Investors, be open to disruption to grow

By Morningstar |  23-01-18 | 

I think I learn more reading about how great investors who weren't value investors invested than I do by reading the 200th book about value investing.

- Bill Nygren

Value investing fans would have definitely heard about Bill Nygren of Oakmark Funds. A pertinent point that Nygren makes, to which he attributes a fair share of his success to, is that he always seeks to understand the views and mental models of those who are not value investors.

He has often admitted how useful it is to read books by various investors and hedge fund managers instead of reading “the 15th book on Warren Buffett detailing his breakfast habits”.

MicroCapClub’s Ian Cassel wrote on this very issue sometime back. His brilliant articulation on the above point has been reproduced below:

I often learn the most by speaking with or studying successful investors that have the complete opposite strategy from my own. There is no better way to find holes in your strategy or extract the nails that have been pounded down deep into your investment subconscious mind, than talking to a successful investor that does things differently.

Disrupt yourself and grow.

I run a concentrated portfolio of “misunderstood” businesses.

I use that term because I’ve found too many equate value with cheap. I’m not necessarily looking for cheap. In general, I’m looking for businesses, management teams, and opportunities that are misunderstood by the market place. Perhaps it’s the business quality that is misunderstood. Perhaps it’s the quality level of management that is misunderstood. Perhaps it’s the culture, strategy, or intellectual property. It could even be misperceived negative events that have occurred, and shareholders are selling, and I believe they are wrong.  Whatever it may be, misunderstood, represents a big opportunity for investors that are willing to put in the work to piece together reality. The quantitative is what might attract you to invest but it’s the qualitative that will keep you invested. Dig below the surface to truly understand the businesses you own and the people that run them.

My investment philosophy has changed quite a bit from 10-15 years ago when I would have described it as more trading – momentum driven. I’m also not condemning a short-term approach to microcaps because a shorter-term approach likely fits better within the lifecycle of most microcap companies. What I mean by this is most microcap success stories are fad stocks that do well for 1-8 quarters. They go up 100-500% very quickly as they catch a wave or trend, but they soon fall back down to mediocrity when the wave hits the beach. Momentum takes them to levels where their business fundamentals cannot keep them.

Due to these shorter-term lifecycles of microcap businesses, short-term thinking is prevalent among microcap investors. This provides a distinct advantage to those that can focus on the minority of potentially sustainable businesses and look at them through a longer-term lens. My maturation as an investor has occurred through a variety of experiences and also encounters with great investors of all types.

Last year, I interacted with Tobias Carlisle. Toby’s investment philosophy is very different from my own. He is a diversified deep value quant. I’m a concentrated, quality focused, management focused investor. Nevertheless, he is a very successful investor and I was very impressed. He introduced me to another friend of his who manages a fund in Canada. This fund manager is literally the opposite of me. He is high turnover, deep value focused, and owns 400 companies in his actively managed fund. He owns megacaps and nanocaps. He will own tiny individual positions ($500) in a $30 million fund. I’ve been privy to his performance, so I know his strategy has been quite successful since he launched it a few years ago. I spent two hours talking to him and couldn’t’ stop peppering him with questions. He made me think differently about some of my strongest held investing beliefs, and I thanked him for it.

The experience didn’t change my overall investment philosophy, but by studying him I was inverting myself, and it allowed me to see things that my own mental model was blocking. By disrupting myself, I was able to think differently about things and fill in some gaps.

Similar to how water flows into a depression, as you mature as an investor, you slowly find your way to an investment philosophy that fits your personality.

  • Don’t just study the masters that are similar to you. Learn from all of them, so you can form your own unique style.
  • Be open to disruption.
  • Some of the most productive decisions you will ever make in life are the ones where you change your mind on a longstanding belief.
  • Disrupt yourself and grow.
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