When I first started my working journey I was all about the numbers. To be fair I probably still am.
I spend a few years working in a firm of Actuaries in the investment field. These guys were off the charts smart. Everything could be expressed in a formula, if it couldn’t then well it didn’t matter and was met with suspicion. I was surrounded by spreadsheets and measurement. It was fun and I enjoyed it.
We were doing analytics on fund manager performance and market performance and writing code in Visual basic when visual Basic was a thing.
And this journey has always stuck with me. Writing mechanical trading systems, back testing, building DCF’s with utmost precision it was the natural progression and there was safety in numbers.
Maslow’s Hammer, which is often a quote Munger gives about when a man only has a hammer everything looks like a nail. My hammer is the precision of the number sorting it out on the spreadsheet and I have been banging away on it for years. The numbers solve all the problems and the rest will take care of itself.
Selling because it’s expensive has been the often result of the hammer. With success and without.
The more I study past trades it is selling when things get expensive based on the number is a lot less relevant of a criterion. If you have done the work and I mean the real work to understand the business, the time to sell is when you have made a mistake or when the drivers of the business have altered the unit economics of the business.
I know this sounds obvious to a qualitative guy but for us numbers guys this is something I have to work on.
Flagging oneself to the value philosophy is something that has also been a handbrake. Value is anything that trades at a discount to what you think the cashlows of the business will be. Nothing says it has to be a low PE. I understand value as a factor but I want to be looking for any value and not restrict my universe to a screen.
The siren song of buying value of 50c on the $1 is alluring and it makes sense. But a lot of these cases where you can find them, the businesses are in such a way or state that you can only double your money, the asset will never trade much greater than $1. In the disaster scenario the investment goes to zero. Nothing wrong with that.
But if you are buying value in great businesses the rewards are better than closing the gap on NTA. Good companies run by good management tend to surprise you with what they can do and achieve. Bad management still surprises me with how bad they can be.
Rob Vinall an investor out of Switzerland summed it up recently in recent memo on his 10 years of running a value fund when talking about value investing:
Although the discount to liquidation value had disappeared in virtually all cases, the dispersion in investment outcomes was huge. Where the company had little in the way of a viable business model, the share price only converged, could only converge, to the net asset value. Where the company had a decent business, the share price expanded significantly beyond the asset value. As operating earnings recovered, the market attached a value to the operating business in addition to the net cash. In the former case the companies’ share prices rarely did better than double and it one case, sadly, end up at zero as it turned out that the company in question had overstated the value of its inventory. In the latter case, the companies’ share prices went up many times over.
For me the challenge will be always be that numbers do not always tell the real story.
The reason I am writing this is I am a recovering quant and I will always be. I need to make sure that I use the old trick of commitment consistency bias and write it down, that way I am more likely to commit to being a less of a quant guy.