Brett Schafer's avatar
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"Trying too Hard" a Must Read For All Investors
This week I stumbled across a great speech from Dean Williams all the way back in 1981 titled "Trying too Hard." I think it is a must-read for any investor because I see the mistakes he highlighted happen on a daily occurrence (myself included).

Here are some of my favorite quotes from the 9-page speech:

"The second idea I am going to ask you to think about is that most of us spend a lot of our time doing something that human beings just don’t do very well. Predicting things. What earnings will be in a few years. When interest rates will peak. What inflation will be. One of the most consuming uses of our time, in fact, has been accumulating information to help us make forecasts of all those things we think we have to predict. Where’s the evidence that it works? I’ve been looking for it. Really."
My takeaway from this line? Focus on investing in stocks where you have to make as few (or as simple) predictions as possible. This includes the business and the price you pay.

"In the advance material you were sent, I noticed some words that smiled at me like the Mona Lisa: “It is generally recognized that growth stocks produce a superior risk-adjusted rate of return. However, this is only true for stocks that are expected to grow in the future, and correlations between past growth and future growth are low”. As Gomer Pyle would say, “How true, how true”. I’ve concluded this about growth stocks: There is no such thing as a growth stock. Only passing phases of growth in almost every company’s life. Phases whose beginning and end usually appear in disguise."
Focusing on whether a stock is "growth" or "value" is useless. The only two questions I need to answer are "Is it cheap enough to buy now?" and "Do I trust management?"

"Look at the best performing funds for the past ten years or more. Templeton, Twentieth Century Growth, Oppenheimer Special, and others. What did they have in common? It sure wasn’t their investment philosophies. It was that whatever their investment plans were, they had the discipline and good sense to carry them out consistently."
There are a lot of investment strategies out there. Most of them can work if you are consistent and disciplined. But many people fail to do so.

"Another problem is knowing ahead of time who is going to grow fast and who isn’t. As early as a dozen years ago Benjamin Graham said, “In our view security analysts as a whole cannot estimate the future earnings pattern of one of more growth stocks with sufficient accuracy to provide a firm basis for valuation in the majority of cases.” When your advance material said that correlations between past growth and future growth are low, it wasn’t kidding. It was referring to one of the most original pieces of research every done in our field. It was by an Englishman named Ian Little. He called it “Higgledy Piggledy Growth.” Its conclusion was, don’t expect past growth rates to give you much help in predicting future ones."

A lot of takeaways from this one, but the big one for me is that if I'm going to pay for an unprofitable growth stock, I need a huge discount vs. the returns I believe I can achieve, given the uncertainty.

"Beginner’s Mind” is a Zen concept which says that, “It is not difficult to attain enlightenment, but it is difficult to keep a beginner’s mind. In the Beginner’s mind there are many possibilities, but in the expert mind there are few.” When we think about all that has been said over the years by experts and accepted by other experts, only to be proven wrong by events, beginner’s mind seems too important to be left to beginners."

I don't think I have the expert's problem right now, seeing as I am still new to the investing game. But it is something for us all to consider: as we age, we'll tend to get stuck in our ways and not be open to new ideas. It may be impossible to defeat this instinct, but understanding that it affects you can be helpful.

"if an unintelligible communication is received from a legitimate source and if this communication claims to be in the recipient’s area of expertise, recipients might assume that they are wasting their time because they receive no useful knowledge. In terms of knowledge, they would be wasting their time. But their involvement in this activity may lead them to try to justify the time spent. Furthermore, the greater the unintelligibility, the greater the need to rationalize about the time spent (e.g., if you cannot understand a paper, it must be a high-level paper). This might be called the Dr. Fox hypothesis: An unintelligible communication from a legitimate source in the recipient’s area of expertise will increase the recipient’s rating of the author’s competence. “

Be wary of trusting an "expert" just because they are an expert. I can think of tons of examples in the investing world where this gets people into trouble.

"The final idea we talked about was that there are two ways we can try to gain an edge over the market. The one that most of us choose is to try to generate superior information. To know more than anyone else. The other choice is to be better at measuring value than others and not to care very much about what other investors think they know. To hold cheaper securities by today’s standards and to let the future speak for itself."

This last quote is the key takeaway from me. Everyone is focused on gathering so much information (on a business, the economy, what other investors think) that it has become a fool's errand. Keeping things simple and trusting what you know while remaining in your circle of competence (and not overpaying!) is all you need to do.

Have a good weekend everyone!
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