momentum, popularity, money on the sidelines, volume, trend uniformity etc. all have a recursive element to them: If I know this, maybe everybody does. If this is cheap or the trend is negative perhaps it's for a reason. Money on the sidelines might be because of poor prospects for risk assets, or does it mean latent buying power? Is popularity good or bad for a stock...

"It's complicated" is a catchphrase for most mature relationships. Well, "it's complex" is its financial equivalent. "Complicated" means something contains a lot of details, like an expensive mechanical Swiss watch. Complex means a system of moving, interdependent parts in hard to define relationships to each other. Newton's 3-body problem isn't very complicated but it's so complex there is no solution.

The market is a complex soup of math, statistics, psychology, politics, randomness and game theory, to mention but a few ingredients. There is no final solution, no final model to follow, no forecasts worthy the name.


Agility

So what can you do faced with the complexity of financial markets?

 

You can be agile

 

You can be curious. You can be a learning machine. You can engage with and understand your adversaries, never being content you know enough, never resting on your laurels. You can explore several different ways of calculating the same thing. You can use several different valuations methods, and several different multiples within each method. You can map owners, directors, suppliers, competitors from several different aspects. You can investigate absolutes as well as relative valuation, momentum, competitive positioning, political risk, customer satisfaction, possible substitutes, technological development etc.

Don't believe everything you think

 

There really is no end to the work you can put in. And yet, there is no definitive answer. You can still be wrong, since investing in (risky) assets means there are several potential futures but you will only find yourself in one of them. If it's a less likely one, one you didn't want, you'll have to be agile enough to adapt your calculations and decisions according to the new circumstances. 

 

Valuation and investing is about a never-ending dynamic triangulation

of

fundamentals, trends and other people's sentiment and knowledge

Actively seek new and seemingly impossible angles regarding all three

Be aware of vantage points different from your own


In my book about 15 years at the best performing hedge fund in Europe over a decade, I list 50 rules of investing.

This post is one in a line of articles detailing and explaining some of my most important insights from that time. Taken together I believe they will make for a useful and inspirational reminder for evolving and consistently improving your investment habits. Whenever having a bad experience in the markets, or exhibiting signs of hubris after a lucky streak, refer back to these twelve ideas, thus combining your own experience with mine to maximize your investment wisdom.


Agility means seeing market complexity for what it is

  • Macro forecasts are mostly useless (whatever forecasts are possible are useless anyway since they tend to get discounted)
  • You can never be certain (see forecasts), but you can line up probabilities in your favor 
  • There is no one definitive answer, but you can keep several potential candidates in mind
  • Recursivity, interdependence, group psychology and randomness mean no situation is the same; a fact made all too clear to me in the most recent long bull market
    • I erreneously thought all the facts I needed for a re-run of some of the worst downturns in history were in place. Had this been my first bull, maybe I would have been less complacent and more open to the merits of, e.g., concerted money-printing not to mention the resolve (madness) of central bankers
  • Agility means being open to alternative explanations and scenarios, without succumbing to the 50/50 fallacy of two scenarios always being equally probable

Equity research and (value) investing

is as complex and frustrating

as

Escher's art and impossible figures 


Agility is the seventh article in my 12-part series of TAOS - The Art Of Sprezzatura. If you missed the previous six articles you can find them here: StrategyPatienceResilienceEnduranceZeal and Zen. Five more are coming over the course of the next five weekdays.


Subscribe

Occasionally I will offer subscriber-only material in my newsletter. Please sign up (it's free, and it includes my book about hedge fund investing), if you want to make sure you don't miss out on freebies, offers and subscriber-only discounts on special products.

Taggar (blogg): 
14 mars 2017

Zen mind investing, and the importance of calmness and perspective

Confront unexpected events with equanimity; opportunities will cycle back eventually

Create habits and foster environments that lend themselves to calmness and perspective

Maintaining a zen mind and enabling surroundings, frees your rational mind of the shackles of panic


BOOM!

A profit warning, a collapsing Ponzi scheme, extreme weather, fraud, a takeover (if you're short). Suddenly you find your portfolio riddled with loss. Why not a margin call as well, to get the heart pumping and your head spinning?

When reality rears its ugly head of randomness and unpredictability it's all too easy to let panic take over.

Even without actual losses, a soaring stock price in a popular company can create a panic of missing out.

The questions attack you: Should I cover? Should I stop my losses? What if I do? What if I don't? What's the best course of action? Could I be embarrassed? What would I do if nobody saw or second-guessed my actions? Getting out now would hurt financially, but if it turns back up afterward might hurt even more psychologically. Can I afford to lose more? What measure would be contrarian? What would be going with the herd? Which would be best in this case? Is the train about to leave the station and I will never get the same chance again?

It's easy to feel like there are only bad solutions and outcomes.

As the panic feeds on itself, making it increasingly difficult to think rationally, self-doubt creeps in. In that situation you are extremely vulnerable as an investor. You can't think. You don't trust yourself. Like Schrödinger's cat you're simultaneously prone to taking drastic action and to sticking your head in the sand (denial). Often you are susceptible to external influence - ready to act on the vaguest of rumors or dubious of recommendations.


You are being irrational. Stop that.

First and foremost, if you have adhered to my advice on resilience and endurance there is no need for panic. It's just an irrational reaction to a sudden loss without any reason for major concern. Even if it feels that way.

Second, even if you're actually in real trouble, panicking won't help 


Calm down

The first thing you need to do is calm down. Stop flitting from one chart to the other. Consult your best practices or your strategy document. Don't make any rash decisions when highly emotional and controlled by your amygdala. The fight or flight reaction to high stress on the financial markets is an evolutionary mismatch which needs to be mitigated. 

 

Human psychology, economics and financial markets move in cycles

Internalize that concept for use during times of turbulence

Meditate and control your emotions,

to be ready for coming challenges

It's never as bad or as final as you think

Keep calm and you will eventually find a solution

 


In my book about 15 years at the best performing hedge fund in Europe over a decade, I list 50 rules of investing.

This post is one in a line of articles detailing and explaining some of my most important insights from that time. Taken together I believe they will make for a useful and inspirational reminder for evolving and consistently improving your investment habits.


Zen means putting things in their right perspective.

  • Zen means not overreacting.
  • Zen means controlling your emotions.
  • Zen means understanding the cyclicality of nature, of humans and ultimately of financial markets.
  • No, missing out on a soaring stock doesn't mean you'll never find such an opportunity again.
  • No, you're not part of the last generation to ever get to make money investing in stocks (or real estate) ever again.

Zen means keeping calm, having practiced methods for keeping unnecessary emotions at bay. Zen means fostering habits of exercising, walking, meditating and meta cognition. Zen means knowing yourself well enough to refrain from making decisions in an agitated state of mind, as well as keeping a set of tools for allowing your rational self to take over when needed.

Reminding yourself that you know enough, that you possess the required knowledge, helps regaining your mental balance. Knowing that you have a functional strategy is another valuable trick. Remember that opportunities will cycle back, and that a loss is but a step along the way to mastery, as long as you avoid complete disasters. There will always be new opportunities, and you will always be able to bounce back as long as you don't wipe out completely.

 


control your emotions

lest they control you


Zen is not about weird mantras or silly riddles. Zen is about nurturing a set of habits and an environment intended to help you keep the right perspective in turbulent times, thus allowing your knowledge, skills, strategy and rational mind make the most out of any given situation.

Zen means having a growth mindset, embracing losses as lessons, and taking both sudden plunges and surges with the same equanimity and willingness to learn. The opposite is branding downturns as permanent failures, and panicking over lost opportunities.

Increasing the risk level is not the way. Reducing the mental effort is not the way. Lashing out is not the way. Don't panic. Fall back to the level of your training. Break down any issue into its components and deal with one problem at a time, calmly, rationally - with equanimity, with a zen mind. 


don't panic


Zen mind is the sixth article in my 12-part series of TAOS - The Art Of Sprezzatura. If you missed the previous five articles you can find them here: StrategyPatienceResilienceEndurance and Zeal. Six more are coming over the course of the next six weekdays.


Subscribe

Occasionally I will offer subscriber-only material in my newsletter. Please sign up (it's free, and it includes my book about hedge fund investing), if you want to make sure you don't miss out on freebies, offers and subscriber-only discounts on special products.

Taggar (blogg): 

Sidor

Blog Archive

Blog Archive
2018 (4)