Buy the Book: The Zurich Axioms is a book about managing risk and reward. Twelve Axioms define how to think about risk and uncertainty in such a way that you’re more likely to be rewarded than not.
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Lessons in Down Markets
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Before the financial crisis, there was the 1980s real estate bust. The southwest part of the country was particularly hit hard.
Along with the bust, came the S&L crisis, many bank failures, and for one company, Trammell Crow, a post-mortem on the numerous mistakes different partners made during the boom times. In 1989, a memo was sent asking partners “to reflect upon the environment which lead to the collapse of the Southwest real estate markets.” The replies were pieced together into over a 100-page list, consisting mostly of mistakes made during the period.
If you work in commercial real estate or study it, it’s a great resource. Being real estate, excess leverage is a recurring theme. Diworsification is another mistake that pops up often. There’s the typical behavioral stuff too — overconfidence, overoptimism, greed, FOMO, etc. — that always surface in hindsight.
It’s interesting how booms, universally, push people to reach for things, lower their standards (while raising expectations), chase more and more investments (instead of staying focused on their top ideas), or do deals because money’s available. That belief that if they don’t do it, someone else will, and they’ll miss out, is like sitting on a time bomb with a hidden countdown during a boom. Continue Reading…
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Charlie Munger’s Uncommon Sense
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Charlie Munger has a system that flips things on their head in a way that makes complete sense. He refers to it as inversion, and when combined with avoidance, it works wonders.
For example, instead of studying successful people in the hopes of also being successful, study what it takes to be unsuccessful and do the opposite. You may never be a huge success, but your chance of total failure decreases dramatically. And by studying unsuccessful people, you avoid any problems of confusing success with the role luck played in some people’s lives.
Munger explains his system like this:
My system in life is to figure out what’s really stupid and then avoid it.
Last week I finished transcribing the Daily Journal Meeting held a few weeks back. Examples of Munger’s system of inversion and avoidance run throughout, which are highlighted below, along with a couple of other important lessons that stood out. Continue Reading…
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Lessons From Buffett’s Letter
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The old Buffett letters are the best. His recent letters have mellowed in a way to be more suitable for a broader shareholder base.
Of course, that’s not a bad thing. Buffett understands his audience well enough to recognize the need to shift. But for the diehards hoping for a glimpse of the old letters in the new ones, we might be out of luck.
If you’ve been living under a rock, his latest letter — the 2018 version — was released last Saturday to the usual fanfare and excitement. As is tradition, I put off reading it until Monday morning and did my best to ignored the Twitter hot-takes till then.
If you’re forced to only read one section, the section on “The American Tailwind” is it. Read it. It’s worth it.
As far as letters go, lessons were sparse. So to mix things up this year, I added some hot-takes from the CNBC interview Buffett does every Monday following a letter release.
Let’s get to it: Continue Reading…
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Howard Marks on Inefficiencies and a Contrarian Mindset
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Howard Marks talked to the CFA Society Chicago last week and streamed it live via Youtube. The video is embedded below (with links).
The entire talk is worth watching but the Q&A portion is what stood out most (his answer to why the market collapsed in the fourth quarter is brilliant @ 55:22). The Q&A starts around 31:35.
Three things stood out in the Q&A, which I transcribed below. The first question was on finding the line between market efficiency and inefficiency. The short version is markets are efficient but some inefficiency exists but it’s hard. Much of it is psychological and tends to be more pronounced at certain points in the market cycle. Marks explains what it takes to take advantage of those periods.
Later, Marks was asked about the right structure for capturing inefficiencies, which is where contrarianism comes in and he circled back around to the contrarian mindset at the end of the talk. He offers a great example on second-level thinking. And finally, he points out that it’s not about always being a contrarian but being an intelligent contrarian only when an opportunity exists that be taken advantage of.
Here’s Marks: Continue Reading…
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Charlie Munger on Concentration
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I watched Charlie Munger’s at the Daily Journal Annual Meeting. As usual, Munger doesn’t pull any punches. One piece from Munger’s opening statement stuck out because it fits with a book I finally started reading called Concentrated Investing.
I think it’s safe to say that broad allocation strategies are not only the accepted norm but anything not in a broadly diversified wrapper is looked down upon these days. Which is both good and bad. Good because most people are better off broadly diversified, earning market returns. Bad because doing anything not seen as popular might turn the few people off who could actually handle a concentrated strategy.
What exactly are they handling? Well, the more concentrated the portfolio, the more volatile it’s likely to be compared to average market volatility and the more likely (and more often) it deviates positively or negatively from a market return. The combination of those two — the potential to underperform the market and higher volatility — is why a broadly diversified option is best for most people but also so enticing for anyone who can stomach the wilder ride.
Munger prefers an extremely concentrated, no turnover portfolio focused on a few huge opportunities. Huge opportunities like that require a lot more dedication, intelligence, and luck than most expect. However, you don’t need Munger’s big brain to come up with a simple process of identifying smaller opportunities that pop up more often. The right temperament and a higher turnover rate than zero are all that’s needed.
Here’s what Munger had to say: Continue Reading…