What are within your Circle of Competence? Be brutally honest.

[DooDiligence]

I'm feeling a consensus forming around "psychological & behavioral" as super important areas to develop competence in.

[muscleman]

Let me be honest. I know nothing. ...

 

... I remember there was a board member who claims to be an oil and gas expert. He lost a lot of money during the 2014 down turn. ...

 

... I think circle of competence is a dangerous term.

 

muscleman,

 

I hope that you - by my biased quoting here - can see, that this line of posting is counter productive, for the CoBF members on here. If persons active here on CoBF can't post here on CoBF about their losses, and their afterwards reasonings related to that - [without being called out on CoBF this way, like you have done here], we [us, here at CoBF] will all most likely fare less well going forward.

 

The wisdom of the losses [investing failures] are as precious as the wisdom of the gains [investing succeses].

 

- - - o 0 o - - -

 

Please, be nice.

 

 

Well... Don't blame me. The starter of this thread said he would like to see "brutally honest" posts, so I am just posting what slipped through my mind without any nice decorations. :P

 

 

 

[muscleman]

 

When I saw the subject line I chuckled a bit thinking of the Sequoia fund and how they have an analyst whose only job is to study Valeant..... and look where it got them.......  misjudgement about your own circle of competence is more damaging than a lack of circle of competence.

 

Exactly. I was gonna mention VRX for sure. So many super investors were in it just because others did.

Sequoia has an analyst that covers nothing but VRX, if I remember correctly, just like Fairholme has an analyst that just covers SHLD.

 

I am surprised that this analyst failed to see what the short sellers saw. Sometimes people can get so biased and can't face reality, just like some financial advisers are still telling their clients that they firmly believe Trump will resign or get impeached in a few months. Too much delusion.

 

 

 

 

[Read the Footnotes]

Let me be honest. I know nothing. ...

 

... I remember there was a board member who claims to be an oil and gas expert. He lost a lot of money during the 2014 down turn. ...

 

... I think circle of competence is a dangerous term.

 

muscleman,

 

I hope that you - by my biased quoting here - can see, that this line of posting is counter productive, for the CoBF members on here. If persons active here on CoBF can't post here on CoBF about their losses, and their afterwards reasonings related to that - [without being called out on CoBF this way, like you have done here], we [us, here at CoBF] will all most likely fare less well going forward.

 

The wisdom of the losses [investing failures] are as precious as the wisdom of the gains [investing succeses].

 

- - - o 0 o - - -

 

Please, be nice.

 

I'd rather not take any "wisdom" from anyone who cannot take a loss and is afraid of being called out on an online forum.

 

Munger in particular encourages us to rub our noses in it when we make mistakes and to be open and honest with people about our mistakes. That is not an easy thing to do. It is all too easy to simply to walk away from your mistakes, especially if you are an anonymous, or relatively anonymous poster on an internet forum. It would be nice if people who were bullish on VRX at $250/share would later return to post to the thread their examination of their mistakes after the crash, but that doesn't seem to happen.

 

I have many friends from the board. Some of the best investors among my friends will happily engage with you in examining where they went wrong on ideas they posted on the board, but even these extremely intellectually honest investors must feel they have better things to do than post an analysis of their mistakes to the board. Part of the reason they are good is because they manage their time well. Occasionally you will see a post regarding mistakes, but not often.

 

We need to recognize that even the best investors are likely to be wrong at least 30% of the time. The goal should be to be less wrong with time and not to lose too much money on either an absolute or relative basis when we are wrong. Anyone lacking that intellectual honesty is potentially dangerous to themselves or their investors.

 

Also, anyone who is unwilling or unable to admit they have made mistakes in the past is a danger. Personally, I think WEB has probably made many mistakes in O&G, and I would bet he would admit to that. He has probably gone outside of his circle and made mistakes in other areas too. IBM might be another recent example. The fact that I think he may have made many mistakes in O&G has nothing to do with my respect for him as a person. Hopefully we can acknowledge mistakes made by investors that moved outside of their circle of competence, without taking that as an attack on the person.

 

Regarding someone who has made misrepresentations, or tries to hide mistakes as part of misleading people with respect to their track record, that is an entirely different problem.

[mrholty]

I've been honest on here about my failures in the past.  My circle of competence (after 20 years of investing) has finally been the ability to read and walk away.

 

When I started I thought I knew it all and could figure it out.  I remember hearing about Buffets 20 great investments and I thought I got it.  After lots of losses and setbacks do I finally get it.  I minimize losses and my holding period keeps expanding.  My average holding period is almost 9 months and my biggest items in my portfolio are over 3 years. 

 

I don't do this for a living and I prefer spending time not doing this so an investment for me already has a high hurdle to keep me involved. 

 

I want an industry tailwind as I don't want good mgmt in bad industries.  No more Cigar butts for me.

I trust mgmt to do ok and I'll give them 2 bad quarters to turn it.  One the third - I'm out 100%.

I don't know how to size my positions so they all get the same size.

 

At the end of the day - I used to invest in weird small cap situations.  Once I realized that when I tell my wife about it - if she doesn't care I'm out.  If she does - I'm in.  This ability to distill the thesis into an elevator pitch has saved my ass countless times as usually I needed 3 things to go right.  Now I want one and I'll take a double.

 

[Guest Cameron]

 

When I saw the subject line I chuckled a bit thinking of the Sequoia fund and how they have an analyst whose only job is to study Valeant..... and look where it got them.......  misjudgement about your own circle of competence is more damaging than a lack of circle of competence.

 

Exactly. I was gonna mention VRX for sure. So many super investors were in it just because others did.

Sequoia has an analyst that covers nothing but VRX, if I remember correctly, just like Fairholme has an analyst that just covers SHLD.

 

I am surprised that this analyst failed to see what the short sellers saw. Sometimes people can get so biased and can't face reality, just like some financial advisers are still telling their clients that they firmly believe Trump will resign or get impeached in a few months. Too much delusion.

 

When your job is to cover Valeant it is sort of counterproductive to tell your boss that its a crap investment, you'd be out of a job.

 

Its easy not to see something when your paid to not see it.

[Read the Footnotes]

Good points.

 

Plus, after having spent years becoming an expert in a single complex situation (such as Sears or Valeant), the cognitive dissonance of saying that you have no idea or it was all a waste would be quite high.

[Uccmal]

I've been honest on here about my failures in the past.  My circle of competence (after 20 years of investing) has finally been the ability to read and walk away.

 

When I started I thought I knew it all and could figure it out.  I remember hearing about Buffets 20 great investments and I thought I got it.  After lots of losses and setbacks do I finally get it.  I minimize losses and my holding period keeps expanding.  My average holding period is almost 9 months and my biggest items in my portfolio are over 3 years. 

 

I don't do this for a living and I prefer spending time not doing this so an investment for me already has a high hurdle to keep me involved. 

 

I want an industry tailwind as I don't want good mgmt in bad industries.  No more Cigar butts for me.

I trust mgmt to do ok and I'll give them 2 bad quarters to turn it.  One the third - I'm out 100%.

I don't know how to size my positions so they all get the same size.

 

At the end of the day - I used to invest in weird small cap situations.  Once I realized that when I tell my wife about it - if she doesn't care I'm out.  If she does - I'm in.  This ability to distill the thesis into an elevator pitch has saved my ass countless times as usually I needed 3 things to go right.  Now I want one and I'll take a double.

 

Nice post.  The ability to walk away is powerful.  I did this with Aimia Prefs and Seaspan this year.  Aimia went for a loss. 

 

And the ability to explain an investment in a brief paragraph so that someone else can understand it is equally powerful. 

 

 

 

 

 

[DooDiligence]

I've read plenty of brutal honesty here & on FinTwit regarding losses & hope to see more postmortems as they give huge value to the examiner & those who read the results.

 

My half assed Express Scripts postmortem is scattered around here & Twitter & I felt wonderful after taking the loss (in a tax advantaged account no less.)

 

It was a victory of sorts, in that I could have paid a shit ton more $$$ than i did, for such a valuable learning experience (also could have paid incrementally less since that warm dog turd has since crept back up.)

 

I've gotten pretty decent at the "read & walk away" superpower & downside protection (ala MrHolty, UCCMAL & Howard Marks...)

 

The honesty & integrity I've been fortunate enough to be a part of here is refreshing & educational & if we (as a group) butt heads occasionally, that's all a part of it.

 

Thanks for participating!

[rukawa]

I don't do this for a living and I prefer spending time not doing this so an investment for me already has a high hurdle to keep me involved. 

 

Agreed. My one great realization is that I don't know what I am doing. And so my goal has been to beat the market while being a fairly ignorant and useless investor.

 

I want an industry tailwind as I don't want good mgmt in bad industries.  No more Cigar butts for me.

 

I only go with cigar butts. Since I have  no clue about industries and their tailwinds...but cigarbutts are very easy to identify. I am happy to have good or bad management in bad industries. I expect diversification and mean reversion to do the work I refuse to do.

 

I am surprised that this analyst failed to see what the short sellers saw. Sometimes people can get so biased and can't face reality, just like some financial advisers are still telling their clients that they firmly believe Trump will resign or get impeached in a few months. Too much delusion.

 

Part of the problem is trying to "make things work". I've realized that often the best solution when something is too complicated and difficult is to just walk away. But how do you do that if that is your job. Could a Sequoia analyst just say after reading Valeant:

 

"Yeah I was reading their financials but you know they were just too complicated and there were too many guesses and assumptions. Its too hard..can I just cover something easier?"

 

Would he get a promotion for that?

 

Because in my process I do that all the time and its saved me from losses.

[LC]

OK but are you an analyst by profession? If not, why do you care?

 

Here's a question: how do you define "competence"? Does it mean to have a conversation with the CEO and talk on par? What defined it

[muscleman]

Overall, I think the term "circle of competence" and "Do not lose money" are critical, but can be quite misleading.

 

These two terms together may get some investors to believe:

1. If I lose money, that means it is out of my circle of competence, which means I need to work harder and study harder.

2. If I study harder, I would gain circle of competence, I would not lose money anymore.

 

Then after another few losing trades, he would start to question his own ability, feel really frustrated, and try to study more and pause investing until he studies those subjects.

Then he would come back with more knowledge therefore higher confidence, invest again, and lose again, and feel even more frustrated than before.

 

I don't care how many other people got into this trap, but that was exactly my own experience over the past few years.

 

Now I view this business as a difference principal. Rigid and flexible.

1. I have to be rigid on my own rules for entering a position. I have to have a check list and the stock has to meet all those criterias. No exception.

2. I have to be flexible on the expectation of each trade. I may make money or I may lose money on this trade. It is just a single trade. No big deal.

 

 

What I observed and what I did in the past few years was exactly the opposite. Flexible and rigid. I was flexible in my rules for opening a position, like, Oh Ackman bought this. It must be good. Oh someone wrote a VIC thesis and they think asset value along is 2x the stock price. That looks good. And I was rigid in my expectation for making money. Like, I am following the value investing principals and there is margin of safety, so I have to be able to win on this trade. Oops it went down. It doesn't feel good, but that just means it is only a better opportunity. Maybe I should buy more? Opps it went down more. Damn! It has to bottom out right here. It will eventually bounce and go up 4x instead of my original 2x, but I am already down 50%. Opps it is even down more, and ouch, Ackman sold! OMG! What should I do tomorrow morning?  :-[

 

 

[Uccmal]

Overall, I think the term "circle of competence" and "Do not lose money" are critical, but can be quite misleading.

 

These two terms together may get some investors to believe:

1. If I lose money, that means it is out of my circle of competence, which means I need to work harder and study harder.

2. If I study harder, I would gain circle of competence, I would not lose money anymore.

 

Then after another few losing trades, he would start to question his own ability, feel really frustrated, and try to study more and pause investing until he studies those subjects.

Then he would come back with more knowledge therefore higher confidence, invest again, and lose again, and feel even more frustrated than before.

 

I don't care how many other people got into this trap, but that was exactly my own experience over the past few years.

 

Now I view this business as a difference principal. Rigid and flexible.

1. I have to be rigid on my own rules for entering a position. I have to have a check list and the stock has to meet all those criterias. No exception.

2. I have to be flexible on the expectation of each trade. I may make money or I may lose money on this trade. It is just a single trade. No big deal.

 

 

What I observed and what I did in the past few years was exactly the opposite. Flexible and rigid. I was flexible in my rules for opening a position, like, Oh Ackman bought this. It must be good. Oh someone wrote a VIC thesis and they think asset value along is 2x the stock price. That looks good. And I was rigid in my expectation for making money. Like, I am following the value investing principals and there is margin of safety, so I have to be able to win on this trade. Oops it went down. It doesn't feel good, but that just means it is only a better opportunity. Maybe I should buy more? Opps it went down more. Damn! It has to bottom out right here. It will eventually bounce and go up 4x instead of my original 2x, but I am already down 50%. Opps it is even down more, and ouch, Ackman sold! OMG! What should I do tomorrow morning?  :-[

 

I really like the way you have summarized this.  It is basically a mental model that you have formed from experience. 

 

Re:'Valeant analyst at Sequioa: This poor person had an unenviable task.  It speaks to greater problems at the Fund company, and extremely poor management:

- If the analyst was hired to look at Valeant or assigned valeant, and nothing else, then what does one expect the analyst to do?  I dont know details of the situation.  Hopefully, the fund took a good look at the situation and fired the managers in charge of assigning work and executing trades, rather than the specific analyst. 

 

It also speaks volumes in how people can get enraptured by numbers and by the story.  We all do this.  I have a similar reverence for BAM and its subs.  I think the difference is that BAM and subs have real assets that you can go visit, and real fee income, and a long track record under current management. 

I get around my rapture by buying on dips and sizing my position accordingly, and genrally handicapping my expectations. 

[Jurgis]

Cryptokitties.

[DooDiligence]

Cryptokitties.

 

http://uglymule.com/images/Borat-Evangelical.gif

 

:)  :D  :o

[Read the Footnotes]

Re:'Valeant analyst at Sequioa: This poor person had an unenviable task.  It speaks to greater problems at the Fund company, and extremely poor management:

- If the analyst was hired to look at Valeant or assigned valeant, and nothing else, then what does one expect the analyst to do?  I dont know details of the situation.  Hopefully, the fund took a good look at the situation and fired the managers in charge of assigning work and executing trades, rather than the specific analyst. 

 

Yes, an unenviable situation in some cases. In other cases the strategy has proven brilliant and the outcomes are phenomenal. The value to us in this discussion is to improve our chances to make informed guesses about when it makes sense to dive deeply over a long period of time and when doing so risks acquiring the analyst's version of Stockholm Syndrome. The risks can be both behavioral finance oriented on an individual level and a matter of incentive structures on an institutional level.

[DocSnowball]

A bit late to the discussion, apologies for repeating -  What is within my circle of competence (after two years of learning)?

Nothing yet!

 

I do think there is such a circle, where one can have a rough idea of:

 

1) the valuation of a company and how unfolding events may affect the probabilities of valuations and in what direction

 

2) the business model (how a company makes money), the strategy (the unique value proposition of the company and how it creates value for itself and its customers) and how th financials support this strategy and what key metrics show it is working

 

3) the industry, ecosystem and competitive landscape - enough to understand what events are fundamental and what are noise

 

4) the management team, at least to have assessed whether they are competent and honest

 

I think Buffett’s four filters describes it well already, but only experience teaches us how hard it is to develop this circle and stay within it. In two years I barely understand the new antibiotics landscape! So I’m compensating for having a very very small circle by taking the risks of concentrating until I can expand the circle or indexes become obviously undervalued.

[rkbabang]

Electromagnetic fields

 

For me it's: 1's and 0's (I'm a digital guy).

 

As for investing... I'm just winging it like almost everyone else.

 

"one of the most fundamental yet still under-appreciated truths of human existence, which is this: everyone is totally just winging it, all the time."

https://www.theguardian.com/news/oliver-burkeman-s-blog/2014/may/21/everyone-is-totally-just-winging-it