There aren’t many investors compounding capital at double digits over the course of decades and those that do are already well known (i.e., that guy from Omaha). However, in a small office above a taco shop, a man did just that.
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Allan Mecham ran a hedge fund called Arlington Value who has demonstrated the advantage in simplicity, long-term thinking, and the power of compounding.
Arlington Value doesn’t have a large team of analysts.
They don’t run advanced machine-learning algorithms or exploit esoteric satellite data and there’s not a single distinguished diploma on their walls.
"In fact many were good ideas. Were there too many consumer startups? Yes! But there were also too many software companies, semiconductor companies, telecom equipment companies, and the list goes on and on.
As we later learned, over-funding (i.e., too many startups with too much capital) was the key issue, not the particular investment category. Low-cost, high-scale marketplaces do in fact exhibit increasing returns.
Successful investing is an active rebellion against one’s instinctual proclivity to sabotage long-term returns.
In a perfect world, investing is like gardening. You cut the weeds (losers) and water you flowers (winners).
In practice, investors do the opposite.
We tend to sell winning stocks too early (cutting the fruit) while desperately clinging to losing positions (watering the weeds).
This habit is called the Disposition Effect.
Coined by Shefrin and Statman in 1985, the Disposition effect explains the tendency for investors to cut their winners short while riding their losers lower.
It’s an academic way of saying, “most investors suck.”
A week ago, @SagaPartners said something that's stuck with me:
"A potentially great idea is when no one agrees with you. A potentially bad idea is when no one agrees with you."
I've thought about some ways to help investors think about these two conundrums ...
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1/ Determine what you are disagreeing over.
If you're on two different "logic" planets, the argument will fail because nobody's gonna listen from that starting position.
Find common principles on why you're wrong and go from there.
2/ Give fair weight to your "opponents" POV and credentials.
If you're pitching a media stock and @AndrewRangeley is ripping it to shreds, that matters *WAY MORE* than say, someone like me who has issues with one or two points.