Excellent Interview. 5 minute read.

[Laxputs]

https://sumzero.com/headlines/telecom/GLN:CN/280-the-buyside-fireside-exploiting-opportunities-in-canadian-small-caps

 

Small caps. Predictable cash flows. Investment process. Worth a read.

[Guest MarkS]

I liked the interview. His comment about cyclical industries being too hard struck home. Thanks.

[Guest notorious546]

Thanks!

[valueinvestingideas]

great read. Great answer below, couldn't write it any better.

 

SumZero: What advice would you give to someone interested in pursuing investing?

Torin Eastburn, Monte Sol Capital: Read The Intelligent Investor. Then read every word Warren Buffett has ever written, starting with his partnership letters. If you lack a business education, take Level 1 of the CFA exam to learn the basics of accounting, valuation, and corporate finance.

 

Start investing as soon as possible. Lose money quickly so that you can experience first-hand the humiliation of being wrong and paying a monetary penalty for your stupidity. Never, ever forget that feeling.

 

Keep reading and investing. Read everything. Each moment you spend not reading, you lose ground to your competitors who are reading. Undertake a lot of deliberate practice by making actual investments and putting your theses down in writing, even if you’re the only person who ends up reading them. You can’t just buy XYZ because you think to yourself, “this seems cheap”. That is not investing. You must have concrete reasons for believing that your differentiated view is the correct view. You must be able to explain those reasons clearly to yourself and to others. You must have a strong understanding of the unit economics of the business, and a well-reasoned opinion about how they will change in the future. You must know how the private market values businesses in the industry where you’re investing.

 

Nobody will be good right off the bat. Investing is hard. By definition you are unlikely to beat the market. You stand no chance at all without thousands of hours of practice. But personally I believe it is possible to consistently outperform provided that you have a contrarian temperament and you are eager to put in the work.

[feynmanresearch]

great read. Great answer below, couldn't write it any better.

 

SumZero: What advice would you give to someone interested in pursuing investing?

Torin Eastburn, Monte Sol Capital: Read The Intelligent Investor. Then read every word Warren Buffett has ever written, starting with his partnership letters. If you lack a business education, take Level 1 of the CFA exam to learn the basics of accounting, valuation, and corporate finance.

 

Start investing as soon as possible. Lose money quickly so that you can experience first-hand the humiliation of being wrong and paying a monetary penalty for your stupidity. Never, ever forget that feeling.

 

Keep reading and investing. Read everything. Each moment you spend not reading, you lose ground to your competitors who are reading. Undertake a lot of deliberate practice by making actual investments and putting your theses down in writing, even if you’re the only person who ends up reading them. You can’t just buy XYZ because you think to yourself, “this seems cheap”. That is not investing. You must have concrete reasons for believing that your differentiated view is the correct view. You must be able to explain those reasons clearly to yourself and to others. You must have a strong understanding of the unit economics of the business, and a well-reasoned opinion about how they will change in the future. You must know how the private market values businesses in the industry where you’re investing.

 

Nobody will be good right off the bat. Investing is hard. By definition you are unlikely to beat the market. You stand no chance at all without thousands of hours of practice. But personally I believe it is possible to consistently outperform provided that you have a contrarian temperament and you are eager to put in the work.

 

I don't know. This sounds pretty ridiculous to me. Humiliated for picking a losing stock? That's completely absurd & irrational. That whole section of the interview comes off as pretty pretentious. I don't think there's any risk of "forgetting the feeling" of losing money in a stock considering no one bats a thousand in this business. My worst picks have been down 80%, my best up 500%+. The individual gains and losses don't mean much; it's what they create in aggregate that counts. Just like a painting is more than just the individual strokes used to create it, so is a portfolio more than the individual winners and losers used to generate its returns.

 

The weighting, timing, magnitude, all these things matter. If you had two stocks allocated 50% each, would you rather have a situation where one went to zero and one went up 10x, or would you rather have each one go up by 10% to avoid the "humiliation" at having been wrong about one?

 

And, just a pet peeve of mine, I hate the concept of having a "differentiated" thesis, variant view or whatever you want to call it. Why? Because it's marketing bullshit that suits use to come across as more insightful than they are. "The market thinks this, but I think that opinion is wrong," conjuring straw men to tear down to make the thesis sound better. When really, you have no clue what every other market participant thinks or if your perspective is truly unique.

 

You can find out what sort of expectations are priced in but not the reasons for those expectations. If you say you can, and then craft some sort of story or narrative for your pitch based on that, you're not really performing analysis. You're marketing. There's nothing wrong with marketing, it's almost a necessary part of business development. But it's important to be aware of the difference when you're reading content that is even somewhat commercial in nature.

 

One last thing, reading can be important but reading everything really isn't necessary. Most content is entirely useless and detracts value. Good for this guy for being successful with his style; seems like a smart dude. Personally? I've found that by cutting out extremely thorough research, my quality of life has gone up and my returns are still pretty good. It's very easy to talk yourself out of a good idea or overthink a problem. More often, the keys to whether an investment pays off are few. I've found focusing on the few things that really matter for each company does the vast majority of the heavy lifting.

 

It is possible for one business to consistently outperform another even without having a structural competitive advantage. Despite all the talk about huge moats at Coca-Cola and American Express and See’s Candy and so on, Berkshire Hathaway’s largest holding by far is Wells Fargo, a bank. Banking is a commodity service and a simple business. The customer deposits money and then later on withdraws it. In the meantime the bank lends that money. That’s it.

 

This is just weird, IMO. Wells Fargo certainly has structural advantages over many other banks and does have something of a moat. Not the world's strongest one, but nothing to sneeze at.

 

I mostly agree with the rest of his comments, but these in particular really stuck out to me. Maybe I'm being too nitpicky, most of this was pretty good.

 

His comment about Wells Fargo was definitely strange. Banking is more complicated than that- if Wells Fargo didn't have an edge, then Buffett most likely would have not invested in it. If his argument holds true, any bank is a strong candidate to invest in, and we all know how  that turned out in the recent past

[Rainforesthiker]

"And, just a pet peeve of mine, I hate the concept of having a "differentiated" thesis, variant view or whatever you want to call it. Why? Because it's marketing bullshit that suits use to come across as more insightful than they are. "The market thinks this, but I think that opinion is wrong," conjuring straw men to tear down to make the thesis sound better. When really, you have no clue what every other market participant thinks or if your perspective is truly unique. "

 

I could not disagree with you more.  IMO, understanding WHY the market is getting it wrong - why the wisdom of the crowd is not manifesting in the stock price - is hugely important.  The vast majority of times the reason the market is getting it wrong is due to some combination of behavioral biases (such as problems with uncertainty) combined with herd mentality.  I believe it is quite helpful to understand what uncertainty / pessimism is affecting the market on a particular stock.  This will:  1) help you identify good investments; and 2) give you more confidence in going against the crowd.

[ScottHall]

"And, just a pet peeve of mine, I hate the concept of having a "differentiated" thesis, variant view or whatever you want to call it. Why? Because it's marketing bullshit that suits use to come across as more insightful than they are. "The market thinks this, but I think that opinion is wrong," conjuring straw men to tear down to make the thesis sound better. When really, you have no clue what every other market participant thinks or if your perspective is truly unique. "

 

I could not disagree with you more.  IMO, understanding WHY the market is getting it wrong - why the wisdom of the crowd is not manifesting in the stock price - is hugely important.  The vast majority of times the reason the market is getting it wrong is due to some combination of behavioral biases (such as problems with uncertainty) combined with herd mentality.  I believe it is quite helpful to understand what uncertainty / pessimism is affecting the market on a particular stock.  This will:  1) help you identify good investments; and 2) give you more confidence in going against the crowd.

 

That's fine. I guess there's no problem with this approach if you can read minds.

[KCLarkin]

That's fine. I guess there's no problem with this approach if you can read minds.

 

Thanks to Charlie Munger (and behavioral finance), it is easy to read minds:

 

[Rainforesthiker]

"And, just a pet peeve of mine, I hate the concept of having a "differentiated" thesis, variant view or whatever you want to call it. Why? Because it's marketing bullshit that suits use to come across as more insightful than they are. "The market thinks this, but I think that opinion is wrong," conjuring straw men to tear down to make the thesis sound better. When really, you have no clue what every other market participant thinks or if your perspective is truly unique. "

 

I could not disagree with you more.  IMO, understanding WHY the market is getting it wrong - why the wisdom of the crowd is not manifesting in the stock price - is hugely important.  The vast majority of times the reason the market is getting it wrong is due to some combination of behavioral biases (such as problems with uncertainty) combined with herd mentality.  I believe it is quite helpful to understand what uncertainty / pessimism is affecting the market on a particular stock.  This will:  1) help you identify good investments; and 2) give you more confidence in going against the crowd.

 

That's fine. I guess there's no problem with this approach if you can read minds.

 

No need to read minds.  You just need to understand human behavior - how people think and behave, and their various cognitive and behavioral flaws and biases, esp. how they behave in crowds.  This should be part of every serious value investor's toolkit.  Without it, you are the proverbial one legged man . . .

http://www.amazon.com/Inefficient-Market-Theory-Investment-Foolishness-ebook/dp/B00MMV5V3Q

 

 

[KCLarkin]

No need to read minds.  You just need to understand human behavior - how people think and behave, and their various cognitive and behavioral flaws and biases

 

Plus institutional biases which limit how professionals can behave.

[Rainforesthiker]

No need to read minds.  You just need to understand human behavior - how people think and behave, and their various cognitive and behavioral flaws and biases

 

Plus institutional biases which limit how professionals can behave.

 

Yep.

[ScottHall]

"And, just a pet peeve of mine, I hate the concept of having a "differentiated" thesis, variant view or whatever you want to call it. Why? Because it's marketing bullshit that suits use to come across as more insightful than they are. "The market thinks this, but I think that opinion is wrong," conjuring straw men to tear down to make the thesis sound better. When really, you have no clue what every other market participant thinks or if your perspective is truly unique. "

 

I could not disagree with you more.  IMO, understanding WHY the market is getting it wrong - why the wisdom of the crowd is not manifesting in the stock price - is hugely important.  The vast majority of times the reason the market is getting it wrong is due to some combination of behavioral biases (such as problems with uncertainty) combined with herd mentality.  I believe it is quite helpful to understand what uncertainty / pessimism is affecting the market on a particular stock.  This will:  1) help you identify good investments; and 2) give you more confidence in going against the crowd.

 

That's fine. I guess there's no problem with this approach if you can read minds.

 

No need to read minds.  You just need to understand human behavior - how people think and behave, and their various cognitive and behavioral flaws and biases, esp. how they behave in crowds.  This should be part of every serious value investor's toolkit.  Without it, you are the proverbial one legged man . . .

http://www.amazon.com/Inefficient-Market-Theory-Investment-Foolishness-ebook/dp/B00MMV5V3Q

 

Charlie Munger's approach is great, but it's very general and really isn't that useful for finding out what your "variant perception" about a business is. Institutional biases that limit how professionals can behave is also not a variant perception about a business, but can impact pricing of certain securities. There's a pretty big difference between the two.

[Jurgis]

I partially agree with ScottHall, perhaps because I am not a great value investor. ;)

 

IMHO having a "variant perception" is incredibly hard. If you guys can do it, you're geniuses and you deserve your outperformance. Power to you.

 

But overall, knowing what market is really expecting from the company, having a different expectations, being one of few people having such different expectations and being right - this is very very hard.

 

It is probably easier to find a great company and invest in it without having a "variant perception" on it. Anyone who bought MSFT or even BRK X years ago did not have to have "variant perception". They just needed to buy and hold.

 

I also agree with ScottHall that a lot of "variant perception" theses sound like a sales pitch for the person instead of a real investment. "Look how great I am, nobody else knows this, but I do". Present company excluded perhaps. ;)

[Hielko]

It is probably easier to find a great company and invest in it without having a "variant perception" on it. Anyone who bought MSFT or even BRK X years ago did not have to have "variant perception". They just needed to buy and hold.

And what would have been their reason for buying those stocks? Why wouldn't they just buy the S&P index? So, apparently they do think that they have a variant perception.

[Jurgis]

It is probably easier to find a great company and invest in it without having a "variant perception" on it. Anyone who bought MSFT or even BRK X years ago did not have to have "variant perception". They just needed to buy and hold.

And what would have been their reason for buying those stocks? Why wouldn't they just buy the S&P index? So, apparently they do think that they have a variant perception.

 

If you call every buy decision having "variant perception" then this phrase becomes meaningless.

[Hielko]

It is probably easier to find a great company and invest in it without having a "variant perception" on it. Anyone who bought MSFT or even BRK X years ago did not have to have "variant perception". They just needed to buy and hold.

And what would have been their reason for buying those stocks? Why wouldn't they just buy the S&P index? So, apparently they do think that they have a variant perception.

 

If you call every buy decision having "variant perception" then this phrase becomes meaningless.

I think it is a largely meaningless phrase for everybody who tries to outperform the market, but the good thing I guess is that it forces you to look at a stock from two sides. You have to make it explicit where you think your edge is.

[KCLarkin]

It is probably easier to find a great company and invest in it without having a "variant perception" on it. Anyone who bought MSFT or even BRK X years ago did not have to have "variant perception". They just needed to buy and hold.

 

Read Munger on the pari-mutuel system or Howard Marks on 2nd Level thinking. Finding a great company is not enough.

 

 

[Jurgis]

It is probably easier to find a great company and invest in it without having a "variant perception" on it. Anyone who bought MSFT or even BRK X years ago did not have to have "variant perception". They just needed to buy and hold.

 

Read Munger on the pari-mutuel system or Howard Marks on 2nd Level thinking. Finding a great company is not enough.

 

OK. It's not enough (actually, it is enough if you bought BRK 20 years ago and held, but I won't argue with you). I said so much above. If you are genius and can do "variant perception", great.

 

Edit: reading Munger and Howard Marks in no way guarantees that someone will suddenly be able to do "variant perception" on their investments BTW.

 

Should the rest of us just slit our wrists and buy index funds?

 

Actually I'll add couple more edits:

 

1. Even someone who bought BRK at the top of past peaks, did really well. So not much for pari-mutuel comment from Munger, although he is definitely right short term and for some companies he's right long term.

2. Most people buy stocks all time (DCA) and not at single moment, so they can get great companies at variety of prices, some better some worse.

3. Buying great company at low(ish) price is not "variant perception". It's just valuation.

 

WTH is "variant perception" anyway? I'm gonna partially agree with Hielko that it's mostly meaningless phrase. Can you give examples? Mike Burry and CDSs? (even he was not alone in that perception, so is it really "variant")? Berkowitz and AIG/SHLD/Fannie? Are these really "variant" either? Ackman and HLF? Or Icahn and HLF? ;)

 

If I bought AAPL in 2013, was that "variant perception"? Valuation? Both? Neither?

 

 

[feynmanresearch]

It is probably easier to find a great company and invest in it without having a "variant perception" on it. Anyone who bought MSFT or even BRK X years ago did not have to have "variant perception". They just needed to buy and hold.

 

Read Munger on the pari-mutuel system or Howard Marks on 2nd Level thinking. Finding a great company is not enough.

 

This. It's not enough to just buy a very good to great company- one must buy it when its undervalued, which often times happens during times of financial distress such as an overall macro crisis or temporary unjust judgement of companys prospects which is not likely to be permanent over the long-term. In short,being an contrarian is often a must if one is looking for consistent, long-term outperformance.

 

Another ways to achieve outperformance would be to detect great companies before the market recognizes them or bet on the direction of the moves of the overall market( I don't think anyone could do this consistently, time after time). Nothing wrong's with buying good to great companies and let them grow, but if you want to manage OPM, its a must that you deliver alpha. For a personal portfolio, I don't see anything wrong if an investor just bought good to great companies and held them for years

 

 

[feynmanresearch]

It is probably easier to find a great company and invest in it without having a "variant perception" on it. Anyone who bought MSFT or even BRK X years ago did not have to have "variant perception". They just needed to buy and hold.

 

Read Munger on the pari-mutuel system or Howard Marks on 2nd Level thinking. Finding a great company is not enough.

 

OK. It's not enough (actually, it is enough if you bought BRK 20 years ago and held, but I won't argue with you). I said so much above. If you are genius and can do "variant perception", great.

 

Edit: reading Munger and Howard Marks in no way guarantees that someone will suddenly be able to do "variant perception" on their investments BTW.

 

Should the rest of us just slit our wrists and buy index funds?

 

Actually I'll add couple more edits:

 

1. Even someone who bought BRK at the top of past peaks, did really well. So not much for pari-mutuel comment from Munger, although he is definitely right short term and for some companies he's right long term.

2. Most people buy stocks all time (DCA) and not at single moment, so they can get great companies at variety of prices, some better some worse.

3. Buying great company at low(ish) price is not "variant perception". It's just valuation.

 

WTH is "variant perception" anyway? I'm gonna partially agree with Hielko that it's mostly meaningless phrase. Can you give examples? Mike Burry and CDSs? (even he was not alone in that perception, so is it really "variant")? Berkowitz and AIG/SHLD/Fannie? Are these really "variant" either? Ackman and HLF? Or Icahn and HLF? ;)

 

If I bought AAPL in 2013, was that "variant perception"? Valuation? Both? Neither?

 

A case of variant perception would be Cheniere Energy( LNG). Carl Icahn and Seth Clarman both have sizable stakes in it, but for the life of me, I can't figure out what they see in that company

[Hielko]

OK. It's not enough (actually, it is enough if you bought BRK 20 years ago and held, but I won't argue with you).

That's called being lucky.

[Jurgis]

A case of variant perception would be Cheniere Energy( LNG). Carl Icahn and Seth Clarman both have sizable stakes in it, but for the life of me, I can't figure out what they see in that company

 

OK. Let's take that as an example. How many positions in your portfolio are such that most people will either not understand why you hold the position or will think that you are wrong (crazy, etc.)?

 

I'm not putting you personally on the spot, this is a question to everyone on this thread.

 

Let me make it even easier: what percentage of your portfolio is in positions where you believe to have "variant perception"?

 

For me personally, the number is 0%. Actually, it's probably negative: I have couple positions where I am pretty sure the market is right and I am wrong, so those would count as negative "variant perception". ;)

[Jurgis]

OK. It's not enough (actually, it is enough if you bought BRK 20 years ago and held, but I won't argue with you).

That's called being lucky.

 

Not necessarily. I was there. I could have done that. It was not a difficult choice. Instead I decided that I have "variant perception" and invested in other things... for worse results. ;)

[KCLarkin]

I'm not here to defend the term "variant perception". I think it is an awful phrase.

 

A great example is Netflix. Someone buying in 2012 was clearly going against the consensus. Someone buying today is clearly going with the consensus. Netflix might still outperform but it was a much better bet in 2012.

 

And you might just call this value investing, but then look at IBM. This is a great company which looks cheap. But the consensus is that it is in secular decline. If the consensus is right, this will be a mediocre investment. Knowing that it is cheap, is not sufficient.

[Jurgis]

I'm not here to defend the term "variant perception". I think it is an awful phrase.

 

A great example is Netflix. Someone buying in 2012 was clearly going against the consensus. Someone buying today is clearly going with the consensus. Netflix might still outperform but it was a much better bet in 2012.

 

And you might just call this value investing, but then look at IBM. This is a great company which looks cheap. But the consensus is that it is in secular decline. If the consensus is right, this will be a mediocre investment. Knowing that it is cheap, is not sufficient.

 

OK. :)

 

Both of the above are interesting examples.

 

NFLX was not cheap in 2012. So maybe buying it was going against consensus, maybe not. I am not sure. It worked out well, but coulda worked out badly.

Buying NFLX now - well that would be against "value investors" consensus although it would be with cheery Market consensus. :)

 

IBM - valuation wise, probably it is cheap (depends on how you look at debt and various one time items though).

Is the consensus that it will have secular decline? I am not sure. Like ScottHall said, it's hard to read Market's mind. Clearly Buffett who owns significant portion of shares does not think that. So is it a consensus of the rest of the market?

If I buy IBM, is that a ... OK, I won't use the phrase that you don't want to defend. ;)

 

I think we might be closer to agreement than we seem to be. ;)

Unless one uses a purely mechanical approach, one always adds one's "perception" to the buys or sells. Sometimes that "perception" is very different from a lot of investors. Sometimes it's not.

 

I think I am saying that investor might do well if they do company valuation and invest in situations where company is cheap and yet investor's opinion is not very different from majority of other investors.

 

ScottHall might be saying that investor might do well if they do company growth extrapolation and invest in situations where they are not very different from majority of investors. (I might be misrepresenting. That's how I read his position, sorry if I'm wrong.)

 

You are probably saying that most gains are from situations where investors do company valuation and invest in situations where company is cheap and investor's opinion is quite different from majority of investors. (Correct me if I'm wrong).

 

Of course, ultimately it's all a spectrum: some positions are likely more "variant" than others. But some investors are probably overall more "variant" than others. It's still not clear to me that the more "variant" ones do much better than less "variant" ones. E.g. I'd classify Tom Gayner as one of the less "variant" ones I think.