Investing

Howard Marks yesterday released his latest memo to clients of Oaktree Capital.

It is titled “Few Losers, or More Winners?”

It’s an insightful take on how a proper choice between the two approaches of investing – one with the aim to minimise losses, and the other to maximise gains – is the path to achieve good investment results over the long run.

I have prepared some notes on the memo. Click here to read my notes.

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Stay safe.

With respect,
– Vishal

We know Ben Graham as the father of value investing and the first real teacher of the subject. His book, The Intelligent Investor, has changed the lives of many, particularly Warren Buffett’s, who was one of Graham’s students at Columbia Business School.

Graham played a significant role in shaping Buffett’s career and investment philosophy. But as Buffett has mentioned at several occasions, Graham’s influence on him extended well beyond lessons on analyzing financial statements.

In a short article in the Financial Analysts Journal, remembering Graham after his death in 1976, Buffett emphasized what he learned from the three things Graham said he hoped — even at the age of 80 — to do every day. He wrote –

Several years ago Ben Graham, then almost 80, expressed to a friend the thought that he hoped to do every day “something foolish, something creative and something generous.”

Let’s talk about each of these.

The word “foolish” often carries a negative connotation, but the implied meaning here has more to do with humility and a willingness to forgo self-importance than anything else. Like this is what Buffett wrote to shareholders in his 1989 letter –

Charlie and I have both total job security and financial interests that are identical with those of our shareholders. We are willing to ‘look’ foolish as long as we don’t feel we have ‘acted’ foolishly.

And this is what he wrote in his 2017 letter –

Though markets are generally rational, they occasionally do crazy things. Seizing the opportunities then offered does not require great intelligence, a degree in economics or a familiarity with Wall Street jargon such as alpha and beta. What investors then need instead is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals.

A willingness to look unimaginative for a sustained period – or even to look foolish – is also essential.

On the aspect of “creativity,” Buffett wrote this about Graham –

A remarkable aspect of Ben’s dominance of his professional field was that he achieved it without that narrowness of mental activity that concentrates all effort on a single end. It was, rather, the incidental by-product of an intellect whose breadth almost exceeded definition.

That’s the thing about creativity – the willingness and the ability to get over the narrowness of your mind and perceive the world in new ways, to find hidden patterns, to make connections between seemingly unrelated phenomena, and to generate solutions.

Maria Popova of Brainpickings defines creativity this way –

Creativity is a combinatorial force: it’s our ability to tap into our ‘inner’ pool of resources – knowledge, insight, information, inspiration and all the fragments populating our minds – that we’ve accumulated over the years just by being present and alive and awake to the world and to combine them in extraordinary new ways.

Coming to the third aspect of “generosity” that Graham aimed to practice in his daily life, Buffett has often told us –

I benefited enormously from the intellectual generosity of Ben Graham, the greatest teacher in the history of finance.

And here is what he wrote in his 1976 remembrance –

…his third imperative – generosity – was where he succeeded beyond all others. I knew Ben as my teacher, my employer and my friend. In each relationship – just as with all his students, employees and friends – there was an absolutely open-ended, no-scores-kept generosity of ideas, time and spirit. If clarity of thinking was required, there was no better place to go.

And if encouragement or counsel was needed, Ben was there. Walter Lippmann spoke of men who plant trees that other men will sit under. Ben Graham was such a man.

Even leaving aside his generous contributions to the world of investing, Graham was an extraordinary man who left the world with invaluable lessons.

This one especially – of daily being foolish, creative, and generous – can certainly help us lead wonderful lives.

Wishing you all a very happy Teachers’ Day. In whatever way you may be playing the role of a teacher – parent, child, friend, colleague, teacher, or even as a student – I thank you for bringing light into dark corners.

More power to you.

Regards, Vishal

In the endnotes of his brilliant book, Winning the Loser’s Game, Charles Ellis wrote about two of his best friends who, at the peak of their distinguished careers in medicine, agreed that the two most important discoveries in medical history were penicillin and washing hands (which stopped the spreading of infection from one mother to another via the midwives who delivered most babies before 1900).

Ellis’s friends also counselled him there was no better advice on how to live longer than to quit smoking and to buckle up when driving.

It is not the strongest or the most intelligent who will survive but those who can best manage change. – Charles Darwin

The thing that separates us humans from other animals is that we constantly change into new forms, new avatars. We are sad, we are happy, we are emotional, and we are angry. We communicate through different languages, we do different kinds of work, and we deal with different kind of people differently. Effectively, we keep on changing ourselves as per the demands of time and situation.

In fact, success in life depends largely on whether we are able to change ourselves with changing times.

If we are flexible and formless – like water – taking the form of whatever is around us, we gain power and succeed against those who rigidly hold on to their ground.

Despite this, when it comes to our ideas – especially when we have only one – we rigidly hold on to them.

This is very much like Henry Ford who supposedly said, “People can have the Model T in any colour – so long as it’s black.” This nearly ruined Ford Motors Company in the 1920s, because while Mr. Ford was in love with his idea of “only black Model T” cars, Americans were shifting to bigger, faster, fancier, and brightly painted automobiles.

Or very much like the old “me” who would often not change views on stocks even when circumstances changed, and paid heavy prices.

I see investors fall in love with their stocks in the garb of ‘buy and hold’. We will hold on to bad businesses, and especially those that are going downhill. We will remain stuck in a status quo mode because we hate to admit we have lost money. We will even put a higher value on the stocks we already own than we would be willing to pay for the same things if we didn’t own them. All this because we are too rigid to change our ideas, even when circumstances are shouting at us to do so.

If you have been through such a moment in your own life (or investing life), you would like to hear what Bruce Lee, who died 50 years ago, today, advised –

Empty your mind. Be formless, shapeless, like water. Put water into a cup, it becomes the cup. Put water into a teapot, it becomes the teapot. Water can flow or creep or drip or crash. Be water, my friend.

Haruki Murakami wrote this in Kafka On The Shore –

Sometimes fate is like a small sandstorm that keeps changing directions. You change direction but the sandstorm chases you. You turn again, but the storm adjusts. Over and over you play this out, like some ominous dance with death just before dawn. Why? Because this storm isn’t something that blew in from far away, something that has nothing to do with you. This storm is you. Something inside of you. So all you can do is give in to it, step right inside the storm, closing your eyes and plugging up your ears so the sand doesn’t get in, and walk through it, step by step. There’s no sun there, no moon, no direction, no sense of time. Just fine white sand swirling up into the sky like pulverized bones. That’s the kind of sandstorm you need to imagine.

And you really will have to make it through that violent, metaphysical, symbolic storm. No matter how metaphysical or symbolic it might be, make no mistake about it: it will cut through flesh like a thousand razor blades. People will bleed there, and you will bleed too. Hot, red blood. You’ll catch that blood in your hands, your own blood and the blood of others.

And once the storm is over you won’t remember how you made it through, how you managed to survive. You won’t even be sure, in fact, whether the storm is really over. But one thing is certain. When you come out of the storm you won’t be the same person who walked in. That’s what this storm’s all about.

Problems arise all the time in life and in investing, and you can try to keep your rigid shape, smashing into the problems until you break. Or you can be like water and slip through the cracks.

Charlie Munger said –

The game of life is the game of everlasting learning. At least it is if you want to win.

In fact, a few of life’s great pleasures are to keep learning, letting go of previously cherished ideas, and emptying your mind for new ideas to come in. Then you’re free to look for new ones.

Be formless. Be adaptable. Be open to new ideas. Like water.

It’s indeed a pleasure to be water, my friend.

That’s about it from me for today.

If you liked this post, please share with others on WhatsApp, Twitter, LinkedIn, or just email them the link to this post.

With respect,
— Vishal