Fantastic read by @mjmauboussin

"Al Rappaport spoke about 3 things that have become central to my work:

1: It’s all about cash — not accounting numbers.

2: Valuation and competitive strategy have to be considered together.

3: The market provides a useful signal for managers.
"Most investors act as if their task is to figure out a stock’s value and then to compare that value to the price. Our approach reverses this mindset. We start with the only thing we know for sure - the price - and then assess what must happen to realize an attractive return."
"Determine what expectations are currently priced in. How well do key value drivers have to perform?

Buy, sell, or hold based on the difference between the stock price and expected value. We develop a specific framework, which we call the “expectations infrastructure."
"When you look at really good forecasters ... there are three possibilities.

They’re less biased, they have better information, or they’re less susceptible to noise.

Noise is twice as important as bias in separating the best forecasters from the average ones."
What distinguishes good from great investors?

"This difference rarely has to do with the tools they’re using but relates to decision-making — especially during challenging and stressful situations. The main way to improve outcomes is to enhance the process of decision-making."
"Efficiency, or the wisdom of crowds, tends to prevail when three conditions are satisfied.

-Investors have diverse views.
-A properly functioning aggregation mechanism (a market)

Extremes are often the consequence of the failure of one of these conditions."
"There are three basic reasons to sell. One, an investor feels the stock has reached fair value. Two, selling because you made a mistake. And three, you find a more compelling investment that you expect may have higher returns."
"Most investors dwell on success and assume there’s a formula that they can learn and apply. That approach is severely limited because it tends to under-sample failures. The question is not, “Did all successes follow strategy X?” but rather, “Did strategy X yield only successes?"
"Getting quality feedback is essential for learning. Measure calibration — the degree to which your subjective probabilities match objective outcomes. There’s a lot of evidence that when forecasters keep track of these assessments, they get more accurate over time."
"It’s really important to keep track of the decisions you decided not to make. Evaluating what you didn’t do can also enhance skill and discipline. But all of this takes time, and most people feel they are too busy to do it. But I think these kinds of ideas are really important."
"What’s good about multiples, which I use myself, is they save you time. What’s bad is they incorporate a lot of economic assumptions that need to be unpacked for investors to accurately understand what they actually mean."
Watch closely:
"the spread between ROIC and the cost of capital, the trajectory of sales growth, and the strategic positioning of the business.

Investors should focus on a firm’s economic returns. A simple proxy is ROIC. Growth amplifies economic returns."
Learn about:
"Economics, finance, psychology, competitive strategy analysis, and science."

"A multidisciplinary approach expands your toolbox to help you understand and solve problems."
"There are two ways to describe the world: statistically and through storytelling. People are moved much more by narratives. So I like to use stories to help explain statistical points."
Michael Mauboussin Is Unshaken…

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More from @NeckarValue

19 Nov
Excited to share my conversation with @scmallaby who shared his research process and insights on legendary investors.

“The key was to do an unreasonable amount of preparation work. It shows that you're serious and not wasting people's time by asking obvious questions.”
“What you really want to know is their thought process around an important or interesting trade. How did they make the call? How did they develop conviction? How did they hold on during the inevitable hiccups and adversity? It's that reconstruction of the case study.”
“I often show up with very detailed notes and a timeline. I'm able to say that, ‘I know from your letter that in this month you made a profit on dollar/yen. Dollar/yen had a big move on the 15th and 16th of that month. I really tried to kind of prompt them as much as possible.”
Read 4 tweets
15 Nov
We all accumulate stuff, ideas, positions. Clutter accumulates on our bookshelves and calendars, in our portfolios and minds.

To be open for the new, we have to create empty space. Or risk being forced into a clean slate by an increasing disconnect from reality.
“If Berkshire has made modest progress, a good deal of it is because Warren and I are very good at destroying our own best-loved ideas. Any year that you don’t destroy one of your best-loved ideas is probably a wasted year.” -Charlie Munger
.@cdixon wrote about the hill climbing problem: to reach the highest peak without visibility requires some randomness in order to avoid getting stuck on a lower hill.

Getting to better ideas requires slack and time for exploration, lest we settle for 'good enough.'
Read 9 tweets
7 Nov
"There’s one thing you have before you put on the trade that you immediately lose once you put on a trade and that’s objectivity."

@jackschwager with @SeanDeLaney23…
"I sometimes will say, not facetiously, that people think I write books about trading, but they’re really books about psychology."
"I often say if I was asked, you can give advice to traders, but you could only use ten words. I know what those 10 words would be. It’s a sentence that Bruce Kovner said, and he said, “I know where I’m getting out before I get in.” Or know when you get out before you get in."
Read 4 tweets
4 Nov
More Money Than God by @scmallaby is the best book to understand history of hedge funds - and therefore a lot of the participants and styles in public markets today.

The footnotes alone are worth the price.
“Rarely do portfolio managers articulate why they are successful. Sometimes they try to do so but are wrong. I have worked with hundreds of PMs and found that articulating why they are successful is quite difficult for them—although often they are not aware that it is.”
“Trading can be intuitive. We are looking at so many factors in the markets [that] a lot of our analysis operates on a subconscious level. All of a sudden you just know this is the right trade. If somebody really quizzed you, you probably couldn’t clearly articulate your views...
Read 37 tweets
4 Nov
"As people are educated in a more and more homogeneous way, the gains to specificity and accuracy that you enjoy, and the gains to certainty, are offset in a way because everybody shares the same blind spots."

"this role of jester, the one person allowed to insult the king as a necessary corrective. There seems also to be an evolutionary mechanism, where we accept that you can say things in a funny way and the social response to that has to be different to if they are said seriously."
“If you want to tell people the truth, you’d better make them laugh or they’ll kill you”
Read 4 tweets
2 Nov
Finally got around to reading the letters of Nick Sleep and Zak Zakaria's Nomad Partnership. These guys crushed the market and left behind a legacy of insights and worldly wisdom.

Going to share some favorite lessons and quotes:
Sleep was an analyst at Marathon Asset Management and Zakaria at Deutsche Bank. The two connected over finding cheap stocks after the Asian financial crisis. In 2001, they set up their own investment partnership.

They closed it after 13 years. Such a mic drop..
Intrinsic motivation.

They ran their partnership because they loved the intellectual challenge and craft, not just for money (but yes, they did earn enough to retire from performance fees). They closed the fund repeatedly and kept management fees low.
Read 42 tweets

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