variant perception - how do you get yours?

[glider3834]

I am always thinking about how can I make my research process better?

 

I am curious to ask if other members of cobf forum would like to share experiences of how they have gone about picking up different pieces of information to gain a unique perspective on stocks that may run counter to the existing narratives that are being pitched on different media outlets. 

 

Here is a quote from an interview with Ted Weschler at Berkshire

https://kingswell.substack.com/p/ted-weschler-variant-perception-charity

 

“I want to be able to look myself in the mirror and say that I’m reading enough weird stuff that nobody else is reading the same stuff that I am,” he says. “If you’re just reading the New York Times and the Wall Street Journal, there’s no way you’re going to beat other people.”

Even so, Weschler makes a point to read as many newspapers and trade journals as possible. Newspapers, in particular, present readers with a random set of stories, curated by editors, that make for a well-rounded reader.

It’s all about building up a critical mass of information and data that will help you connect the dots when examining a potential investment idea.

“I read Furniture Today and Uranium Weekly,” Weschler laughs. “I’m not sure there’s a lot of people who subscribe to both of those, but you’re looking at one of them.”

 

In the insurance space, some of the things I read 

https://www.reinsurancene.ws/

https://www.insidepandc.com/

https://www.theinsurer.com/

https://www.ajg.com/gallagherre/news-and-insights/

 

I also try & push my knowledge completely outside my comfort zone - I watched a Netflix series that was super interesting on understanding black holes & I don't want to spoil the show you might want to watch - but it underlines that to get the answer to a difficult problem, you may need to take a unique research approach that no-one else may have pursued.

 

 

 

 

Edited June 9, 2023 by glider3834

[james22]

Always inverting gets you halfway there.

[glider3834]

15 minutes ago, james22 said:

Always inverting gets you halfway there.

Right so like looking from customer perspective -  why are they buying the product or using the service? 

Edited June 9, 2023 by glider3834

[Gregmal]

I generally just tend to focus on smaller or more obscure stuff. That way I don’t need to do anything special. Just make sure I know what I am buying because more often than not the rest of the market doesn’t. I look at some of my holdings over the years….PCYO, JOE, HTL, APTS, the MSG stuff, CKX, OMG-L, AIV, ALCO, CTO, FRPH, NATH, FIZZ, probably a few more I’m forgetting, ex MSG I’m not sure there’s more than a handful of analysts combined who’ve covered those and that’s on top of the fact that analysts aren’t generally respectably knowledgeable to begin with. So it’s really just on me; to know and be confident in what I own, and that’s how I like it.

 

When making buys or sells in a trading manner, inverting is crucial. Understand the supply and demand characteristics and psychology behind it. First thing you need to do is take what you’re feeling, and get on the other side because most people are feeling and acting the same way. IE when I feel like I’m the best investor ever I need to be leaning towards reducing my exposure and when I feel like a total fucking loser who can’t do anything right, double check my work, and then load the boat adding.

[E. Nashton]

Figuring out or trying to figure out what the consensus lens is currently. If is extremely short term oriented, zoom out and get a better view/perspective of things and act accordingly. If it tilted long term to an extreme, zoom in to get a variant perspective. 

 

This doesn't mean one needs to  be contrary all the time (I've learned my lesson here and paid dearly) but the exercise allows you to see another perspective and once you layer on some work on the WHYs for each, it can lead to same satisfactory results or atleast some interesting debate points. 

 

 

[james22]

Inverting:

 

Why you believe making your research process better will improve your returns?

 

Unknown unknowns always existing, better research will likely only make you overconfident.

 

Reading:

 

How many here are really familiar with the arguments for indexing? Compare their returns to the S&P500 every year?

[Spooky]

This is something I want to devote more time to - curating my news / information sources to only have high quality inputs. I pay for both the WSJ and FT and I've stopped getting my news through social media entirely. I've been poking around with Nikkei Asia and some German sources. What are people's go to publications / sources?

 

I also truly believe in Charlie Munger's approach - read as widely as possible about as many topics as possible. Pick up Poor Charlie's almanack or get a copy of his book recommendations and start there. Lots of books about science, economics, etc. Understanding the world better is key. I'm always looking for insights which are counter-intuitive and go against accepted wisdom. I also have found that some of the great investors have an almost philosophical bent like Bill Miller and I have been reading a lot of books on Stoicism lately.

 

My favourite line from Sam Zell: when everyone is going right, look left.

[longlake95]

1 hour ago, james22 said:

Inverting:

 

Why you believe making your research process better will improve your returns?

 

Unknown unknowns always existing, better research will likely only make you overconfident.

 

Reading:

 

How many here are really familiar with the arguments for indexing? Compare their returns to the S&P500 every year?

Same….most of my ideas revolve around what a business won’t do as opposed to what it will do. Many ideas have the same narrative: this biz doesn’t have to do much other than get back to “normal” (whatever that is) and we do ok. Any “growth” on top of that basic idea is gravy. Combined with a heavy does of common sense and basic probability. 

[Saluki]

I read a lot of things that I find interesting and it may not pay off immediately, but eventually you may see something and the pattern recognition kicks in and it helps you.  Years ago I read something about Packard automobiles. They were the Cadillac/Mercedes of the day. After WWII they came out with a lower end car and sales went up for a couple of years, then the company tanked. It diluted their premium brand and the boost in lower margin cheap cars came at the expense of their higher margin cars. The Japanese car companies did it right when they  came out with separately branded cars like Infinity and Lexus because they knew that people won't pay $50k for a luxury brand if you can get the same brand for $25k. So I was long Harley Davidson and when they announced a lower end model to appeal to millennials, I immediately sold. Why buy a $40k Harley when you can buy one for $18k? That was pattern recognition. People thought the news was positive, but I'd seen it tried before and I thought there is a wrong way (Packard) and a right way (Toyota, Honda --> Infinity Lexus) and they were doing it wrong. 

 

Some of it, as others said, is just knowing more about a specific area where others have general knowledge.  The good news is that you can acquire that. When bird flu was decimating chicken flocks and chicken stocks, I started reading up on it and the industry. I think Poultry Weekly or something was something that I read a lot of to get knowledgable about how long it would take to replace a flock (less than a year) and about how bird flu spreads and what they can do to prevent it.  When I was looking into an offshore wind turbine company I signed up for Offshore Wind Daily and it shows up in my inbox every day.  The good news about doing a "deep dive" like this is that even if it takes you a while, the long term compounders won't be something where the opportunity goes away in a few weeks.  It would take me a loooooong time to know enough to have an edge or variant perception in a pharmaceutical company, but a lot of businesses are not that complicated.  PLOW (which I don't own) makes 65% of the snow plows for trucks in the US.  Steel comes in one end of the factory and snow plows go out the other end.  So the two things that move the needle are steel prices and snow fall the prior year.

 

Just keep reading things that interest you, without thinking specifically about investing, and if you find a company that looks cheap, you can start digging deeper into that area. If it takes to long and the opportunity passes, you don't get the money but you got to keep the knowledge and it may come in handy next time. There are some things like refineries and potash that I don't want to hold for a long time but I've traded in and out the names when things got really cheap (2020) because I did the work on them before. 

 

And one other thought on variant perception.  Think about companies like BABA or NFLX that got decimated recently.  One came back quickly and the other hasn't yet. A lot of people sold them but each time there was a buyer on the other end. So what's the counter argument for you selling (or buying).  You can't be sure that you're right unless you know why they are wrong, and if you don't know what the person trading against you thinks, then how do you know they are wrong?  

 

 

[brobro777]

What helped me personally to find these different ideas that work out is by focusing on cash. Years ago I bought a condo in Los Angeles because the monthly rent I was paying was similar to the monthly cost of owning the condo (mortgage at 30 year fixed+HOA+Property tax). Yes I had to lock up capital in the property for down payment but I would get tax deduction for mortgage interest, I would be repaying the mortgage principal, and I wouldn't have to worry about rent increases. Any property appreciation would be bonus. Just on cash basis it made sense. But this was during years when the housing bust fresh on people's minds so not many were keen to buy. I kind of lowballed the seller and he came back with such a weak counter that I accepted right away. 

 

So I think counting the cash works. These opportunities don't come often so it requires patience but they say it's not supposed to be easy... 

[hasilp89]

didn't want to start a new topic so posting here as its tangential to above. Anyone have recs for good business newspapers in Canada and the UK?

[Spooky]

I love the Financial Times based out of the UK but this is a pretty widely followed newspaper. As a Canadian, I'm sad to say that I don't really like any of the business publications here.

 

 

[rogermunibond]

Weschler's recommendation of trade journals is very relevant.  I've found lots of good insight in waste management, railroad, and aluminum trade journals.  Great resource for learning about an industry.

 

FT and the Economist are good recommends as well.

[james22]

On 6/9/2023 at 10:39 AM, Saluki said:

I read a lot of things that I find interesting and it may not pay off immediately, but eventually you may see something and the pattern recognition kicks in and it helps you.

 

This.

[SharperDingaan]

Just pick a trade journal in an industry you are interested in, and the industry news aggregator. At the broader level, add a subscription to the nations business newspaper (G&M in Canada). You are looking for the blow-ups, scandals, dividend cuts, messaging, etc. - not the journalism; and ideally, waiting for a negative 'event' in your circle of competence 

 

SD

[hasilp89]

10 hours ago, SharperDingaan said:

(G&M in Canada)

Thank you!

[james22]

On 6/9/2023 at 10:39 AM, Saluki said:

I read a lot of things that I find interesting and it may not pay off immediately, but eventually you may see something and the pattern recognition kicks in and it helps you.

 

Can't find, but once read a study where two groups were posed the question:

 

Imagine you are a doctor and one of your patients is about to die from a tumor. You can’t perform surgery, but you do have a ray gun which can focus a high-intensity ray to destroy the tumor. However, there’s a slight problem. At this high intensity, the ray will also damage the healthy tissue it passes through. If you try to lower the intensity, while the healthy tissue is safe it no longer has the energy to destroy the actual tumor.

So the question is: How do you destroy the tumor without damaging the tissue? 

 

Very few of the first group (3%) were able to answer the question (Mount 10 ray guns around the patient, and set each ray’s intensity at ten per cent. Then, when you focus the ray guns, the low intensity won’t damage the healthy tissue, but when combined, the radiation is high enough to destroy the tumor).

 

Most (66%?) of the second group were able to after being asked to read several news articles, most unrelated but one of which had to do with something similar (streams flowing into a river? multiple columns converging to attack at a single point? I can't remember).

 

The study's authors concluded we are very good at pattern recognition and mapping across solutions to like problems.

[Saluki]

@james22 I remember seeing that study in the book "Range."  It's a great way to think about hedgehogs vs foxes and how it works in the real world. And yes, the diverse viewpoints and pattern recognition are the best way to solve problems that haven't been seen before. I think Range and The Innovator's Dilemma should be required reading for every business major. 

 

 

 

[james22]

Thanks, Saluki. I must have a copy lying around.

 

Investing: The Last Liberal Art is another great read: 

 

Hagstrom explores basic and fundamental investing concepts in a range of fields outside of economics, including physics, biology, sociology, psychology, philosophy, and literature. He discusses, for instance, how the theory of evolution disrupts the notion of the efficient market and how reading strategies for literature can be gainfully applied to investing research.

 

Building on Charlie Munger's famous "latticework of mental models" concept, Hagstrom argues that it is impossible to make good investment decisions based solely on a strong knowledge of finance theory alone. 

 

https://www.amazon.com/Investing-Liberal-Columbia-Business-Publishing/dp/0231160100

[Gregmal]

2 hours ago, james22 said:

Building on Charlie Munger's famous "latticework of mental models" concept, Hagstrom argues that it is impossible to make good investment decisions based solely on a strong knowledge of finance theory alone. 

Cough. Spreadsheeters. 
 

 

[SharperDingaan]

One of the benefits of playing chess is pattern recognition; ability to rapidly see disparate linkages/development, see patterns, and use the outcome. Play against others 'like you' and you just sharpen your wits, but play against masters who are not 'like you' .... and things happen.

 

Back in my early days; I used to play against 'escapees' from Lebanon, Iran, the old Soviet Block, and a retired Asian academic who had reverted back to the hippy life... They all had very distinctive 'styles', and much of it was a reflection of their home culture/life experience. 'Cause everyone was short a few bucks, we'd often play 'blitz chess' in local pubs, against a simultaneous 5 players at a time, in return for a couple of beers. Ability to 'carny bark', think and act on your feet, while being a little blitzed yourself!  

 

Learnt all kinds of 'under the table' skills from some of the worlds best, and thoroughly enjoyed myself. Quickly discovered that I knew nothing, compared to the gents from Lebanon and Iran; and that there weren't any shrinking violets when it came to straight-up cunning and shrewdness!

 

It was such a bummer to have to return to the 'above the table' life, once I started university

 

SD

Edited July 19, 2023 by SharperDingaan