Reflection On My Framework

Yesterday, I had the fortune of being on the negative end of a price movement in one of my positions after an earnings call. It was only about a 10% swing after hours, but it was enough to make me question my conviction. As an inexperienced personal investor, it is very easy to look back on history and assume that if put in the shoes of a superinvestor, you would be unaffected by major price movements in their portfolio. However, it is only when you put your money where your mouth is that you are able to understand the pressure of maintaining composure under conflict.
Needless to say, even if I had wanted to cut down my position by about 50% before the earnings were released, I am unable to do so due to compliance issues with the mutual fund/hedge fund shop I’m working for this summer.

I have been re-reading parts of Einhorn’s Fooling Some of the People All of the Time and what always stands out to me is his ability to maintain an unwavering conviction in his ideas for the long term. We all know that ‘markets can remain irrational longer than we can remain solvent.’
I am continuously impressed with the ability of the longer-term thinker to achieve great performance, and that respect grows as I continue to learn more about the hedge fund business and how extremely difficult it is to maintain a firm for an extended length of time. Working for a value shop has opened my eyes to how much goes into keeping the pistons of a firm firing. Last weekend I read Money Mavericks by Lars Kroijer on his hedge fund journey in founding and running Holte Capital–it was extremely eye opening for someone who continues to aspire to work in money management. Being an undergraduate student at a rather obscure liberal arts school, my chances to succeed in the hedge fund industry are not only very limited but also not promising at all if I want to be objective and honest with myself. Kroijer was a Harvard grad and he still had serious difficulties. It really puts things into perspective. I guess I have a certain advantage by being passionate and inquisitive, as well as relatively young in pursuing a specific career path, however this does not push me away from acknowledging the specific facts involved with my potential.
Getting a summer seat was very encouraging and motivating at the same time. The fact that I am in a place where I agree with the firm’s philosophy and approach is also very motivating for me. It does not keep me from the search in discovering who I am as an investor. I keep in constant contact with one of my best friends and we constantly discuss the philosophy behind being a great investor and what that means to us. He made an interesting comment today about the learning process. He said we should strive to “learn and extend” in everything we are doing. That struck me in an interesting way. It is very easy to be concerned with the learning process and acquiring a breadth of knowledge, but learning skills not be the end goal. This means different things to every individual, as methods of learning are varied across a broad spectrum, but what is consistent for everyone is how that learning is then “extended” into a working framework for active decision making. As all decisions in life stem from this working framework, we must strive to develop this in our every day lives. Especially when it concerns markets. I wrote a little bit about this in my paper on contrarian thinking.
It is also critical to highlight the importance of active decision making. I am amazed at the amount of people who are not necessarily concerned with an active life. What I mean is there is limited focus on contemplating every specific decision. Rather there is a passive movement towards a decision that simply reflects your specific time and place without thought to the future.
I really liked this quote by Dan Gilbert from Farnam Street today:

“The bottom line is, time is a powerful force. It transforms our preferences. It reshapes our values. It alters our personalities. We seem to appreciate this fact, but only in retrospect. Only when we look backwards do we realize how much change happens in a decade. It’s as if, for most of us, the present is a magic time. It’s a watershed on the timeline. It’s the moment at which we finally become ourselves. Human beings are works in progress that mistakenly think they’re finished. The person you are right now is as transient, as fleeting and as temporary as all the people you’ve ever been. The one constant in our life is change.”

People, to generalize (fallacy I know), want to think they have the capability to make good active decisions, in the moment, without understanding that decisions in the present no longer impact the past, rather they impact the future framework/outlook of their life. If this is rightly understood, it can provide a rare opportunity to start understanding how we approach decision making in our daily lives. Reflection provides an opportunity to scrutinize past behavioral processes, however it provides an even more important opportunity to understand the daily process and how that translates into the future process. I find myself wanting to jump straight into the big things without the desire to be excellent in the little baby steps. This really separates good from great, in the sense that so many people are willing to take the easy route, or the shortcut. Having an exhaustive and robust process can help to eliminate the grey area around shortcuts.

Going back to my original point, I believe this is important to understanding why we feel the urge to sell under drawdowns, or “bad news” even if this news does not affect the economics of the business. This is probably why I appreciate Jeff Ubben and ValueAct so much. Not only is he arguably one of the greatest investors out there, but he truly views an investment as the means to being a great business owner/manager. Einhorn is a little different in his approach, but he is extremely robust in his process and allows his analysis to confirm his thought process– being extremely invested in the long-term economics of the business and making decisions purely based off of that thinking. Why is their failure rate so much lower than your typical market participant? It is because they, through sound reasoning and intellectual curiosity, have implemented the “learn and extend” thinking into their investing framework and process. It has then flowed down into their firm and their long-term performance reflects that.

Intellectual curiosity must be one of the most important characteristics one can possess if he wants to remain in the investing business long term. Without the curiosity, burn-out or under-performance is eventually inevitable. Passion infuses the curiosity, and without that combination there will not be the will to achieve success. Creativity plays a significant roll in this–something that can’t necessarily be taught. Going back to the “learn and extend” thought, creativity really drives that. I found that when I was first learning about investing, I would read a book and it would unleash a whirlwind of questions in my mind. These questions could only be answered by my quest to find the information. I think this really helped me develop a solid foundation for analysis, as I had to teach myself something that was intellectually engaging and challenging. So I feel I have gotten lucky to a certain extent that my first bites into investing were stemmed by an intellectually curious approach, but what does that all really mean? I am still trying to conceptualize that whole idea for myself. Something that is not easy in the slightest. Even questions such as, “What does it mean to be an excellent analyst?” This sounds like such an easy question to answer, or understand, but if there is inquisitive analysis of the question and all the implications involved you come to realize that this question is something extremely challenging to get a grasp of. How can you possibly define what it means to be a good analyst in the hedge fund industry. And if it was so easy, why is there such a huge failure rate? I’m off on a tangent at this point. But I think it’s clear– I struggle to create a framework that can put me in the shoes of a great investor. That is my goal, of course, to be a great investor in the absolute sense. I have experienced many meaningful failures in my life thus far, and it has forced me to be extremely adaptive in my thinking. It has also forced me to really focus on trying to create a working framework for how I view the world and how that view of the world translates into investing. Something that is clearly a work in progress, yet something that gives me energy and excitement every day. This is very satisfying to know at least.

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