Quote of the week:

“You’ll want ’em again when they’re higher. It’s not your fault. Your mind isn’t designed for this. It’s the product of millions of years of evolution. It wants you to run. It wants you to avoid discomfort. You’ll want back the very thing you sold when it’s higher. It’s weird.” (Source)

The stock sleuth approach

Two weeks ago in Issue #76 of The Nightcrawler, I shared an older clip of Warren Buffett in 1992 in which he compares investigative journalism to investing. “Ninety percent of investing is assigning yourself the right story,” he says to a room full of reporters. “The story always happens to be, ‘What is X worth?’ But that’s a story.”

Since then, a few folks have suggested I check out Avner Mandelman’s work. Avner—a former rocket scientist and hedge fund manager—writes about his own quasi-investigative-reporting techniques his book, The Sleuth Investor. (His favorite research tools to get people to talk: “A phone—and beer.”)

Mandelman participated in a semi-recent podcast discussion in which he explores how to think about company-specific information that doesn’t appear in the “ink squiggles” of an earnings report or 10-Q. He also acknowledges the many complex behavioral elements of investing in public markets—and the game theory involved. “If you play poker, you don’t just play the cards,” he says. “You play the faces. Beyond a certain level, you have to play the opponent.”

There’s no real news peg to Avner’s podcast, but I found much of the conversation to be especially relevant in today’s hyper-volatile market. Sentiment, fear, greed—these are drivers in the short-term. But over the long-term, valuations increase as a result of business performance—which is why a forward-looking research process is so critical. (H/T Brett Dorendorf, Shadowridge Capital)

“For a piece of information to be useful for an investor, it has to have three criteria. It has to be true, it has to be significant, and it has to be exclusive to you. The only way to generate it is to do the work yourself. If you trust others, they are going to try to sell you the stuff they are invested in. Or they are lying. Or they’re just trying to promote something. You never really know if it’s useful or not. You can only know if it’s useful if you know the business, which again, you can only know if you go down into the trenches to check it out.”

*** 

Slack as edge

“Flourishing in life seems to be determined by our ability to navigate fitness landscapes,” writes my friend Tom Morgan in one of his typically thoughtful recent essays. One trait I’ve observed across all the best-performing stocks in recent history (from Apple to Amazon) is this idea of continuous reinvention—a unique but intangible imprint within an organization that encourages adaption and evolution (and eventual new lines of business). 

 Tom’s essay focuses on the individual, but the concept applies on an organizational level, too. It also reinforced to me a way of thinking about how to find the most compelling value in the stock market by looking for companies that haven’t just succeeded in the past—but are actively thinking of ways to adapt and grow into an ever-changing future. “If everything needs to be perfectly evolved for a narrow set of circumstances,” he writes, “that means risking mass extinction if things change.”

“In reality, fitness landscapes aren’t actually static. Everything is continuously in flux. Predators and prey are locked in a constant dance of co-evolution. The broader environment, climate, and terrain is changing. It’s less like a landscape and more like the surface of rolling sea. Jack’s goal is to learn how to glide smoothly across the waves.”

A few more links I enjoyed: 

The Future of the Book Industry Starts Today –  via Nir Zicherman, Spotify
“So by enabling new modes of monetization for authors and publishers, by investing in creation, publication, and distribution tools (in large part via our acquisition of Findaway), and by enabling content to more easily find its audience, I believe we’re about to see tremendous growth in the amount of audiobooks in existence. That will be the case in countries where audiobooks are common (like the United States). But over time, it will also be the catalyzer that enables other markets to embrace the format as well.”
Liz Ann Sonders on Economic Cycles, Stock Prices, and Investing Mistakes – via John Rotonti / The Motley Fool
“Shorter economic cycles and more frequent recessions doesn’t necessarily mean the downturns will be brutal. John Rotonti talked with Liz Ann Sonders, Chief Investment Strategist at Charles Schwab. They cover: The ‘mother’s milk’ of stock prices, how this market is simultaneously like the 1970s, post-WWII, and completely unique, and one common rebalancing mistake that investors often make.”

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