Focusing on what’s important

Active Investing requires independent research and decision making that forces you to learn a lot about yourself and your manner of thinking.  Nassim Taleb has recently published an interesting principle on his Facebook page about decision making and the importance of focusing on the key factors.  The below graph proposes a typical scenario you have to make a decision on, which has 30 factors which lend varying weight to the outcome:

Taleb writes:

WHY NOT TO ENGAGE IN STANDARD DEBATES/FOLLOW NEWS (LESS IS MORE, or “It is not the quantity but the *quality* of arguments that matters”). This graph shows the relative role of independent factors in a system, with among, say 30 identifiable factors, 97% of the variations can be attributed to the first 2 factors (a system with “fat tails” will be even more concentrated with 99.999% coming from one single factor). The remaining 28 factors are chickens**t. The graph presents a statistical view of the “less is more” argument, and why one should not follow the news for, in a given month, “low loads” represent 99.99% of the conversation and .01% of the contribution.

 

If you are right on factor 1 (& possibly 2), the rest is irrelevant. But the problem is that those trained in debate will drag you into factors 3 through 99, just to distract from the core issue. 
I have decided to avoid Cambridge and Oxford Union debates, those discussion with people trained in argument by debating societies. The Oxbridge system of “covering all sides of an issue” drives you to the irrelevant and drowns your Factor 1 argument. If you do things right you should have “only one argument”, which clashes with this culture. 
(This graph also explains in statistical terms the “lady complains too much”, or why a “balanced” view presenting drawbacks is everything but balanced.)

 

It doesn’t just add little value to focus on factors 3-30, it in fact makes the situation worse, because it clouds your thinking and wastes time.  It is simpler and more effective to identify the primary factors in a decision and then focus solely on them (In value investing, one of the key things I do is try to find if there is hidden factor which outweighs all the others – this will generally be a reason not to invest).

 

An example of this is BigAir (BGL) – I have had discussions with people on HotCopper asking questions about BigAir’s relevance in the future with LTE, NBN, etc. The downsides are all red herrings.  The most important factors in making a decision to invest are:

  • Company has a broad base of subscribers, delivers a growing cashflow which exceeds both opex and capex for network expansion and acquisitions, and has no debt.
  • Most customers are unlikely to move to an alternative provider or technology (due to advantages of wimax, barriers to entry, lack of competition, etc).

Nothing else matters, except for whether the current price of BGL is too high or too low.

 

This is really an application of the 80-20 rule, which I try to live my life by.

Warren Buffett’s 2013 letter to investors has been released

You can find a copy here: http://www.berkshirehathaway.com/letters/2012ltr.pdf

I’ve been reading the Buffett letters for years, and have read the historic reports dating back to 1977.  My main interest is the colour Warren puts on his approach to a manager, and his openness with investors.  He uses increases in book value against the S&P500 as a yardstick for BRKA’s performance.  I particularly enjoyed this quote from the latest letter:

“There are a lot of ways to lose money in insurance, and the industry never ceases searching for new ones.”

I disagree with his current view that the US economy will not tank, but there’s still plenty to learn from the letters.  For further reading on Buffett I would recommend The Snowball: Warren Buffett and the business of life.  The Author, Alice Shroeder, used to cover Berkshire Hathaway as a financial analyst.

My guide to completing an MBA

At the end of 2013, I’ll have finished my MBA, and I’ve learned a number of rules to succeed in the MBA and maximising your return on investment (dollars, time, etc).  The MBA is really a bunch of different lenses you can look at management through, whether it be HR, Internationalisation, Finance, etc.  By immersing yourself in each lens you can learn how to apply them in day-to-day business decisions.

 

Don’t come in cold.

Before I decided to do the MBA I read a few books that compressed the core principles into a single volume.  10-day MBA, The Personal MBA are both good starting points.  Peter Drucker’s Essential Management is another complement.  So much of what you learn is the useful but obvious stuff that you can easily pick up by reading $100 worth of books.  Getting that learning out of the way helps for 2 reasons:

  1. You might decide you don’t need to invest the time and money to do an MBA
  2. You can focus on applying the principles you already know rather than learning them from scratch.

 

80-20 rule

If you’re working full-time, you’ll soon realise doing an MBA is like having a second full-time job, that you’ve got to do really half-assed to keep your life on the rails.  There’s no shame in taking shortcuts, the reality of the real world is you’re going to need to prioritise your life to get the important stuff done, and some things are going to slip through the cracks.  I’d be more embarrassed to be wasting my time on something that isn’t important.

Most academic papers can be summarised in 50 words or less.  It took me a year to learn to make notes of the key points for each reading so I had a handy word doc with an entire class worth of study in a couple of pages.

 

Contribute to class

You know that dork who wouldn’t shut up in class and wanted to suck up to the teacher?  Most MBA classes are full of those people.  Fact is you have to participate in class to get value out of your investment.  My only advise is to phrase contributions as a question rather than a statement, so you don’t look so conceited, and if you’re responsible for more than half the discussion in class, people probably think you’re a nob.

 

Network as much as you can

The time you save by only doing the 20% of the work that will give you 80% of the results gives you an opportunity to work on your professional network by connecting with high achievers across industries.  At least half the people in your class are going to be pretty big hitters, and can help you in your career, so you’d be mad not to know them well enough to get a character reference on your next interview.  I only get 4s or 5s but one of my group regulars has offered me a job.  Who’s focused on the wrong things?

 

Learn from your peers

One of the tragedies of MBA programs (at least the one I’m in) is that most lecturers are too academic, and so have massive blind spots in their thinking.  Taking their word as gospel is the kind of mistake that Lehman Brothers risk analysts made, relying on spreadsheets and confusing the map for the territory.  An analogy would be reading martial arts theory and then expecting to survive in a street fight.  You’re better off doing some street fighting, learning some theory (while still streetfighting), and then progressively applying the theory to become a better streetfighter.