Jump to content

Value Investing for Right Brain Dominant People


Mephistopheles
 Share

Recommended Posts

I decided to make this thread in order to get opinions on this topic from fellow value investors. I'm a relatively new investor, and I consider myself right brain dominant. My questions are as follows: is it possible for me to have a successful and enjoyable career in value investing? Are there others here who consider themselves right brain dominant? What about famous value investors, such as Buffett, Munger, Berkowitz, Klarman, etc? How would you describe their left vs. right brain dominance?

 

I've researched a little on this topic, but I think that some of the common perceptions on this issue are misleading. One idea is that right brained people tend to be more emotional, and therefore cannot be successful investors, as they will succumb to fear and greed too easily. I disagree with this notion. I sincerely believe that my temperament is a major advantage for me as an investor. I have taken advantage of severe equity mispricings over the last few years, by buying when the rest of the world is fearful. For example, I've made significant money by buying Wells Fargo in March 2009, BP in June 2010, and more recently - BAC late last year. I've trained myself well to be fearful when others are greedy, and greedy when others are fearful.

 

But that's where my advantage ends, at least for now. Although I read 10-k's and 10-q's as much as I can, I have a hard time staying focused and forming an opinion. I generally get lost in the dry information that is presented in these filings. I also hate net-nets because of the pure quantitative analysis required. I've realized that I like situations in which there are a lot of headlines and emotions involved, even if the emotions aren't my own. Again, I site BP and BAC as those situations. They just seem more colorful to me, and reading about them in newspapers and magazines helps me form a clear picture in my head, whereas I get lost combing through annual reports.

 

I also enjoy the creativity involved in special situations. How many times has there been an investment opportunity as the result of a major oil spill? I liked the BP situation because it wasn't a part of my routine to study the long term consequence of oil spills, the Gulf ecosystem, and the Clean Water Act. Most of this I was able to understand by reading dozens of newspaper and magazine articles, as well as analysis by Whitney Tilson. It was something unique and unexpected, and so it appealed to me.

 

I've also considered the possibility that I don't enjoy the routine reading of annual reports simply because I'm new, and don't understand them well enough. I understand that there is a major learning curve required there. Contrarily, I love reading the writings of value investors including Buffett, Munger, Watsa, Klarman, and more. So you see why I can't decide whether this career is right for me?

 

I hope I haven't lost anyone here. Thanks for reading. I hope this thread generates discussion.

Link to comment
Share on other sites

Are you wondering if investing will be a good career fit or if value investing in and of itself is a good fit?

 

As for right/left brain I am by far a more right brained person.  In all those psychological fit tests I'm always a big picture thinker, hates details which is actually mostly true.  I seem to do alright investing, I'm mindful of the details but I don't get stuck in them.  When I was in college I debated on majors between music, psychology, sociology and systems analysis.  I talked to some professors in the sociology and psychology departments and they said take the degree that makes money, so I majored in systems analysis with a minor in sociology.  I'd say I use a lot more of what I learned in sociology day to day, the degree made me think differently about things which is very useful. 

 

I think in the end you need to find an investment style that fits you.  Sounds like you enjoy event driven investments, dig deep into those and see how things turn out.  I'm with you, I'd go crazy reading some of the bigger 10-Ks.  There's a thread about some BAC warrants that requires digging through some crazy prospectus.  Good luck to those investors I hope they are rewarded but I'll take a pass on that one.  I'd start out, read 10-15 pages, start to daydream and miss some important detail.  I know I have this flaw so I can work with it.  I've also created an investment process for myself that compensates for this and reduces the amount of time I spend reading through annual reports for companies I never end up purchasing.

 

I like small caps, they're easy to understand, easy to read the reports, and easy to think about the business aspects of them.  I'll really buy anything that's attractive and relatively simple.  Maybe someday I'll be forced to invest in complex things, but so far the simple investments have worked out well.  I try to buy companies with a margin of safety and positive cash flow.

 

Of course this is all my opinion and what do I know, I'm just some dude who writes about investing on the internet.  If you're looking for career advice on Wall Street I have none.  I'd say find a job that is somewhat enjoyable (afterall it's a job, not fun) and will provide for your family and doesn't require 100% of your waking hours.  If you're thinking about a career a lot of people can tell you what to expect on this board. 

Link to comment
Share on other sites

The critic in the left brain is very important, but both sides are necessary.  You might profit from use of a checklist.  If your right brain says, "I like this" , and the checklist says that the situation has the characteristics  necessary for a high probability of success, you will likely do well.  :)

Link to comment
Share on other sites

I think your talking about qualitative versus quantitative investing.  Twacowfca has a good suggestion.  My biggest hits are mostly qualitative.  I have had very limited success with deep balance sheet dives.  I am very able to see the big picture in situations where I dont have an emotional investment. 

 

FFH, March of 2009, big banks 2011, AIG now.  Everytime people would discuss these inevitably someone would say: "how can you invest in a P&c company, a big US bank, etc.  they are black boxes".  I try to deal with what I can know rather than what I cant know.  I can know that these companies were trading at obscenely cheap prices by any normalized metric.  I can know that regulators, employees, and managers are all working mightly to right the ship, whether its March 2009, when I bought Starbucks, AXp, GE, and WFC at multigeneration lows, or AIG now.  So I read the ARs to get a gist of where a company is at and if they are walking the talk, or if there is anything grossly misleading.  It has to be grossly misleading for me to catch it. 

 

By big picture, I can see in my mind what is going on for BAC, or WFC.  Conversely, I cant see anything clearly in the oil or gas industry at the moment. 

 

My background is Geography, Environmental Science, and now Manufacturing, so I bring different skills to investing than most. 

 

The dngerous side is when, for some reason, I become emotionally attached to a company, such as RIM, recently.  For the future I will try to avoid positions to close to home, unless I am the controlling shareholder.  > 20 % cagr over 8 years. 

Link to comment
Share on other sites

Every PM will disagree, but value-investing as a career makes zero sense. Basic risk diversification - have multiple careers, but don’t mix the two together. Or don’t P*ss in the pond you drink from.

 

I do a renovation, I go to Home Depot/Lowes to buy the materials. I research a stock I go to the 10Q’s, financials, etc.  It’s just a data warehouse trying to sell me something. Dressing it in a glamorous wrapper is marketing.

 

Most <30’s like logic. Get the algorithm out of a book, have an Ivy league B-school teach you, program it, & you’re an instant high class wizard; simple, easy to get, everybody benefits. Can’t apply worth sh*t though, because B-school didn’t teach you how.  Wisdom is realizing there are many ways of application, & learning it on someone else’s dime. More right brained.

 

If you can ‘read’ people, headlines, etc. well – a great poker &/or bridge skill - go for it. You don’t have to be able to recognize too many ‘manias’, in order to get rich betting against the media line. The less fortunate need to troll the 10Q’s & financials, etc.

 

Most experienced investors can tell < 5 minutes if an investment is for them. They get there through experience, intuition, & logic – not an algorithm, & we call it their value proposition. Sadly, for most folks, a mutual fund offers a better value proposition.

 

... really sad when you recognize that you also need to clip 3.0.-4.0% off the funds return for inflation, management fees, & the one-year risk free equivalent (i.e. 1 yr GIC for the retail trade) – to get to the risk adjusted return.

 

Link to comment
Share on other sites

 

Most experienced investors can tell < 5 minutes if an investment is for them. They get there through experience, intuition, & logic – not an algorithm, & we call it their value proposition.

 

SD, your whole post was excellent.  This part resonates particularly.  Another Defect I need to watch for is talking myself into something that I know doesn't make sense.

Link to comment
Share on other sites

Interesting topic and replies, thank you.

 

Mephistopheles, I think you might like this speech: http://www.manualofideas.com/files/sellers.pdf I recently read it and your topic reminded me of it. I believe there is a lot of truth to it. Most things you can learn, but you either have the correct mental framework or you don't. Most people don't and will always fall in the same traps. He also says something about 'working with both sides of your brain'. You'll need characteristics of both sides to come out on top. Little logic and reasoning and a lot of intuitivity won't cut it and vice versa. Not an easy thing to do I'm sure!

Link to comment
Share on other sites

Just my two cents (if it's worth that much), but my fear is that if you can't sit down with a 10-K and read it from front to back and understand a business without any problems, one day a "sound" gut value investment may end up being not so sound.  And that's all it would take to ruin a long run of above average returns.

 

This being said, reading 10-Ks is a skill that can be learned.  It just takes time.  When I was first getting started, I'd go to a local library with no laptop, no cellphone, no nothing.  Just a notebook and a 10-K.  (And an easy one at that.)  I'd outline the 10-K section by section, and then go through it section by section.  Do this enough times and you'll get fast at it :).

 

As far as whether value investing is impaired by being right brained, I've got no idea.  However, I'd like to think everything in life is learnable if you just practice enough.

 

And +1 on twacowfca's checklist idea.  It's a great idea regardless if you're right brained or left brained :).

Link to comment
Share on other sites

Just my two cents (if it's worth that much), but my fear is that if you can't sit down with a 10-K and read it from front to back and understand a business without any problems, one day a "sound" gut value investment may end up being not so sound.  And that's all it would take to ruin a long run of above average returns.

 

This being said, reading 10-Ks is a skill that can be learned.  It just takes time.  When I was first getting started, I'd go to a local library with no laptop, no cellphone, no nothing.  Just a notebook and a 10-K.  (And an easy one at that.)  I'd outline the 10-K section by section, and then go through it section by section.  Do this enough times and you'll get fast at it :).

 

As far as whether value investing is impaired by being right brained, I've got no idea.  However, I'd like to think everything in life is learnable if you just practice enough.

 

And +1 on twacowfca's checklist idea.  It's a great idea regardless if you're right brained or left brained :).

 

Agreed, you need to be able to read an annual report and quarterlies cover to cover buy this doesn't mean you need to be able to read through AIG's 10-K. 

 

Not sure where you're located, I've found non-US reports to be much more readable than US reports.  SEC filings contain a ton of boilerplate text.  There's a lot of paragraphs you need to read three times to understand.  Most non-US reports are a lot shorter as well although once you get into the mega-cap realm they start to become similar sized.

 

I guess the bottom line from this thread is if you don't enjoy reading value investing probably isn't your thing.  There are plenty of traders and quants who've done quite well for themselves without ever opening a 10k!

Link to comment
Share on other sites

I sometimes face similar problems. The following could help:

 

1. Go for good, simple businesses with honorable management (when at right price) where you don't have strange accounting. More Peter Lynch approach of looking at businesses we come across in daily lives. 

 

2. More orientation towards larger and better governed businesses in every sector rather than the cheapest one.

 

3. Checklist is a great idea - too many red flags could mean just skip the stock - no need to spend time on detailed analysis

 

4. If idea seems great but calls for too much accounting/ too much intricate analysis, i talk to couple of friends who are much more blessed in this. Ofcourse final decision is mine, with normal than higher MoS and lower portfolio allocation.

 

I think it all boils down to 2 principles : Circle of competence + trying to cross one foot hurdles than seven foot ones. 

 

Link to comment
Share on other sites

FYI-The whole left brain right brain thing is a popular myth, although seemingly embedded in popular culture.

 

As a general rule, you really should love what you are doing, so if

[*]you do not like the reading, once you know and understand what you are reading, i.e. the 10K's, etc. 

[*]your temperament is not suited to investing

then may be value investing is not the "career" for you.  (Don't you find reading the annual reports of businesses you know about interesting?  For whatever reason, I suspect many on this board do actually like this sort of thing.)

 

That said you may have a career in the business, but not as value investor.

Link to comment
Share on other sites

FYI-The whole left brain right brain thing is a popular myth, although seemingly embedded in popular culture.

 

As a general rule, you really should love what you are doing, so if

[*]you do not like the reading, once you know and understand what you are reading, i.e. the 10K's, etc. 

[*]your temperament is not suited to investing

then may be value investing is not the "career" for you.  (Don't you find reading the annual reports of businesses you know about interesting?  For whatever reason, I suspect many on this board do actually like this sort of thing.)

 

That said you may have a career in the business, but not as value investor.

 

Not necessarily.  One merely has to be able to identify the best value investors who don't charge high fees and let them do the investing.  The very best will treat shareholders as they would like to be treated, run their own companies that are not subject to redemptions and charge no fees.

Link to comment
Share on other sites

FYI-The whole left brain right brain thing is a popular myth, although seemingly embedded in popular culture.

 

As a general rule, you really should love what you are doing, so if

[*]you do not like the reading, once you know and understand what you are reading, i.e. the 10K's, etc. 

[*]your temperament is not suited to investing

then may be value investing is not the "career" for you.  (Don't you find reading the annual reports of businesses you know about interesting?  For whatever reason, I suspect many on this board do actually like this sort of thing.)

 

That said you may have a career in the business, but not as value investor.

 

Not necessarily.  One merely has to be able to identify the very best value investors who don't charge high fees and let them do the investing.  :)

 

I think you proved his point, good at business.  Set up a fund of funds, find those managers, skim an extra 2% off of AUM and hit the links.

Link to comment
Share on other sites

FYI-The whole left brain right brain thing is a popular myth, although seemingly embedded in popular culture.

 

As a general rule, you really should love what you are doing, so if

[*]you do not like the reading, once you know and understand what you are reading, i.e. the 10K's, etc. 

[*]your temperament is not suited to investing

then may be value investing is not the "career" for you.  (Don't you find reading the annual reports of businesses you know about interesting?  For whatever reason, I suspect many on this board do actually like this sort of thing.)

 

That said you may have a career in the business, but not as value investor.

 

Not necessarily.  One merely has to be able to identify the very best value investors who don't charge high fees and let them do the investing.  :)

 

I think you proved his point, good at business.  Set up a fund of funds, find those managers, skim an extra 2% off of AUM and hit the links.

 

The very best available value investors will charge no fees, accept modest compensation, and run their own stock companies that are not subject to redemptions.  They will have excellent, long term records, treat others as they would like to be treated and have a large percentage of their wealth invested in the enterprise. 

 

A value investor who doesn't like to read financial statements could seek out owner operators in the mold of Buffett, Brindle, Munger and Watsa and then get aboard their trains.  :)

Link to comment
Share on other sites

Are you wondering if investing will be a good career fit or if value investing in and of itself is a good fit?

 

As for right/left brain I am by far a more right brained person.  In all those psychological fit tests I'm always a big picture thinker, hates details which is actually mostly true.  I seem to do alright investing, I'm mindful of the details but I don't get stuck in them.  When I was in college I debated on majors between music, psychology, sociology and systems analysis.  I talked to some professors in the sociology and psychology departments and they said take the degree that makes money, so I majored in systems analysis with a minor in sociology.  I'd say I use a lot more of what I learned in sociology day to day, the degree made me think differently about things which is very useful. 

 

I think in the end you need to find an investment style that fits you.  Sounds like you enjoy event driven investments, dig deep into those and see how things turn out.  I'm with you, I'd go crazy reading some of the bigger 10-Ks.  There's a thread about some BAC warrants that requires digging through some crazy prospectus.  Good luck to those investors I hope they are rewarded but I'll take a pass on that one.  I'd start out, read 10-15 pages, start to daydream and miss some important detail.  I know I have this flaw so I can work with it.  I've also created an investment process for myself that compensates for this and reduces the amount of time I spend reading through annual reports for companies I never end up purchasing.

 

I like small caps, they're easy to understand, easy to read the reports, and easy to think about the business aspects of them.  I'll really buy anything that's attractive and relatively simple.  Maybe someday I'll be forced to invest in complex things, but so far the simple investments have worked out well.  I try to buy companies with a margin of safety and positive cash flow.

 

Of course this is all my opinion and what do I know, I'm just some dude who writes about investing on the internet.  If you're looking for career advice on Wall Street I have none.  I'd say find a job that is somewhat enjoyable (afterall it's a job, not fun) and will provide for your family and doesn't require 100% of your waking hours.  If you're thinking about a career a lot of people can tell you what to expect on this board.

 

Thanks for your reply. I'm glad to hear that I'm not the only one who has trouble following detail. I actually used to work on Wall Street, in equity research, but I hated it the work so much that I quit. But it wasn't until after that I discovered the extent of value investing, and so I am trying to figure out whether it is right for me.

 

Btw, I read your blog once in while, but I'll be sure to check it more often now that I know that we think similarly.

Link to comment
Share on other sites

Interesting topic and replies, thank you.

 

Mephistopheles, I think you might like this speech: http://www.manualofideas.com/files/sellers.pdf I recently read it and your topic reminded me of it. I believe there is a lot of truth to it. Most things you can learn, but you either have the correct mental framework or you don't. Most people don't and will always fall in the same traps. He also says something about 'working with both sides of your brain'. You'll need characteristics of both sides to come out on top. Little logic and reasoning and a lot of intuitivity won't cut it and vice versa. Not an easy thing to do I'm sure!

 

Thanks for sharing. Yea I read this article recently and it makes a lot of sense. Just, I have to work on enjoying my left brain.

 

I know I have all of the temperament traits that he talks about in the article. So I think it's a matter of sitting down and being able to work through the calculations for me.

Link to comment
Share on other sites

FYI-The whole left brain right brain thing is a popular myth, although seemingly embedded in popular culture.

 

As a general rule, you really should love what you are doing, so if

[*]you do not like the reading, once you know and understand what you are reading, i.e. the 10K's, etc. 

[*]your temperament is not suited to investing

then may be value investing is not the "career" for you.  (Don't you find reading the annual reports of businesses you know about interesting?  For whatever reason, I suspect many on this board do actually like this sort of thing.)

 

That said you may have a career in the business, but not as value investor.

 

Not necessarily.  One merely has to be able to identify the very best value investors who don't charge high fees and let them do the investing.  :)

 

I think you proved his point, good at business.  Set up a fund of funds, find those managers, skim an extra 2% off of AUM and hit the links.

 

The very best available value investors will charge no fees, accept modest compensation, and run their own stock companies that are not subject to redemptions.  They will have excellent, long term records, treat others as they would like to be treated and have a large percentage of their wealth invested in the enterprise. 

 

 

So are you suggesting that Bruce Berkowitz, Bill Ackman, etc. are morally wrong for raking in such high fees for doing their job? Is this what some of you mean when you say you can't have a career as a "value investor"?

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share

×
×
  • Create New...