EXPECT ABUNDANCE.

THE STREAM OF PLENTY ALWAYS FLOWS TOWARD THE OPEN, EXPECTANT MIND.

- Bob Proctor

A. Dealing With Uncertainty

You know, people talk about this being an uncertain time. You know, all time is uncertain. I mean, it was uncertain back in - in 2007, we just didn't know it was uncertain. It was uncertain on Sep 10, 2001. It was uncertain on Oct 18, 1987, you just didn't know.

- Warren Buffett

It’s all uncertain again :-)

I was reading Howard Marks latest memo titled You Bet ! - it’s a discussion on investing while being uncertain.

Here are the steps that I see:

Understand That It’s Always Uncertain:

Marks references a speech by Charlie Munger (Warren Buffett’s partner at Berkshire) titled “The Art of Stock Picking”. Charlie compared stock market investing with the pari-mutuel betting system at the racetrack, where the payoff for each horse winning is determined by how many people bet on it:

….a pari-mutuel system is a market. Everybody goes there and bets and the odds change based on what’s bet…..Any damn fool can see the horse carrying a light weight with a wonderful win rate and a good post position etc., etc. is way more likely to win than a horse with a terrible record and extra weight and so on and so on. 

But if you look at the odds, the bad horse pays 100 to 1, whereas the good horse pays 3 to 2.  Then it’s not clear which is statistically the best bet….

Find The Superior Propositions:

Success in gambling doesn’t go to those who pick winners, but to those with the ability to identify superior propositions. The goal is to find situations where the odds are generous to one side or the other, whether favorite or underdog. In other words, a mis-pricing.

It’s exactly the same in investing. People often say to me, “XYZ is a great company with a bright future, so I bought the stock.” They’re picking a favorite but ignoring the proposition.  The former alone isn’t enough; they should consider the latter as well.    

Make Good Bets:

This late in the cycle it’s easy to bet on the great company with a bright future, but Marks’ summarizes what he’s learnt about making good bets:

• You have to be able to understand which companies or assets are favored and the attractiveness of the proposition.

• You need a sense for whether your holding is a good one and for the chance the competition – the market, which you’re playing against – might have better.

• You need the discipline to follow a process and the wisdom to accept that no process is sure to produce good results.

• You have to understand the significance of the information you have, as well as that which you don’t have. You need the nerve to bet heavily based on what you think you know and a healthy respect for what you may not know.

• You need to control greed and fear, hopefulness and despondency. You have to resist making an unwise bet just because it could enable you to catch up with the indices or the competition.

And Prepare For Bad Luck:

And from Annie Duke’s great book: Thinking In Bets, a great point about good luck and bad luck:

First the world is a pretty random place. The influence of luck makes it impossible to predict exactly how things will turn out, and all the hidden information makes it even worse. Poker teaches that lesson. A great poker player who has a good sized advantage over the other players at the table, making significantly better strategic decisions, will still be losing over 40% of the time at the end of eight hours of play. That’s a whole lot of wrong. And it’s not just confined to poker. . . .

Sometimes You Just Don’t See The Risk:

From Morgan Housel’s essay: Risk Is What You Don’t See.

Quoting him:

The biggest economic risk is what no one’s talking about, because if no one’s talking about no one’s prepared for it, and if no one’s prepared for it its damage will be amplified when it arrives.

But look at forecasts of the biggest economic risks for the year ahead, which are published in force this time of year.

With few exceptions people cite the trade war and the election. Last year it was impeachment and the trade war. In 2018 it was interest rate hikes and the trade war.

Compare that to what in hindsight have actually been the biggest risks.

To name a few: 9/11, Lehman Brothers’ inability to find a buyer, Iraq invading Kuwait, the 1973 OPEC embargo, Pearl Harbor, and a small Austrian bank called Creditanstalt whose 1931 bankruptcy set off a chain reaction of global bank failures that ignited the Great Depression.

These were big events. What turned them into disasters was that few discussed them even moments before they occurred. They were surprises. So the people affected by them did not prepare, either mentally or with actions. They could only react, often amid panic.

Lest you think that I am arguing for a correction or selloff, my view on that is simple and can be summarized by Peter Lynch:

“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”

So where does that leave me ?

1. I’m looking for those good bets (some of which we discussed here) and not trying to anticipate or predict anything.

2. Trying to keep it simple either by operating with enough margin of safety or by having enough anti-fragility in my life that I don’t need to spend time predicting or waiting.

3. Admitting that I probably have no idea what the real risks are.

B. A Few Things Worth Checking Out:

1. Matt Clifford was on the Invest Like The Best podcast - discussing deep tech, talent scouts and investing pre-company.

2. Great discussion by Naval Ravikant on Finding Time to Invest in Yourself.

3. ValueAct’s CEO Jeff Ubben spoke about the future of shareholder engagement and the future of capitalism, which was something we discussed last time.

4. Awesome RethinkX report on the future of Food & Agriculture. I’ve been slow on the clean meat story, but after reading this I realized that a) we are on the cusp of a deep disruption in agriculture and b) the rapid advances in precision biology and an entirely new model of production - Food-as-Software - will massively impact the wider economy, society, and the environment.

5. Talking of Uncertainty - Dominic Cummings

England has it’s own Steve Bannon and his name is Dominic Cummings.

The Financial Times has a great article this weekend titled:

Dominic Cummings has ‘done’ Brexit. Now he plans to reinvent politics

His blog has all sorts of other crazy stuff. This guy is obviously very smart but what’s he trying to do ?

By the way this video is amazing - Cummings shares out loud, How Leave Won the Brexit vote. All the things you didn’t know and all the tricks they used.

C. Quotes I’ve Been Thinking About:

The most dangerous items on your to-do list are the ones that look like opportunities, but are actually distractions.

- James Clear

Any idiot can face a crisis – it’s day-to-day living that wears you out.

- Anton Chekov

All your anxiety is because of your desire for harmony. Seek disharmony; then you will gain peace.

- Rumi