There is a certain beauty and corresponding reverence to the scientific method. The “problem” is that humans are using it: we are subject to biases and, most importantly, incentive systems. I highlight a Wired article about a young billionaire who has declared “a war on bad science”. His foundation’s work seeks to shed light on the instances of bad use of the scientific method, when data was perhaps ignored and corners perhaps cut. Analysts know what I am talking about: brushing away data points that seem “incoherent” with a theme, weighting independent factors disproportionately… We have all been there, no matter how hard we fight to be 100% rational and intellectually honest.
It was my birthday yesterday and I want to share a great information source with my readers: the Valor Intrínseco blog (translation: Intrinsic Value), which joins our blogroll. The blog posts are only in Portuguese, but its subject matter is Value Investing and the material they source is, 99% of the time, in English. I am more than glad to help this “competitor” out because great work always deserves praise – and because there is so much noise in the investment world, we need all the help we can get to hone in on the good stuff.
My notes on Guy Spier’s book, The Education of a Value Investor. The book is much better for beginners, but there are very interesting tidbits for experienced investors. Some of what he shared about productivity and about finding a group of people you both admire and trust so you can debate ideas with them resonated a lot with things I had been thinking about, or doing, without necessarily having an idea of where it could lead to.
Back in March 2014 we published our 4Q13 management report containing a special section discussing Proxy Advisory Firms. It was motivated by further research following a June 2013 post on Buysiders.com called “Proxy Advisory firms: use with caution”. In the original post I highlighted “the dangers of “outsourcing research” – be it in Corporate Governance, people, financials, business models, competition, whatever – and the temptation of trying to systematize/quantify an investigation that is, by nature, subjective and case by case.” In the excerpt inside I addressed this part in detail but also mentioned “the fundamental choices we should make in terms of capital allocation (be it financial or human).” We can choose how we do our research, and we should choose wisely. For us the choice is clear.
I get repetitive about the number one issue at my mind at any given time: how do I know if and when I know something? How to distinguish superficial from deep knowledge – and what to do to get from one to the other? I have posted this before and allude to it every now and then, and so does the brilliant Shane Parrish at uber-source Farnam Street Blog. His post on Richard Feynman’s famous TV special focuses on the part of truly knowing something.
As long-term investors, we are always trying to understand where the companies we cover are competition-wise. We have to try to understand for years, sometimes decades into the future, something that very well-educated, intelligent and experienced company executives, industry consultants, academics (and so on) can get oh-so-wrong, so often. All this from reading a NY Times’ article about the semi-conductor industry, whose products power so many of our beloved consumer gadgets that make the likes of Apple so rich, and what they could do to change the game – if anything. Very interesting read, especially when you consider the technology-induced pickle in which the New York Times itself is in!
These are very exciting times in Brazil – forget the protests and the soccer action, I’m talking about the current decline in Brazilian equity prices – somewhat selective, yes, but it is starting to generate interesting opportunities. In times like these we are always reminded of the power of Cash, that benevolent King, and this post about Seth Klarman’s 2010 letter has great tidbits on the subject. But I’d like to highlight a longer post called Don’t Panic.
I’ve just read a Stanford paper on the decision-making process of Proxy Advisory firms such as ISS and Glass Lewis. I will write more in-depth about this in the future, but in summary this paper highlights the dangers of “outsourcing research” – be it in Corporate Governance, people, financials, business models, competition, whatever – and the temptation of trying to systematize/quantify an investigation that is, by nature, subjective and case by case. The paper itself falls into to some of these traps.
An anonymous survey of 365 U.S. sell-side analysts confirmed many insights about that industry’s practices that should trouble the long-term, value-oriented investor (at least the ones who didn’t yet already know this). That said, it is wrong to generalize and say that all sell-side research is flawed and I explain why in the post. Ultimately, any knowledge that has not been directly earned by you, no matter the source, can’t be taken at face value.
We posted last Thursday about a long article at The Atlantic arguing that banks are increasingly “too hard to understand”. As in all bank matters, the Epicurean Dealmaker couldn’t resist writing about that article and his response is the best so far. If you haven’t read last week’s post yet, you’d do well to start with this one instead.