Hunter of Lewis Enterprises wrote an extremely thought provoking piece a couple of weeks ago on the apparent lack of innovation in the investing field post-GFC. As with all great writing, it prompted an episode of uneasy introspection. Such episodes demand a reply, but in this case not a rebuttal.
Hunter’s premise:
Despite a proliferation of financial content in the form of newsletters, substacks, and podcasts, there has not been any uniquely new, or refreshingly bold, thought on the inherent problem of investing in at least the post-GFC-era.
I’m reminded of the age old aphorism: there are bold traders and there are old traders, but there are no old and bold traders.
Hunter’s explanation of this phenomena:
Perhaps it is anathema to value investors to even believe there should be pioneering ideas around investing. It could be that there simply isn’t much more philosophically to add to the canon…
It is also conceivable that the Money Game has simply gotten too disambiguated to be talked about practically….
It seems unlikely that in the face of accelerating technological, social, and political change that investing or even the role of finance in society should not warrant new degrees of enlightenment.
Intelligent Investing
My first humble submission would be that: all intelligent investment (the kind where you make money anyway) is principles driven, not necessarily process driven. This has to be true in the academic sense - after all, paying less than what you receive in terms of value can take on many different forms. It is also an observable historical fact. Market inefficiencies are generally exploited over time (all long term successful investors migrate strategies across a career).
The devil is, of course, always in the application of these age old principles. While the early pioneers of a risk-averse, and value oriented investment approach stressed the primacy of the balance sheet, developments have moved the investment community towards earnings power analysis. This arena, if I may say, has garnered innovators both real and supposed.
This Time it’s Different
Some of the best investment principles, which are not so general as to presuppose evergreen application, are once again radical. Much of what has passed for ‘value investment’ in recent years has been speculation in the future prospects of new business models. We can all recall the names of investors who had significant holdings in businesses that required radical change to succeed. Some of these businesses also demanded a radical suppression in the cost of capital to breach this chasm. A double dose of sin for the conservative investor.
Successful long term investments (those which imply business ownership) are bets that things will not change. Innovation extraneous to our portfolio companies should not be forthcoming. Positive changes in operating metrics (the likes of which continuing shareholders benefit from), are a corollary of competitive dynamics remaining the same or improving for incumbents - ideally a competitive market place wouldn’t exist in the first place. For such companies, complex explanations of their financial performance was not necessary.
We have to remember that it was only a year or two ago that many respected investors were waxing philosophic about how the limitations of GAAP accounting. Those companies who were spending heavily on R&D and Sales and Marketing were apparently building long term customer bases, and yet they couldn’t capitalise these ‘investments’. Amazing how quickly this new paradigm has become a relic of antiquity.
In all fairness, sometimes picking the new winners works. We know the names of those luminaries who saw the future with clairvoyance. Was it luck or skill that took them to the country club instead of the poorhouse? We can’t know. Even the ex-post analysis of these investments leaves little to be gleamed from. When one analyses earnings power, one analyses a business, and as Peter Thiel said:
Every moment in the history business happens only once.
Probabilities Can’t Lie
While we crave certainties, they can only exist in retrospect:
…the Money Game has simply gotten too disambiguated to be talked about practically…
While this is undoubtedly true, the more one becomes familiar with the endeavour of investment, the less certain they must become about it. Unfortunately, laying out money today to receive more tomorrow requires some foresight. Therein lies our problem: seeing the future is basically impossible. This reality hits every young investor like a tonne of bricks.
The great practitioners understand investment as probabilistic, not path dependant. Alice Schroeder wrote in a Reddit AMA:
Thinking you can be smarter at buying Johnson & Johnson is essentially market timing. Warren rules that out unless he has some kind of insight he is convinced no one else has. He may not always be right, but it’s the right approach and it works over time.
This is why speaking about investments in a unambiguous way is something of a fool’s errand. Overconfidence is the mother’s milk of the madmen and the idiot, and it distracts from the fact that every investment has a risk profile, and a risk/reward payout. One can speak clearly and cogently about a hypothesis, but it is just that - an argument made at a point in time subject to certain factors. We look commonplace if we succeed, and foolhardy if we fail.
The career’s of the great investment professionals are usually punctuated with a small number of extremely successful bets. For example, the majority of Berkshire’s returns have been generated by a relatively small number of investments. Making sweeping, definitive statements about outcomes subject to the power law can be counterproductive.
The More Things Change, the More they Stay the Same
Finally, perhaps the absence of bold new thinking in investments is best explained by the investment question itself: how much money are you willing to lay out today to receive some amount of money in the future?
This question is so simple that innovation in answering it is all but impossible. There’s an investible universe, opportunity cost, and hurdle rates.
When you’re in heaven, do you really need a bus to get there?
Larry.
This was a fantastic read
As you may know, recently I have been making myself familiar with Bill Ackmans more recent investment philosophies. One of the things he said recently was quite interesting, he said he has started thinking of his long term high quality investments like so: “I feel good about the long term prospects of this business, what is the probability I permanently lose 25% of my capital. Not marked to market fluctuations, permanent loss. If the answer is very small, I buy”
Quite an interesting exercise to do on one’s investment portfolio I think. Not a new way of thinking but an interesting one.
In terms of innovation, I’m not sure there’s much that can be added to the large bountiful landscape Wareen Buffett has laid out before us. In the age of ZIRP, there have been many investment innovations but much like the dotcom era, they will fade away in my opinion.