The importance (and discomfort) of avoiding the herd 

One of my favorite scenes in Monty Python’s Life of Brian goes something like this:

Brian: You’ve got to think for yourselves! You’re ALL individuals!
Crowd [in unison]: Yes! We’re ALL individuals!
Brian: You’re all different!
Crowd [in unison]: Yes! We are all different!
Man in crowd: I’m not!
The Crowd: Shhhh

Humans are biologically wired to stay within the herd for safety. But what if the herd is heading towards a cliff? In this environment, I increasingly believe what feels safe in the short-term (i.e. “cheap” legacy business models) may prove to be the riskiest assets over the long-term. My friend Joe Frankenfield, portfolio manager of Saga Partners, writes about some of these ideas—from behavioral psychology to long-term investing—in his Q4 letter. “While it may not feel like it at the time, significant volatility is in the investor’s long-term interests,” Joe writes. “An investor’s most significant advantage of investing in the public market is the ability to take advantage of it when an opportunity presents itself or to ignore it when they want to. The key is to never give up this advantage.”

“One thing will always remain true so long as human behavior does not change, people get excited when stocks go up and scared when stocks go down. With the help of hindsight, every market drawdown has been an opportunity. However, as we live through each new drawdown it always makes one consider, ‘Is this time different?’ We are wired to panic when others panic and get greedy when others are greedy despite the exact opposite behavior being far more lucrative when it comes to investing in publicly traded stocks.”


“Embracing your funk” is the only path to outperformance

Back in Issue 31 of The Nightcrawler I wrote about an essay by Chris Cerrone, in which he argued that selling a winning position too soon was perhaps the greatest mistake an investor can make. (I agree.) This week, Chris—a partner at Akre Capital Management—sat down with Bill Brewster for a conversation about everything from investing mistakes to valuation techniques to the idea of “cultivating quality” as a way of life. (H/T Rishi Gosalia)

“If you follow someone else’s path, you’ll never achieve that world-class performer status. You have to really embrace the core of who you are, and whatever it is that you’re doing…. You have to build the portfolio that is in harmony with your unique disposition. This makes it so that there is never a right or wrong answer…”


The neuroscience of pressure

Reading this essay by clinical neuroscientist Louisa Nicola, I was struck by some of the similarities between tennis and investing. Obviously, stock picking is not a physical activity, but certain elements—endurance, conditioning, training, studying the field, understanding your opponents, dealing with pressure—share many similarities to competitive sports. “While most people run from pressure, great champions learn to run to and through it,” Louisa writes. “It challenges them and forces them to grow, to improve. Concentrate on breathing, focus on the process, focus on this very moment and performing each current skill as perfectly as possible and trust in your preparation.” (H/T John Huber)

“Athletes like Nadal who view the game as a challenge can often maintain composure and high levels of confidence. And with the extra energy and a sharpened concentration, they can utilize the full capacity of their working memory to analyze an on-court situation, formulate and execute the best strategy in real-time, hence helping them to thrive under pressure.”

A few more links I enjoyed: 

“In hindsight, those years gave OpenSea a crucial head start on competing NFT markets. Basic online marketplace systems had been around for decades, but OpenSea was implementing the familiar features in a new format. It’s simple for eBay to offer something for sale to a high bidder, but doing the same transaction with an NFT requires an intricate chain of smart contracts handling offers, proof of ownership, and secure exchange. OpenSea isn’t the only group implementing those contracts (and crucially, most of the systems are open source), but they still have the best system for it.”
“In the case of consciousness, the thing we are trying to explain is not publicly observable. And this is utterly unique. “
“One very important thing we have learned: setting out to play this game without being set up to play this game is likely to end in disaster. Tolerating volatility is not a natural state (for humans and investment firms at least) – this capability must be deliberately and carefully engineered. The unadjusted price of high volatility can be extreme pain, and can be fatal for your portfolio and/or investment business. There is a rare set of things that have to come together to be able to play the high returns with high volatility game.”
“Paul Kotas may be the most important person in internet advertising that almost nobody in advertising has ever heard of. Mention Kotas—the leader of Amazon’s burgeoning, multibillion-dollar ad businesses—around ad agencies, as The Information did to more than a half-dozen senior ad executives, and you’ll get blank stares. One of those executives, whose agency will spend between $100 million and $150 million on streaming video ads alone this year with Amazon, Google-stalked Kotas in the middle of a phone interview to see if he could recognize Kotas. He couldn’t.”

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