Long Term Investing
I’ve got this love-hate thing with work
Hey hey! Welcome to issue #29. I’ll be honest, I’ve been flat out like a lizard drinking. Some wicked guests lined up for the podcast! So a shorter CbK issue than usual. Next week I’ll be back to regularly scheduled programming. But as always, I’m keen to share what I’ve been reading, learning, and compressing. Starting with a quick quote from Christian Bale:
I’ve got this love-hate thing with work. But I actually think the love-hate thing is quite a healthy thing to have. If all you do is love...then you’re just going to imitate what you love, right? It takes people to fucking hate it at the same time to make any sort of change to what they’re doing, you know? And to me, that’s when it becomes interesting.
Here’s the format of today’s email:
Part 1: Long Term Investing
Part 2: Bonus Quirky Content - Something to Read, Watch, and Listen
Long Term Investing
Inspired by Greenlea Lane (@joshtarasoff) sharing an essay on how they invest. Which highlights having a long term focus. But first, John Maynard Keynes on why you ought to have a long term orientation:
Human nature desires quick results, there is a particular zest in making money quickly, and remoter gains are discounted by the average man at a very high rate.
And then Charlie Munger goes straight for the throat:
Sit on your ass. You’re paying less to brokers, you’re listening to less nonsense, and if it works, the tax system gives you an extra one, two, or three percentage points per annum
How Greenlea Lane Invests [Link]
Been doing the rounds big time on FinTwit. And for good reason. Covers long-termism as a way of being, positive feedback loops, and overwhelming logic driving very long-term endgames.
My takeaway: you can’t half-arse it. You gotta whole arse it.
True long-termism should be automatic--not something you do but something you are.
And this behemoth:
Another reason I like endgames is that they tend to be undervalued. They are so far into the future—typically 10 years or more—that most market participants simply do not care. Even if they intellectually grasp the overwhelming logic, it simply might not matter to them. One kind of investment situation I’m fond of is when a company’s best decade won’t even begin for 5 years or more: the endgame is clear, but there is an immediate murkiness as the pieces fall into place. Instead of focusing on the far future, investors commonly try to construct a narrative or a series of events that will occur over the next few months, quarters, or years—what I call a path. People obsess over the path because they crave the comfort of a play-by-play understanding of how their investment will progress.
Embrace uncertainty my friends.
Buy and Hold babyyyyy
Ok, I’ll admit. Cherry-picked stocks. Which isn’t Eugene’s fault! But would be interesting to see the returns for all 50 stocks. But taking into account mergers and bankruptcies might be hard to check. For reference, the S&P500 from 1972 to 2012 has returned 9.95% a year (including dividends). So buying these at stupid high valuations and holding on for dear life ain’t the worst thing in the world. I’ve previously written about arguments for underperformance as well, so I’m not cracking the shits about lower potential returns.
Recommend reading the original post by Lawrence Hamtil too.
Long-Term Investing in a Short-Term World [Link]
The topic just wouldn’t be complete without Michael Mauboussin weighing in! Michael shares that there are four reasons why a short term view is so pervasive today:
Incentives. Many companies revamped executive compensation, so companies and their management fixate more on short-term EPS, often to the detriment of long-term value. All because bonuses are tied to short term metrics.
Psychology. Basically, stress causes a short term view. Just as there’s no use worrying about next week if a lion is chasing you, there’s no need to consider three-year investment returns if you’re likely to get fired for poor three-month results. Heightened stress undoubtedly encourages a short-term mindset. Psychology also comes into play when individuals intend to make good decisions but fall prey to certain decision-making pitfalls, including availability bias, recency bias, and loss aversion.
Information. More information = more noise and more market reaction, without generating insight or value. News companies don’t care about information, they want your eyeballs.
Rate of change. The apparent acceleration of the rate of change for businesses creates a final source of shorter time horizons. For example, the average asset life in corporate America declined by a third in the last thirty years or so. Said differently, a chief financial officer today needs to generate an appropriate rate of return over roughly ten years, while his mid-1970s predecessor could wait fifteen years.
Overall, it’s a great 11-page read. If you’re going to read anything linked, read this.
In a similar vein, Joe Wiggins’ Active Management has Become a Game of Musical Chairs, raises a similar point. Why is the long-term is ignored by others?
The threat that most active managers face of being fired tomorrow has profound implications for decision making, both for individual managers and their employers. Is there any purpose in making a long-term investment decision if there is little chance you will be around to witness it come to fruition? Indeed, making such farsighted decisions may well hasten your departure. Investing is a long-term endeavour, active management has become a short-term game.
Mic drop moment. Love these insights on how professional investing can be so damn different compared to in private.
Frustrated active managers will often complain that fundamentals don’t matter any longer. They do, they are just not important in the game being played.
There is the argument that markets have become much more liquid since the 70s. That along with high-frequency trading could be a significant factor. Like anything in investing, it’s probably a combination of things and there’s no clear answer.
Either way, love this quote from Nick Sleep:
Only by looking further out than the short term crowd can we expect to beat them.”
Long-term investing means not missing out
Chris Mayer in his book 100 Baggers: Stocks That Return 100-to-1 and How To Find Them stresses the importance of a long-term view:
The biggest hurdle to making 100 times your money in a stock—or even just tripling it—may be the ability to stomach the ups and downs and hold on.
“To finish first first you must first finish” and if you’re gonna finish, you gotta commit.
The above chart and quote from Erick are super timely. March 2020 anyone? I’d starting dipping my toes in around then and the market was off to the races. I still did alright so don’t weep for me. But definitely reinforced that when things do happen, they can happen quickly. From Rudiger Dornbusch:
Things take longer to happen than you think they will, and then they happen faster than you thought they could.
I’ll finish with something relatable
Bonus Quirky Content
Something to read: How New Zealand went from 45 all out to the verge of being inaugural World Test champions [Link]
*Spoiler Alert* New Zealand is the inaugural world test champion. I knew my kiwi passport would come in handy one day! But awesome to see how they went about it. Using their smaller size as an advantage. Getting it done!
Rather than use their size as an excuse, New Zealand have sought to turn it to their advantage - as an enabler for nimble, coordinated decision-making. “We're probably lucky that we can make change maybe quicker than some other teams can, because we are small,”
Something to watch: How 60,000 Metric Tons of Salt Are Harvested from One of the World’s Saltiest Lakes [12 mins]
Just something I found interesting. This YouTube comment sums it up better than I ever could:
what's crazy is that the harvester isn't even just a worker, but also hella knowledgeable about the job he is working such as how things are like this and why it is made this way, what to use and what not to use, why the color is this way, what causes such color, why the salt doesn't dissolve due to this or whatever the factors is. He explained it all. He should be an educator
Something to listen to: A General Theory Of Catastrophe — Niall Ferguson [Link] [Apple Link]
Doom and gloom? Yes. But plenty to take away here. The study of history, our ability to bounce back from doom, and attitudes towards reading. Pro tip: skip the first 6mins.
Something to listen to (from me): Michael Fritzell on Compounding Curiosity [Link] [Apple Link]
Michael is the author and owner of the Asian Century Stocks newsletter. Highly recommend you subscribe if you haven’t already! We chatted about investing in Europe compared to Asia, fraud in China, the pros and cons of founding family companies and SOE’s, and his process for writing his newsletter. Loved his thoughts on family-owned companies:
It’s a double-edged sword. I think just the variability or the range of outcomes in family companies is a lot greater […] They have an interested party that really pushes the company forward, especially the first generation. And in China, especially in Vietnam, many of these companies are really young, they were formed after 1988 in China. That means that many of these entrepreneurs, they are first-generation entrepreneurs, which makes them usually hardworking, usually intelligent as well. They’ve survived throughout the environment. And in many cases that’s a good thing.
On the other hand, family companies can be totally complete frauds. So you got to be more careful about corporate governance in them. […] And also another thing is with the second generation, Asian family companies tend to become less focused with the next generation. They tend to give different parts of the family business to different children or cousins of their children and so on. I mean, it really depends. I think you would like to bet on a specific person rather than saying you should invest in family companies per se.
If you want to know the upcoming guests for the podcast and get the opportunity to ask them questions, join the CbK Discord Server.
Rabbit hole/resource to dive into: Q2 2021 Letters & Reports [Link]
Just your timely reminder that /r/SecurityAnalysis on Reddit compiles and shares a lot of reports and letters each quarter.
Final thought for the week:
Until next week, have a good one!
Liked this post? Why not sign up.