Do you like hedge fund letters with commentary on portfolio positions? Do you like Llamas with Hats? Do you like hands-on discussions of behavioral control? Well, you’re in luck, because Askeladden’s Q2 2017 letter has a little something for everyone.
I try very hard to avoid strong ideology; I have, as best I can tell, one core postulate that I have no interest in debating (free will exists), one core universal framework for approaching life (rationality), and everything else is nuanced and up for grabs with only the level of confidence justified by my knowledge base (occasionally moderate to high; usually pretty low).
If I have anything resembling a core credo, though, it’s probably “be a filter, not a sponge.” This is a line I stole from The Perks Of Being A Wallflower (which I’ve watched… an embarrassing number of times… while consuming an embarrassing amount of ice cream.) Charlie’s teacher gives him, ironically, The Fountainhead (a great book… in moderation) and advises Charlie, basically, to be open to new ideas, but not to let others do his thinking for him. He needs to stand between his brain and new information and let the good stuff through while filtering out the chaff.
I’ve talked about this before a little bit (Grit Is Overrated), but the problem with advice, or even ideas more broadly, is that they don’t exist in a vacuum: they exist with certain premises and goals in mind, in a certain environment, and even to the extent that they are valid for those premises and goals in that environment, they will not necessarily stay valid (in whole or in part) when placed into different circumstances.
In other words: it’s important to learn from those who came before you (whether via their writing, or from speaking to them), but you need to be an active listener/learner and calibrate what they’re saying to account for any differences. Essentially it’s a game of five-whys, dimensionalizing what you learn to find the root/core idea and separate that from its packaging. For example, that could go something like:
- entrepreneurs say you have to get up at 5 AM if you want to be successful
- why? because they need uninterrupted time to work and once the day starts, there are lots of interruptions
- therefore: there’s nothing magical about getting up at 5 AM, other than it gives you a few hours to work before the distractions start
- therefore: if 5 AM isn’t your thing and you can find other times of day to do focused work without distractions, that’s perfectly acceptable as well
Altogether too often, both inside and outside of the value investing world, I see people acting as “sponges” – “oh, let me just do what he did/does” – to the extent, sometimes, of cloning investment ideas or strategies (both of which are generally terrible ideas for intuitive reasons). I suppose to some degree this is marginally better than not being a sponge at all… but it’s certainly not as productive as being a filter.
Tell us where you’re from, what you want to become
… and we’ll say if you’re okay
Where did you go to school? Right answer and you’re cool
… yeah, you’re the kid all day
– Milencolin, “No Cigar”*
I get lots of e-mails from “kids” (my generic term for anyone in their teens/twenties notwithstanding that many of them are older and better-educated than me) who want input on their journey as value investors; naturally, many of these conversations gravitate in the direction of careers. More than anything else, the theme I hear over and over usually boils down to:
I go (went) to a state school (and/or have an otherwise non-traditional, non-target background). How can I break into value investing?
I’m not sure why I get so many of these questions – I imagine partially because there’s simply a lot of people out there with this question, and partially because I, through what can honestly only be dimensionalized as extraordinary brazenness combined with extraordinary luck – started working as an analyst at a hedge fund when I was 19 with no real formal financial education, which for some weird reason makes people think I’m uniquely qualified to opine on this topic (I’m not).
With the caveat that I only have one person’s perspective from what can honestly only be called (charitably) the very fringes of the industry, I do, at least, have more insight than 19-year-old-me did, and have more time / willingness to share that insight than most people who get the occasional cold email on the topic. Rather than answer this over and over again in individual conversations, I’m answering it once and for all here. Some of this may be basic/redundant while some of it may be new; hopefully it proves helpful on the whole.
Premises and Underlying Phenomena
Any reasonable discussion of this topic has to start with a clear understanding of not only the observable facts, but the drivers that underlie those facts. I’m just the messenger; I don’t necessarily agree that all these things are justified – but they are what they are.
Premise 1: Pedigree Matters (Today) In Investment Management
Underlying phenomena: pedigree as a heuristic for trust, investment management as an industry past its peak attractiveness
One of the weird things about investment management as an industry is that you can read about plenty of old guys who had terrible GPAs and unremarkable resumes who are now managing silly amounts of money… in fact, you can even meet plenty of guys who meet that description. And yet at the same time, it can feel nearly impossible for someone just out of college, with (comparatively) a solid resume, to break into the industry.
A brief history discussion is justified (and mind you, this is all super high level, I’m not exactly an expert): once upon a time (before we were born), investment management was not really looked upon as the sort of prestigious industry that you would go into to earn fame and fortune. Then people started figuring out why Warren Buffett and company were so wealthy, and all of a sudden there was an explosion to either get into the industry, or get your assets into the industry behind some of these smart people (no matter the fee structure). Throw in a lengthy period of extremely favorable markets, and the market boomed.
What happened? Well, at some point, the proliferation of players and democratization of information drove down available excess returns, making the market more efficient (as you would expect, mathematically speaking). This led to a transition: as you are undoubtedly aware unless you live under a rock, the trend du jour is firmly in the direction of indexing, “smart beta,” quantitative, and other lower-fee products.
But looking in the rearview mirror at what the industry used to be like (as told by romanticized books and biographies) – or, even looking at what compensation structures look like today (which is not what they will look like tomorrow) – there are still tons of people who want to exploit the still-wide gap between return-on-time in asset management vs. other industries. So what you end up with is an industry with (IMO) a fairly bad secular outlook both for volume and pricing, yet still very high demand, leading to high competition for positions.
This all is simple enough, and perhaps I overdid the analysis. But it nicely frames why, more than ever, “pedigree” is a very easy heuristic for prospective employers (/allocators) to use. As one of my friends puts it, giving someone your money takes a lot of trust – and whether or not it’s fair or deserved, a wide body of behavioral science (Cialdini is probably a good reference here, perhaps also Thaler) demonstrates that we use heuristics whenever possible, and one of those heuristics is associating credibility with a uniform, a reputation, an image, a certification.
Think about it. If the person who was ACTUALLY the best surgeon in the world showed up to operate on you with unkempt facial hair, sweaty armpits, a rusty-looking scalpel, and the OR turned out to be an event tent in the middle of a rainforest with a single flickering halogen bulb, wouldn’t you have second thoughts? Conversely, what do they call the person who graduated last in their class in medical school, when they’re wearing scrubs in a clean medical facility? “Doctor.” Similarly, many consulting and legal firms hire associates predominantly from Ivy Leagues not necessarily because they’re any better than equivalently-talented candidates from other schools, but rather because it makes their clients feel better to know that they’ve got Mr. Harvard and Ms. Princeton solving their problem instead of Mr. Aggie and Ms. West Nowhereville Technical.
So, faced with the challenges that the industry faces, and the high ratio of applicants-to-available-jobs, it’s understandable (if regrettable, for intuitive reasons) that prospective employers prioritize easily-screenable metrics like where you went to school or whether you know someone who they trust.
And this doesn’t apply just to getting a job as an analyst, mind you, but also to launching your own shop (if that is something you decide to do, the advisability of which is a whole separate discussion but loosely tracks my advice for people looking to enter this industry – i.e. don’t do it for the money because whatever you think the money is down the road, it’s probably an order of magnitude lower.) I’ve scraped and struggled my way to a low-single-digit ($MM) level of FPAUM after ~11 months of being able to accept outside capital, whereas you could find plenty of people, today or historically, in the business with comparable quality experience / resume who – by virtue of family or other connections – have low to mid eight figures of AUM the day they start. It’s just part of the terrain that you have to accept if you want to play.
Premise 2: The Value Investing Industry is Fragmented
Underlying phenomenon: few natural recruiting paths for either employers or students leads to over-concentration in obvious searching points
Relative to something like investment banking or consulting, the recruiting process for funds is less standardized (for both employers and students) because most funds don’t really have the scale to have someone (or a department) dedicated full-time to bringing in potential analysts.
This means a reliance on either a small number of “target” schools, recruiters (who default to finding the most palatable, most easily located individuals) or relationships (I get at least one email a quarter from someone I know looking for an analyst).
Premise 3: Analysts Have A Learning Curve
Underlying phenomena: understanding business logic and basic analytical techniques takes some time and effort;
Becoming an analyst takes time and effort; it’s usually several years between the first time you (seriously) pick up a 10-K and the first time everything “clicks” and you’re able to, without direction, produce meaningfully useful investment research. This is required even more than it used to be because technology has made the “data gathering” element of an analyst’s job much quicker and easier – there are even plenty of sites and tools that offer pre-built, templated models where you can just tweak forecasts and see what you come up with – meaning the value-add is now more in the higher-level conceptual understanding, which takes time to develop.
While the technical education (i.e. learning all the nonsense about beta and Sharpe ratios) is more or less equivalent at state schools and Ivy League schools (or at least, those few state schools with strong investing/finance programs), there are three major differences:
- In-class opportunities for beginning to understand qualitative business logic – this is very rarely taught outside of “case study” like classes, which aren’t often offered at the undergraduate level.
- Extracurricular opportunities with guidance – such as case competitions, etc.
- Networking opportunities with industry professionals.
In total, these factors usually combine to make the average graduate from a “target school” more prepared and well-rounded, even if they aren’t any more talented or technically competent.
Tangible Action Items
1: Deserve It + Maximize Your Shots On Goal
The first thing you should be doing is reading, reading, reading. Consume books and articles and podcasts like they’re both your water and your oxygen. Having read Snowball and Margin of Safety and Thinking Fast and Slow and The Outsiders doesn’t make you qualified to be a professional investor- it’s just table stakes for being able to enter the conversation. One of the major commonalities between all the successful state-school alumni in finance that I know is that they view(ed) school as the biggest impediment to (rather than driver of) their success. Nobody in the real world cares about 80% of what you learn in school. Here is a non-exhaustive list of things you should be reading (some specific recommendations are on my Favorite Things page):
- value investing books (you only need two or three – the theory is easy to grasp)
- successful investor biographies or bio-pieces in long-form content magazines (New Yorker, Vanity Fair, etc)
- successful entrepreneur and CEO biographies
- business literature and personal development books
- “mental model” books in disciplines like behavioral science and psychology (most important), biology, statistics, etc
- Silicon Valley books/blogs/etc
- investment research by actual investors (buy-side, not sell-side)
- did I mention investment research by actual investors?
Here is a list of things you should not be reading because they’re going to take you in the wrong direction:
- CNBC or 24-hour-news-cycle-stuff in general
- Yahoo Finance message boards
- Any other low-quality, retail-oriented news source
Somewhere along the way, you need to figure out a draft investment philosophy – obviously this should be subject to change over time, but the world is simply too big for you to do everything at once. The what isn’t exactly so important as just having one that’s coherent and workable. Figure out what kind of situations make sense in the context of your resources, personality, and skillset. Pro tip: at least at the beginning, it’s usually best/easiest to eliminate as many variables as possible, so you can focus on improving skills and get useful feedback. For example, if you do a lot of research on cyclical, commodity-sensitive stocks, it’s hard to know whether you got things right or wrong because so much depends on the price of the commodity – whereas if you’re researching something like a cereal or SaaS company, on the other hand, it’s easier to disaggregate unanticipated macro events from company fundamentals.
Of course, reading isn’t sufficient; in theory practice and theory are the same; in practice, well, you get the aphorism. There’s usually a huge gap between grasping the theory (easy) and applying it (hard); there are many people I know – some are even professional investors – who can talk a great game and say all the right things, but don’t know what they’re doing when it comes down to researching a stock.
Obviously this is challenging and there’s less practical instruction here in books and blogs than there is on the theory. Of course, there are paid courses, some of which are good: my favorite is my friend Todd’s Invest Like The Street Program (which focuses more on practical investing concepts than BIWS/WSO, which basically just focus on modeling). But for autodidacts – or those on a budget – there’s a lot you can do yourself, too.
Rather than starting from scratch, it’s usually easiest to find investors whose philosophies you align with, and look at their actual research that they’ve published (whether on sites like VIC/SumZero/Seeking Alpha, in their investor letters or on their websites, at conferences like Sohn, in interviews with Bloomberg or CNBC, etc). Do the work yourself to recreate their logic… do you agree? Disagree? Why or why not? Would you put your own money into this idea? This helps focus your research on the relevant issues and avoids the “regurgitate the 10-K and build a detailed but useless model” problem that plagues a lot of student research.
What’s even better than mirroring investors’ current ideas is using past ideas as case studies. Did it go really right? Really wrong? The latter is often more interesting. Would you have come to the same conclusions with data available at the time? What happened since then? What analytical techniques can you add to your toolkit for future use?
Once you have something on paper, if you don’t directly have people to share it with, you can publish it on Seeking Alpha for feedback (pseudonyms can be used if you’re concerned about what people will think in 5 years). It’s important to get into the cycle of doing real investment research, seeing whether your conclusions turn out to be right or not, and learning over time what matters and what doesn’t. Remember, research needs to have a point and actionable insight – not just be a collection of facts that the PM could’ve found himself. Keep asking yourself why does this matter? Go back over old projects from time to time to a) note improvement and pat yourself on the back, and b) see what you got right, what you got wrong, and what you could improve on going forward.
Learning all this stuff takes time – like Warren Buffett says, you can get nine girls pregnant but still won’t have a baby in a month – so you need to start now if you want to be ready in two years. The more time you can spend doing real work, the better you’ll be…
As referenced many times, this is still a highly relationship-driven business, and having people who can vouch for you (and mentor you) will go a long way. Luckily, the internet and the rise of social media makes it easier than ever to identify and reach out to people who seem to share your ideas. Obviously you’re more likely to get responses from people who are smaller or earlier on in their career, but that’s doesn’t mean you should totally write off bigshots either – I know a college student who got in touch with Clayton Christensen and a fund manager who occasionally corresponds with Howard Marks, for example. Don’t spam, but it never hurts to try, particularly if you truly have an affinity for what someone does.
This isn’t exactly new news, but e-mails that show you’ve done your work and know who you’re talking to are more likely to get a response. Particularly in the era of social media, it’s not hard to figure out the basics about somebody’s approach, interests, holdings, etc; not doing at least that much background reading (when you want someone’s help) is likely to be perceived as lazy. Moreover, if someone just says hey, I want to be a value investor, help me, not only may I not feel like responding, but I also won’t really know where to take the conversation from there – and it shouldn’t be my job.
On the other hand, if you ask an interesting and personalized question like “hey Samir, I noticed that you were bullish on Fogo de Chao as of last year, and I was curious what you think about T.H. Lee selling part of their stake at a lower valuation than they did two years ago at the IPO.” – then you’re more likely to get a response and start an interesting conversation.
Additionally, don’t just go for fund managers or people who work at major funds – some of the more interesting people I know are off-the-beaten-path former analysts or even just individual investors – anyone with interesting ideas is worth getting to know; focus on the knowledge and the opportunities will come.
Finally, and I can’t stress this one enough: show up for heaven’s sake. What do I mean by that? Well, my friend Clayton likes to tell the story of how, almost a decade ago, he was working a couple dead-end jobs when he met a guy at the YMCA (we’ll call him Joe, because that’s his name) who turned out to be a financially successful local businessman who offered to mentor Clayton and his roommate. Clayton showed up every time Joe called… Clayton’s roommate didn’t (and it’s not like he had anything better to do). Fastforward to the present, and Clayton ended up with an MBA and has branched out on his own as an entrepreneur after figuring out the corporate world isn’t for him. His roommate, well, who knows? I do know, however, that Joe’s offered to mentor plenty of other people who could’ve benefited from it… and none took him up to the extent that Clayton did.
And the same goes for me, both as a mentor and a mentee: when I started out, I collected mentors like state quarters; I wanted to catch them all (okay I’m mixing my metaphors here), and I engaged with them as deeply as I could, and it was huge because different ones played different roles at different points during my development. I still seek out mentors today. On the other hand, I get people asking me for mentorship all the time, and sometimes I just offer it apropos of nothing to people who I find and like. Some people take me up on it… and others don’t. It’s very strange to me that someone would reach out asking for guidance, and we go back and forth and I offer a concrete and personalized action plan at meaningful expenditure of time and no personal benefit to myself other than the intellectual/emotional rewards, and then they vanish never to be heard from again. Don’t do that!
2: Figure Out Acceptable Trade-Offs.
This is really broader career/life advice, but: you need to start stack-ranking your priorities. It would be awesome if everyone could have a first job where there was a great corporate culture, tremendous learning/advancement opportunities, a breathtaking, yuppie-friendly location, and a salary that makes your i-banking buddies jealous.
Of course, out here in the real world, most opportunities look nothing like that. All that’s available might be an unpaid internship in a dilapidated office in the middle of some really boring town. What are you willing to give up to get the two or three things you actually really want?
Trade-offs take broader forms too: is it more valuable to get a couple B+s instead of As if it gives you the incremental time to study things that actually matter? Are you willing to sacrifice the short-term and potential long-term benefits of establishing deep friendships to further your career? (In hindsight, I did that to far too great an extent.) Does your role have to be in public equities, or are you open to anything where you get to apply the philosophy? Is there a way to get closer to where you want to be, if not all the way to where you want to be? Etc. Get creative with your perspectives – often times people only look at things from one angle and miss out on a lot of opportunities because they look a little different than expected. Ex: newsletters, family offices, etc.
3: Own Your Background (Without Putting People Off)
It seems like there are one of two paths that most kids with a non-traditional background take: they either despair because it’s so hard, or they get a big chip on their shoulder that makes them untouchable to prospective employers.
Look, I get it. I really do. I had the same issues as a biochem undergrad trying to secure business-related internships: the whole reason I got into writing for Seeking Alpha back when I was 18 is I went something like 0-for-20 on summer internship opportunities despite a 4.0 GPA. It can be frustrating. But eventually you’ll find someone who’ll listen; one dirty little secret of adult life is that tons of people end up doing stuff that has nothing to do with their formal education whatsoever. It’s just an issue of finding those people, and then being able to tell your story effectively.
To that end, packaging is really important, and by that I don’t mean your clothes and haircut so much as I mean the way you describe who you are and what you’re looking for. Unfortunately, that can often be as (or more) important than content, particularly when you’re trying to make a first impression over the internet – if it weren’t important, do you think clickbait would exist?
Walking the tightrope between not begging and not sounding like you think you’re the second coming is admittedly difficult. But it’s possible. Read Dale Carnegie, etc etc; these are all learnable skills that everyone can improve if they want to. You have a story to tell: if you’ve made it this far, you’re a self-starting person who is used to continuous self-improvement. That’s more than a lot of people can say, and might even help you edge out someone who presently has slightly better technical skills…
Finally, avoid the temptation to try to make yourself too much like the “ideal” candidate from a “target” school. If you put yourself on their playground, you’re automatically going to lose because you’ll be compared to them. It’s better to just separate yourself entirely and come in with a story and resume that looks completely different than what they usually get (and therefore is more likely to stand out). Case competitions and all that are great, and you should do them, but nothing will impress an actual investor like a portfolio of actually thoughtful, solid investment research – the number of people who can produce that during college tends to be fairly low and you’re way ahead of the curve if you can do that. (Back to the “write” point!)
On that note… we’ll end where we started.
No, I don’t wanna hear it. No, it’s more than I accept.
’cause I don’t care where I belong no more.
What we share or not I will ignore.
And I won’t waste my time fitting in, ’cause I don’t think contrast is a sin
No, it’s not a sin.
– “No Cigar” by Millencolin*
*um yeah I may have spent a little too much time playing Tony Hawk and fantasizing about being an actual rebel kid instead of a overly studious poser and um no I’m not going to tell you exactly how recent that phase was but we’ll peg it at sometime between t minus 2 and t minus 5 years from the present day mmkay?
I’ve always been a slacker. This is something that people are either surprised or annoyed to hear, depending respectively on whether they think I’m someone who I’m not, or whether they think I’m humblebragging or doing the false humility thing or whatever. (Perhaps guilty as charged – I suppose usually you don’t get an MBA and a couple years of professional work experience before you’re 21 with a sloppy work ethic – and I’m certainly not judging myself relative to “average” but rather relative to where I think I should be, which explains at least part of the delta.)
But as I’ve talked about in various places, the truth is that I never really worked all that hard most days, it didn’t feel like. There were times when I had a lot to do between coursework and real work and I got it all done, but what I’ve never really been good at is doing work that I don’t actually have to do (in the sense of, not having immediate payoff or consequence if it isn’t done.) i.e. – even when I was working full-time plus going to school full-time, I would still play video games near-addictively many weeks when I should’ve been studying, instead only cramming for exams at the very last minute. Every semester in school, I told myself that this would finally be the semester when I actually, like, did the whole student thing properly and took notes and kept up with the reading and… every semester, that did not happen past the third class, nope. I have the spiral-bound notebooks with two pages of dated notes and another page of undated doodles to prove it.
One of the more jarring transitions from college/analyst life to being a portfolio manager was realizing that I could no longer skate by on doing work in a caffeine-and-sugar-aided-spurt at the last minute before the deadline, because there are no deadlines, and because (at least if you invest the way I do), you need to follow a methodical and consistent research process to generate a large-enough pool of potentially actionable investment candidates down the line.
That is to say: if, for whatever reason, you slack off on research today, the detrimental effects usually show up in future periods, creating a challenge because of the meaningful asynchronicity of payoffs with a lack of clear natural interim steps or milestones. Jim Roumell, who is unusually transparent and thoughtful (both publicly and privately) about his experiences, cleverly and succinctly summarized this in a recent podcast interview with John Mihaljevic (quoted portion starts around 9:20). Note: Jim’s comments have been summarized/paraphrased for clarity.
- [In 2013], we were spending a lot of time (on non-investing activities)… the first year, things were going fine, but that’s really kind of older stuff maturing. When we really started getting into 2014, a lot of the seeds that normally would have been planted in 2013 – candidly, they weren’t, because there was so much time spent [on marketing] – it happens, it’s very insidious, it just begins to happen slowly, and in retrospect, [I didn’t notice it] – so ’14 was a wake-up call, and I think by mid-’15… [we] decided we had to get back to our knitting and we had made a mistake… things have gone very well [in the 18 months] since that decision, [although] we’re cognizant that the game’s not over.
This sort of thing takes a lot of courage to admit because it’s just not said in a public domain, just like it’s not said (in front of HR / your boss) that you probably work 30% of the time and mess around on the internet the rest of the time.
The thing though is that, I think, it’s true for many of us, whether in the field of investing or elsewhere, whether the bogey-man is too much time spent on marketing, or too much time spent on consuming content that has the sheen of work (say, reading the news or watching stock prices) but has no payoff whatsoever, or simple god-I-don’t-want-to-wake-up-and-spend-all-day-working-on-yet-another-company-that’s-30-percent-frickin’-overvalued.
That latter bucket, that’s my on-and-off problem: midway through 2017, even moreso than during a 2016 most value investors found challenging, ideas are hard to come by. Most things that are metrics-cheap have way too much obvious hair on them (what no I don’t want a 5x levered balance sheet in a cyclical commodity industry with massive customer concentration, thank you very much). Most things that are interesting qualitatively seem like they’re about three market corrections away from being actionable – and as much fun as it can sometimes be to learn about interesting little niches, a lot of the joy is taken away when the briefest possible look at the financials suggests that there’s fairly low real near-term likelihood of the stock hitting my required discount to “fair value” without some sort of meaningful fundamental degradation.
The reason I really liked Jim’s phrasing is his usage of “insidious” and “slow” because they describe, totally exactly, how I feel. It’s usually not a bright-line on/off switch from “I am gonna get lots of work done today” to “huh, I wonder if my tomatoes have grown any bigger since I checked on them five minutes ago… or if there’s any new articles about the Cowboys’ voluntary OTAs.” It’s more a gradual progression from research firing on all cylinders to a project that should take one day dragging out into two or three because… what’s the hurry, it’s not like the stock is going to run away from me if I don’t figure this out by Tuesday. Why not just put it on the burner until next week? And do I really need to set up an IR call this month? I might as well do it in February. Of 2037. Because we all know the stock won’t get cheap enough until a few decades after that.
Exaggeration aside, the challenge, of course, is that with the sort of research process that I have, the first dopamine hit (i.e. getting to buy the stock at an attractive valuation) usually occurs so long after the work that led to it, that it’s wholly useless for motivational purposes. And when things actually hit the fan (ex. Feb 2016 or pre-election 2016) and there are a lot of opportunities, you can’t possibly do enough “cramming” then to make up for time lost. So, what can I do to make sure I stay on track?
Tangible Action Items (Or, At Least, Things That Have Helped Me)
1. Focus on “lead measures” vs. “lag measures” and gamify them
yes yes, this post is mostly a shameless Franklin Covey (FC) plug (disclosure: long, in case you had forgotten). No but seriously, part of my attraction to the company is that this stuff works. To summarize The Four Disciplines of Execution (4DX) in such a traumatically botched way that mgmt will stop taking my calls if they ever notice this blog post, you can think about your business (or your life) in terms of “lead measures” or “lag measures.” Lag measures have more direct correlation to what you actually want, but are usually too late to modify directly – i.e., revenues or profits could be viewed as a lag measure, and if you want more of them today, you are gonna need a time machine to go back to a few months ago, or maybe even farther. The “lead measure” might be something like warm leads, or new product development, or whatever, but basically it’s something that will lead directly to your desired lag measure, but is actually modifiable in real time
So for productivity purposes, it’s important to determine quantitative, trackable, measurable “lead measures.” In my case, I’ve settled on a pretty simple one: “pages of research.” I target 20 pages per week, which is really just a psychological gambit for a true goal of 25 pages per week, but I tend to do better personally when I feel like I’m on top of things than when I feel like I’m behind (with a lower goal, I get to feel like I’m winning more of the time.)
Research pages are defined as anything ranging from my own written research on new companies, to earnings reviews of portfolio companies or updates on other companies I follow, to notes from IR or management calls that I make. This would not be a robust goal with a large team because there are plenty of ways to game this – I could do a lot of “research” that’s useless and unproductive, or I could just stuff research reports with lots of block quotes and charts and graphs and such. However, since it’s just me and I trust my ability to not do stupid stuff like that for the sake of “winning the game,” it works.
What is the correlation? Well, my investment process is, vaguely, A) research companies, B) follow them over time, C) eventually, statistics dictate that some of them will become cheap enough to buy, and I’ll know a lot about them already, making the go/no-go decision easier/faster and leaving more time for thought and further due diligence. (I’ve discussed previously why I shy away from the quantitative-heavy, screener/metrics-focused, cheap-now approach that many investors utilize – briefly, behavioral bias.)
Given this process, if I (arbitrarily) assume that half of my work is on new companies and half is on existing companies, and the average report is 10 pages, and that in any given year, 5% of companies on my list will be actionable at my 20% IRR hurdle, then adding 40-50 to my database should result in two or three brand spanking new ideas per year, with the existing database of course hopefully adding more (I don’t need many given concentration – 4-5-6/yr should theoretically be sufficient). In practice these numbers are probably B.S., but I tried to at least make them reasonably directional B.S. – to the extent that if I hit the guidelines, I should be “planting enough seeds” so to speak.
Are these guidelines perfect? No, of course not – but they are certainly, directionally speaking, a helluva lot better than what I was doing previously (no specific goal, just doing what I felt like). My next step is to extend this beyond research to big-picture reading / personal development stuff as well – which even moreso than research is one of those “payoff isn’t always immediate” things that is easy to put on the backburner when you have other stuff going on.
2. Pacing? Screw pacing.
alright so I’m gonna go ahead and blow up everything I just said – yes, it’s great to have something to keep you on track; it helps me a lot and I swear by it. but at the same time, I think one of the core advantages to being on your own vs. working for someone else is you don’t have to conform to the stupid social norm of sitting at your desk for a fixed number of hours regardless of the actual amount of work to be done (or whether you are working).
I don’t think my experiences quite rise to the rigorousness of precisely-tracked, sensor-driven A/B testing that some people employ, but in the ~18 months I’ve been solo, I’ve tried a lot of things – sitting desks, standing desks; working 7 days a week, working 4 days a week; going at a blistering pace for as long as I can, trying to measure my pace; etc.
What I’ve found (and this is really just personal, not intended to be used as a mantra) is that my productivity comes in waves – I will have weeks/months where I slice through my targets like they’re a block of Kerrygold butter that’s been sitting on the counter for hours; there are other days where I feel like I’ve struggled for hours to read a single risk factors section. I’m a big fan of working for myself rather than against myself, mainly because doing the latter tends to lead to a) burnout and b) emotional guilt for being unproductive, which prolongs the unproductive state and so on.
This is, really, how I’ve always been – I’m an (amateur) novelist and some of the “classic” advice given to aspiring writers is “butt in chair” – which means what you think it does; i.e. sit down every day and write no matter how you’re feeling.
Yeah, that’s not me – I will go months, years even, without writing anything of meaningful heft, then will almost pretty much spontaneously write an entire novel in an unimaginably short period of time (my record is four days for a ~58K word novel, but usually we’re talking more like a few weeks or months). For some people, slow and steady may win the race – but personally, when I hit the gym and am feeling it, I need to take advantage of it and not worry about spending the extra half hour or hour there to do extra sets, because there will be an equal number of days where things just aren’t going my way.
It’s important to note that this isn’t, or shouldn’t be, an excuse to just chicken out when things aren’t going perfectly. But at the same time, systems should have some embedded level of flexibility to account for the fact that we’re not perfectly consistent machines. This is part of the reason I chose a weekly goal – while I certainly still have some weeks that are cake and some that are a struggle, I find that having a daily goal is actually much harder because my productivity varies far more on a day-to-day basis than on a week-to-week basis.
3. Please!!! You’re my ACCOUNTABILI-BUDDY!!! How will this make me look???
One of the most powerful but underutilized productivity tools is simply the social-proof element of accountability to a standard (Franklin Covey’s 4DX uses this as well). Malicious and antiquated (I’m sorry, I meant misinformed and… antiquated) HR managers use this as an excuse to deny work-from-home flexibility, and I would buy the logic if modern offices weren’t a terribly inefficient work environment and people were actually productive at work.
Nonetheless, everyone’s heard the story about the eyes (or vaguely eye-shaped objects) above the communal coffee money pool (which really we need a new anecdote – isn’t free coffee a standard perk now? – I digress). When you’re being watched, you’re more likely to do what you’re supposed to; this is the whole concept behind Weight Watchers (was the phrasing intentional?)
I think this is a valuable tool not just for solo entrepreneurs like myself, but even for people working in large corporate environments where things can get lost in the shuffle and it’s easy enough to just “coast.” If there’s no natural oversight mechanism, find someone you trust and become accountabili-buddies. Sharing research with Zeke has actually, unintentionally, had the side effect of incentivizing me to produce more research – because I don’t want to have to answer “uhhh, nothing” when he asks what I’ve been up to this week.
If personal productivity were easy or automatic, it wouldn’t be a multi-billion dollar industry and the seeming holy grail for smart people (alongside happiness / contentment / enlightenment / whatever you want to call it). So yeah, it’s hard. But not impossible. And I’m not yet wholly where I want to be, but I’m farther along than where I was.
I’ve previously referenced my belief that heuristics – i.e., any mental shortcuts such as frameworks, mnemonics, or otherwise – are neither inherently bad nor inherently good; they’re just a rational response to a world which has too much information for us to possibly analyze our way to a solution from first principles every time.
Most of the time, heuristics work quite well; situations when they fail to work include:
- when circumstances deviate abruptly from what you are used to – for example, when you deplane in a foreign country and your habitual “left right left” traffic checking at crosswalks must reverse to “right left right.” The good news is that in most instances, the salience of the different circumstances is sufficient to trigger reevaluation of your heuristics.
- more insidiously, when circumstances change slowly over time. examples: career advice from someone who grew up in an era when the path to prosperity was working 30 years straight for one employer, or traditional colocated 9-to-5 work schedules in the era of Slack and Google Hangouts.
Hey, That Hurts!
I was recently reminded of the danger of (2) by an old nemesis of mine: neck pain. For a few years now, I’ve had on-and-off mostly-psychosomatic pain/tension in the muscles of my left shoulder and left side of my neck, which can range from mildly annoying/uncomfortable to severe enough that it’s hard to focus on anything else.
Over time, via trial and error more than anything else, I figured out causes and solutions. It turns out that in my case, rubbing and stretching where it hurt only served to make the problem worse; eventually I traced the problem to my tendency to hunch my shoulders (which could be alleviated by positioning my keyboard differently and trying to spend less time sitting at my desk when I’m not working), and my tendency to slouch to one side (which I have to watch for, and can combat via stretching my hip flexors, quads, and adductors of my left leg.) Weirdly, applying fairly intense pressure to certain spots on my biceps/triceps above my elbow also relieves the tension.
That proved to be a useful heuristic for quite a while: neck hurts? –> leg stretches and kneading + push on certain points in my left arm until my fingers are sore . Feel better in 30 minutes. Being able to identify (and preempt) the symptoms made things a lot easier.
But over the past few weeks, the pain had been returning with increasing intensity and duration despite a relatively low level of stress and desk hours (the normal causal/proportionate predictors of neck pain). My usual heuristics were failing me – the muscles from my left knee to my left hip have actually gotten to the point where they’re pretty loose/pliable – and while they hurt when I worked on them, my miracle cure for neck pain was no longer working. An online recommendation of using a tennis ball as a targeted foamroller did help, but I could tell it was more of a palliative than a cure – a bit like popping an Advil, it made it hurt less for a while, but wasn’t solving whatever the underlying issue was.
As with many problems, the solution was born of desperation – if every muscle in my body is as loose as it can be, then there shouldn’t be any cause for this pain.
In the process of attempting to loosen every muscle in my body, I discovered that my calf was tight beyond all belief. This was a surprise to me because I’ve never really had calf pain – I’ve had shin pain sometimes while running, but other than typical post-workout soreness, my calves have never been a pain point. But my left calf took almost a week of stretching, foamrolling, and vigorous massage to untense. I started feeling better almost immediately – clearly, even though they weren’t explicitly hurting, the tightness in my calves was pulling the rest of my muscle chain out of alignment.
When Circumstances Change, Heuristics Fail
So what changed? After thinking about it, I realized that a couple months ago, I finally decided to get a little more serious about cardio and have been doing (lamesauce and unremarkable) intervals on the treadmill. Quick Googling revealed that a lot of runners suffer from tight calves. I haven’t exactly been doing a lot of running in the absolute sense ($100 to anyone who ever sees me in a marathon – ain’t gonna happen), but it’s definitely a lot more than I ever have done (i.e., nothing meaningful.)
How are my mundane faulty biomechanics relevant to investing and mental models? Well, the idea is that I developed a heuristic to solve a problem, and then the underlying cause of that problem shifted somewhat, and my heuristic broke. This was a relatively trivial problem (tight calves) with clear feedback as to whether the old/new heuristics were still working (neck pain or lack thereof), but: in the context of currently reading Thomas Kuhn’s The Structure of Scientific Revolutions, it got me thinking: in the whole process of building up mental models and heuristics, how do you ensure that the world hasn’t shifted under your feet? And how do you deal with it if it has? What happens when you’re forced to pull out a foundational Jenga block supporting the pillars of your intellectual life?
It’s a question with meaningful implications even beyond investing; I’m at the age where a lot of my friends are finding or losing (mostly losing) the religion or ideology they grew up with, and the process of rebuilding a sense of identity or self around a missing pillar that’s supported you forever… well, let’s just say it’s non-trivial.
Investing Application: Value Investing Is Dead… Long Live Value Investing?
In terms of investing, reading two dozen investor biographies as a young beginning investor had the opposite effect on me, I think, than it was supposed to (if the people defining “supposed to” are the in-crowd) – rather than coming away with a sense of awe and veneration for many of the successful investors of past decades, I came away with a belief that while they laid the intellectual foundation, we (i.e. modern value investors) have far surpassed it. It’s a bit like athletes, really – I imagine an “All-Pro” NFL team from the 1970s would be decimated by today’s Cleveland Browns. Players today are simply bigger, stronger, faster, and better-coached. Absolute skill has never been higher… but relative skill has never been lower.
And this is a problem: many investment approaches, for example, succeeded not because of the brilliance of the approach or its proponents, but simply because they were good-enough for an environment with far less competition from both humans and technology, and far less awareness of fundamental investment principles; not all that long ago, compelling investment ideas were as common as raindrops in Seattle.
That isn’t the case today, and while there are certainly cyclical elements, there’s also the undeniable structural element of more people than ever competing in this business with better intellectual frameworks and superior technology. Out of self-preservation, proponents of strategies that are no longer working, rather than admitting they’re broken and doing the heavy lifting to find something more workable, turn to mystical explanations of why things will “go back to normal” soon – citing the wildly misunderstood concept of “mean reversion” or faulty statistics like CAPE ratios or whatever – i.e., it always has been this way and so it always will – while refusing to acknowledge structural changes in the world. (Buffett, for his part, continues to buck the trend – having abandoned his long-standing heuristics of “no technology” and “no airlines” – I am not a noted Buffett acolyte but I do have to give him credit for being more adaptable than most…)
Scaffolding: Not Pretty, But Necessary
One clear takeaway is that in the process of building frameworks, it’s important not to assume that once a heuristic is in place, it’s set in stone; the pyramid of knowledge should be viewed more like a constant work in progress, like the skyline of New York City, with scaffolding erected every so often in different parts to allow maintenance to be done on what already exists.
What’s the optimal frequency and depth of such re-checking? I don’t know. That’s a hard question to answer. Models built on bedrock principles that are unlikely to change rapidly (gravity, for example, or human nature) probably don’t need to be reevaluated terribly often. On the other hand, models built on principles that tend to be rather mutable (technology, or human culture) should likely be reassessed more frequently, in some sort of proportion to the underlying rate of change.
But this process needs to be explicitly incorporated, on some sort of basis, because otherwise you risk the same frameworks that have served you well for so long becoming calcified and hindering rather than assisting you in your path toward excess returns (or world hegemony, or whatever.) The unfortunate challenge is that in the real world, feedback is not nearly as clear or immediate as neck pain: you don’t always know, moment to moment, whether what you’re doing is (sub-)optimal; when there are multiple confounding factors and payoffs are long-term rather than immediate, it can be hard to notice/know what’s going on.
Maybe this isn’t wholly original. I dunno. But I thought to mention it because while I see a dozen and one mentions a month of building mental models, I see very few about reevaluating ones that are already built… and of course, incremental competitive advantage can only be achieved by doing something different than what everyone else is doing.