Being A “Disagreeable” Investor

Having a disagreeable streak is an advantage in the investing world. If backed by stakeholders that are not beholden to conventional thinking (rare), you at least have a chance to stand apart from the herd. Some observations I’ve collected on contrarianism and investing.

  • Josh Wolfe on the Invest Like the Best Podcast: Not all contentious ideas turn out great, but all great ideas were contentious. The contentiousness is what allowed them to be underpriced. If everyone loves an idea from the outset than it’s probably overpriced or it’s obvious which increases the chance someone else has tried it and failed for a reason you have yet to discover.
  • Since 1968 [until recent history], Altria has generated average annual returns of more than 20%. No other stock has come close to matching that long-term performance, according to renowned stock market expert and Wharton professor Jeremy Siegel. Jared Dillian would not be surprised. His pet theory of ‘constraints investing’ advocates for owning names that others can’t be seen holding. This is not limited to sin stocks. Mall REITs, brick & mortar retail, and perhaps even the next round of unicorn IPOs are all businesses a constrained investor might not look at since the downside is losing money AND ridicule.
  • Unsexy businesses and careers can be quietly lucrative. My impulse is that people who own funeral homes and sanitation companies are doing pretty well. Small-cap private equity investor Brent Beshore is making a living out of this idea. His company Adventures’ website is a wealth of real business knowledge and he’s one of my favorite follows on fintwit.
  • A very simple math example to demonstrate the importance of divergence when filling out an NCAA bracket: Suppose 4 people are filling out a bracket and the favorite has a 72% chance of winning the tourney. If 3 people choose the favorite and I choose the second best team which has a 28% of winning the tourney (the numbers are silly but it won’t change the conclusion), then I have the most equity. How? If the favorite wins only 1 of the 3 people will claim the prize based upon the rest of their bracket, reducing their initial equity to 72/3 or 24% vs my 28%. Assuming the scoring system is designed to give massive weight to the final game (most brackets do) then the conclusion is apparent: if many people overbet the favorite you want to pick the likeliest teams to win who are relatively ignored! (h/t Steve for help with the example)
  • Many investors create risk management rules that say “if I lose X dollars, I will close the position”. This type of rule fails to acknowledge that the best opportunities often occur when an asset’s path has inflicted max pain. The merit of an investment on a going-forward basis has nothing to do with your p/l up until that point. Instead, consider a risk management framework that recognizes the benefits of contrarianism. Such a system would have its users establish max pain tolerance as an input into sizing the position in the first place. This may sound like a subtle difference but in practice it is not. Work it out yourself to see why.
  • The Allocators’s Dilemma

  • Activist investors are great examples of ‘disagreeable’ personalities. Being funny is a byproduct of their style. Market folk will recall the venom in Dan Loeb’s pen as well.
  • Short sellers are like the investigative journalists of corporate America, sniffing out frauds and accounting anomalies. One of my favorite interviews is with famous short-seller Marc Cohodes. His irreverent, iconoclast reputation is on full display. Being a short-seller requires an extremely ‘disagreeable’ personality streak since they are often battling against charming executives who are masterful story-tellers and fundraisers. Short selling is often condemned by its targets as opportunistic when in fact it serves an imperative truth-seeking function in the markets. For technical reasons I’ve described here, it is one of the most challenging strategies. When short-sellers are sounding off we should actually pay extra attention since the truth they uncover is a byproduct of one of the most masochistic paths to profit.
  • Examples of businesses featured on Guy Raz’s How I Built This born from contrarian thinking.
  • I have concerns about climate change but have reservations about the discourse around it. Let me explain. Dissenting with the scientific orthodoxy immediately gets you associated with the unwoke, the climate deniers, or Trump. In other words, you get camped with uncritical ideologues that are often associated with being stupid. This is a binary view of the world. One of Moontower’s recurring themes is the world is messy and grey. When something becomes that polarized, the ensuing lack of nuance raises an antenna. There’s no short-seller function in discussions like this. Truth-seeking is completely suppressed by signaling tribe allegiance. Honesty is compromised by incentives. Dissension risks academic grants, public ridicule, and maybe even friendships.

Lyall Taylor is an independent investor I read. He answers to nobody. He’s disagreeable. This gives him an edge in finding situations where the baby has been thrown out with the bathwater. His recent post on climate change discourse and ESG discourse is a great way to step through nuanced thinking. Agree or disagree with him, but don’t miss the lesson. Behind every conversation exists an intellectual meta backdrop. The odds of any conclusions need to be discounted by the incentives embedded in the evidence.

Here’s the post with my highlights.

A concept I call “Career TANSTAAFL”

There is a psychic premium to jobs that are sexy like chefs or jobs that are rewarding like teaching. So those types of careers will either be very competitive or pay poorly. If a job was lucrative and rewarding everyone would want to do it. Musicians are cool. No way they get to be well paid too. Same for actors, artists, models, athletes. Unless you think being the best basketball player in your state (that’s roughly how good you need to be to have a shot at the NBA) is a legit career plan, recognize that working on cool things means you will need to give up financial comfort.

A tangential, possibly cynical, musing: You can be paid in money. In prestige. In honor. In gratitude. How you weigh these things is personal. And the weights reveal your insecurities.

3 Economic Novels

Introductory Learning Recs

In the past year, I have read 3 relatively simple finance books while flying. They would make great gifts for teens or anyone interested in learning about some basic economic and business concepts. What all three have in common is they are narratives. They teach explicitly but in a fiction wrapper. And while it’s not Shakespeare, this style is underrepresented since I could see it being more resonant than textbook or essay style instruction because the lessons are weaved into the character’s stories. Here’s a link to my notes on:

  • The Rebel Allocator: This book’s device is a junior private equity analyst learning the lessons of capital allocation by a Buffet/Munger composite
  • Invisible Heart: An economic romance novel by leading economist and podcast host Russ Roberts.
  • The Accounting Game: This book has taught scores of people accounting for good reason. By following a boy’s lemonade stand for a summer you will learn how financial statements work to the pros and cons to various accounting strategies and regimes. It’s structured as a workbook so you get to practice constantly. It’s also just fun. Seriously.

For Investors or Inspiring Investors

Adam at Movement Capital is a reader whose business and blog I discovered this year. He’s always putting out content that is pound for pound some of the most educational, useful and concise reading. You can start with his most recent post Investment Switch Calculator. With funds slashing their fees, you may want to compute how long it will take you to break even on a transaction from a higher cost fund to a lower cost fund. This is not as straightforward as it initially appears and requires a tool like his. By walking through the model you are bound to learn something if this is not your expertise. His site is one of the first I’d send someone to if they were trying to learn the basics of portfolio construction and math. His approach is true to Einstein’s advice: “Everything should be made as simple as possible, but no simpler.”

ESG, Trump Tweet Trades, Volatility Follow Ups

The Money Angle from Weekly Moontower #32

  • You will recognize ESG as the latest battleground between corporate axiology, morality, and law.
    • Takeaways from Matt Levine compartmentalizing your role as a corporate citizen from your role as a person. He channels realism and illuminates the downsides of mission driven companies. My notes here.
    • Cullen Roche’s pragmatic view on ESG investing. His pragmatic concerns are drawn from matters of axiology, morality, and law.
    • Aswath Damodaran’s explanation of shareholder vs stakeholder views of the corporation.
  • The article dismantling the conspiracy theories of friends of Trump trading ahead of his announcements. At the end of the article I noticed one of the contributors as an anonymous blogger/trader KidDynamite. I have been following him for nearly a decade. His work is top-notch especially his accounting level forensics to debunk claims that precious metals prices are manipulated.
  • Follow-ups from last week’s discussion about volatility’s toll on compounded returns:
    • My notes on a fun paper about how inept even educated people are about sizing wagers and how you can adapt the Kelly criterion for binary type bets.
    • A walkthrough of my simulation of investing in a 2 coin portfolio including the impact of rebalance and the influence of volatility on mean vs geometric returns.
    • An observation: A friend with some rental properties mentioned he does not aggressively raise his tenants’ rent. This incents the tenants to take good care of the place since they don’t want to lose the apartment. That means lower maintenance costs which is a second-order effect that offsets the first-order effect of keeping the headline rent a bit low. Between that and a very low vacancy rate, the returns of the rental properties are less volatile. And we all learned what volatility does to portfolios. An especially interesting bit to keep in mind since rental properties are usually levered.