Quote of the week:

“Nature does not hurry, yet everything is accomplished.” – Lao Tzu

Focusing on what matters 

I’ve long been a fan of Howard Marks’ memos, and his most recent memo—What Really Matters?—is an immediate favorite. In the piece, Marks explores long-term investing via a powerful heuristic: What matters—and what doesn’t—to an active manager? What Marks articulates throughout the memo are all the edges an investor can accumulate simply by not making decisions based on noise, e.g. short-term events, macro-driven volatility, and so on. This is, of course, easier said than done; in my own experience, the ability to distinguish between noise and signal is a heck of a lot easier to understand in retrospect than it is to determine in the present.

Perhaps an even bigger challenge that Marks articulates so well is the requisite conviction it takes to go directly against the perceived desires of other stakeholders—be it bosses or clients or investment consultants—in periods of heightened volatility. “Since it’s hard to make multiple consecutive decisions correctly,” Marks argues, “and trading costs money and is often likely to result from an investor’s emotional swings, it’s better to do less of it.” He continues:

“When I was a boy, there was a popular saying: Don’t just sit there; do something. But for investing, I’d invert it: Don’t just do something; sit there. Develop the mindset that you don’t make money on what you buy and sell; you make money (hopefully) on what you hold. Think more. Trade less. Make fewer, but more consequential, trades. Over-diversification reduces the importance of each trade; thus it can allow investors to take actions without adequate investigation or great conviction. I think most portfolios are over-diversified and over-traded.”


The Brookfield story

Nima Shayegh, founder of Rumi Capital Partners, recently spoke to Matt Reustle of Business Breakdowns to discuss Brookfield Asset Management. As readers likely know, Brookfield is one of the world’s largest alternative asset managers with a storied history that dates back to 1899. What readers might not appreciate, and what Nima does a fantastic job expressing, is Brookfield’s remarkable consistent execution in the allocation and compounding of capital. 

Nima discusses Brookfield’s journey—from owner/operator of infrastructure assets in Brazil and later as vehicle through which the Bronfman family invested their capital—to its present-day strategy that has generated above-market total returns for shareholders over the last 20 years. 

“The first thing you would typically see is a small amount of balance sheet capital allocated as kind of a test tube for the opportunity. Brookfield typically spends several years learning while keeping the capital-at-risk modest. Over time, it scales the investment as it proves out a process for generating attractive returns. Only then would you see Brookfield begin to bring in third-party capital to specific deals and then potentially launching a dedicated investment fund around it. At a later point in maturity, that scaled business might be separated or distributed out as a stand-alone entity, of which the parent would, of course, retain a large interest. This machine has created tremendous value over time, while also avoiding getting overexposed on any individual bet.”

A few more links I enjoyed:

“The reason it would matter is that writing is not just a way to convey ideas, but also a way to have them. A good writer doesn’t just think, and then write down what he thought, as a sort of transcript. A good writer will almost always discover new things in the process of writing. And there is, as far as I know, no substitute for this kind of discovery. Talking about your ideas with other people is a good way to develop them. But even after doing this, you’ll find you still discover new things when you sit down to write. There is a kind of thinking that can only be done by writing.”
“This is called the ‘switch-cost effect’. It means that if you check your texts while trying to work, you aren’t only losing the little bursts of time you spend looking at the texts themselves – you are also losing the time it takes to refocus afterwards, which turns out to be a huge amount. For example, one study at the Carnegie Mellon University’s human computer interaction lab took 136 students and got them to sit a test. Some of them had to have their phones switched off, and others had their phones on and received intermittent text messages. The students who received messages performed, on average, 20% worse. It seems to me that almost all of us are currently losing that 20% of our brainpower, almost all the time. Miller told me that as a result we now live in ‘a perfect storm of cognitive degradation’.”

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