Quote of the week: 

“The way to be safe is to never be secure.” – Benjamin Franklin 

The art of cutting bait 

Just like poker, active investing is the business of ruthless curation. Over time, what isn’t in the portfolio—or what hands you choose to fold—is the most important determinant of success. In the stock market, this is a statistical fact: Though indices indeed tend to go up over time, the lifetime returns of most individual securities underperform their benchmarks by a relatively wide margin [Source: Page 6.] In that sense, knowing when to cut bait on bad ideas (or simply creating a process to consistently avoid them) is perhaps the key ingredient to long-term outperformance. But how?

Annie Duke, the former poker pro, offers a good mental model to think about cutting bait on bad ideas. In an essay adapted from her book, Duke explores a “kill criteria” framework to help you make decisions on how to cut losses—whether it’s on a stock, a hand in poker, a business venture, or anything else. “Essentially, when you enter into an endeavor, you want to imagine what you could find out that would tell you it’s no longer worth pursuing,” she writes. “Ask yourself, ‘What are the signs that, if I see them in the future, will cause me to exit the road I’m on? What could I learn about the state of the world or the state of myself that would change my commitment to this decision?'” She continues: 

“That list offers you a set of kill criteria, literally criteria for killing a project or changing your mind or cutting your losses. It’s one of the best tools for helping you figure out when to quit closer to on time. Kill criteria could consist of information you learn that tells you the monkey isn’t trainable or that you’re not sufficiently likely to reach your goal, or signs that luck has gone against you. The best quitting criteria combine two things: a state and a date. A state is just what it sounds like, an objective, measurable condition you or your project is in, a benchmark that you have hit or missed. A date is the when.”

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How to quantify risk

“Value investing requires zigging when the consensus is zagging,” writes Bill Nygren in a recent shareholder letter. Nygren, the longtime Oakmark Funds portfolio manager, explores the concept of risk from a variety of viewpoints, the extreme concentration across today’s index funds, the high price of low volatility strategies, and much more. 

“We believe that index fund investors have become blind to the concentration risk that has crept into their portfolios. Further, we believe that investors who think they are decreasing their risk by buying low volatility stocks are blind to the valuation risk they are taking. We believe that owning cheap stocks that have become more volatile and sizing them based on their attractiveness rather than their market capitalization not only reduces our risk of loss but is one of today’s most attractive opportunities. We expect that eventually, the premium investors pay for low volatility will diminish, and we would expect our Oakmark portfolios to again become less volatile. But while we wait, as Warren Buffett said, ‘We prefer a lumpy 15% return to a smooth 12%.'”

A few more links I enjoyed:

The Unintended Consequences of Generative AI – via Gini Dietrich
“But something Chris said at that time has always stuck with me. He said, and I’m paraphrasing, stop freaking out about AI replacing you. Eventually, you will have a bunch of machines working for you, and your job will be to ensure they’re all doing what you need them to do—ethically and responsibly. He likened it to a symphony. Your robots will be the orchestra, and you will be the conductor. So get smart on conducting your orchestra of robots to get the best results.”
A Good Prospect | Mining Climate Anxiety for Profit– via The Drift
“Lithium is also expected to win big. A world that does not rely on fossil fuel combustion will need rechargeable battery technology at an unprecedented scale, in everything from the cars we drive to grid-scale energy storage infrastructure, with enough capacity to power a city when the sun sets and everyone turns on their lights. None of this will be possible without lithium.”

This information should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the investments or strategies referenced were or will be profitable, or that investment recommendations or decisions we make in the future will be profitable. This article contains links to 3rd party websites and is used for informational purposes only. This does not constitute as an endorsement of any kind. While Nightview uses sources it considers to be reliable, no guarantee is made regarding the accuracy of information or data provided by third-party sources. Nightview Capital Management, LLC (Nightview Capital) is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Nightview Capital including our investment strategies and objectives can be found in our ADV Part 2, which is available upon request.