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:
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.