The One Percent Almanack

Wit and Wisdom on Investing, Business, and Life

Vishal Khandelwal

SuperInvestor: Howard Marks on Contrarianism

Great insights on contrarian investing from one of the world’s best investors. You cannot go wrong reading Marks and following his advice.

What do you do if Warren Buffett calls you personally and offers to write the foreword for your book? First, you write the book as soon as possible and second, you make it worthy and useful enough to deserve an endorsement from Buffett.(Source: Google Talk)

That’s precisely what Howard Marks did with his book called The  Most  Important ThingMarks runs a US$ 90 billion hedge fund called Oaktree Capital and has more than four decades of investing experience. Just like Buffett, he has been writing letters (memos) to his investors for last twenty five years.

These memos contain insightful commentary and a time- tested philosophy about sensible investing. Howard Marks is not only a super investor but a thoughtful author too. His writings are not to be missed and that’s what Buffett seems to say in this statement –

“When I see memos from Howard Marks in my mail, they’re the first thing I open and read. I always learn something, and that goes double for his book.”

In this post, I try to draw one big lesson from his writings and offer them to you for reflection. The big idea for today is contrarian investing. Let’s dive in right away.

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Life 2.0: Journaling

Today I am going to share an insight that shook my life pretty hard, for the good of course.

How many times it has happened with you that after reading a book you thought that you understood the idea until you were asked to explain it. The idea seemed pretty clear in your head but the moment you had to verbalise it you discovered that either you didn’t have a proper grasp on the idea at the first place or you were unable to explain it in a logical coherent way to a third person.

This is the kind of silent reaction I got from people “You’re telling me that you just finished reading a compelling book but can’t explain the central idea in few sentences?”

This problem haunted me for a long time. Then one fine day I discovered the Feynman Technique, which says that the mere action of writing something down allows for a more effective integration of the learning. This further led me to the idea of Journaling. It was a Eureka moment!

Let me first share my definition of journaling. Journaling is simply an activity of writing in plain language about what’s going on around you and what your thoughts are about them. It can include things like your future goals, plans, dreams, reminders to yourself, comments on ideas/people or any unrelated thing that crosses your mind. It’s a conversation that you have with yourself.

So what’s so special about journaling? Stick with me through the rest of the post and you might find some surprising insights.

Journaling allows you to take fuzzy thinking and distil it into precise line of thought. If you want to think better you have to start writing your thoughts. It’s not a common knowledge that writing, apart from being a communication tool, is a thinking tool too. Famous author, Dan Pink, further validated my belief in this commencement speech.
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Corporate Governance: Charlie Munger on Governance

Charlie Munger is widely quoted in value investing community for his multidisciplinary ideas. However, he has some unconventional advice on the subject of corporate governance also which deserves a discussion. Let’s look at some of the insights from Munger on the issue of governance.

Munger believes more in the spirit of corporate governance rather than enforcement of compliance rules and regulations. If the intention is not right, people can always bend the rules and find workarounds for carrying out unethical practices without breaking the law. But when you know that the intentions are right then even an occasional instance of non-compliance doesn’t bother you because you trust the person and know that things will eventually get sorted out.

Munger is of the opinion that different companies have different cultures and you cannot come up with a one-size-fits-all solution in form generic compliance rules. An organization is made up of diverse set of people with different interests and values. Such collection of people behaves as a complex adaptive system. The moment complex rules are infused to command more control it invariably results in unintended consequence. So the solution is not to device more rules but to make the system simpler.

In the annual meeting for Wesco Financials in 2007, Munger pointed out –

A lot of people think if you just had more process and more compliance—checks and double checks and so forth—you could create a better result in the world. Well, Berkshire has had practically no process. We had hardly any internal auditing until they forced it on us. We just try to operate in a seamless web of deserved trust and be careful whom we trust.

This brings us to the Munger’s first idea for simplifying the corporate governance puzzle.

Seamless Web of Deserved Trust

A system in which the individuals making decisions do not bear the consequences of those decisions seems incompatible with a seamless web of deserved trust. Munger explains –

Good character is very efficient. If you can trust people, your system can be way simpler. There’s enormous efficiency in good character and dis-efficiency in bad character.

Moreover, unethical behavior is contagious. Gresham’s law says that bad values (or currency or people) drive out the good values from a system. If you find that it’s easy to cheat and steal in an organization, it’s just a matter of time before majority of the people in that system start exhibiting dishonest and unethical behaviour. Even if everybody was absolutely honest to begin with. Such is the human behaviour.
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InvestorInsights: Jae Jun, Old School Value

Jae Jun is the founder of Old School Value, a deep fundamental analysis tool that helps value investors make speeds up the analysis process and make better investment decisions.

Safal Niveshak (SN): Could you tell us a little about your background, and also about your wonderful blog Old School Value?

Jae Jun (JJ): I believe my path to investing is very similar to most people. I met a life insurance salesman who convinced me that I needed life insurance that also acted as an “investment” account. A 2-in-1 deal which I blindly agreed to without doing any homework.

The reason for my poor decision was because I saw friends and colleagues making money in stocks and I wanted to do the same. I also believed that anyone in the financial industry knew a lot more than I ever would. After I started Old School Value, I realized it was the opposite. Most people in the finance industry don’t know a thing about finance.

After several months, I would check my shiny new “investment” account, but things didn’t look right. The market was up 10%, but my account was doing nothing and a lot of the insurance premium were deducted as fees. After some digging around, the veil fell from my eyes and I saw the sucker I was. I immediately cancelled the life insurance, forfeited all the money and locked in my first 100% investment loss.

I figured that, if I wanted to lose money, I could do it myself and at least have some fun doing it. That’s when I started digging into articles, magazines and books and documented my learning through Old School Value.

I thoroughly enjoy sharing and educating people and the blog is an outlet for me so that I don’t have to bore my wife or friends to death about balance sheet analysis and how to value stocks.

Coming from a telecommunications engineering background, I grew up with tunnel vision. I never considered the possibility that I would enjoy business or finance. So my entire schooling years was dedicated to math, physics and other engineering courses. I never took a course in accounting, business or economics. Investing and starting Old School Value really opened my eyes to a new world.

SN: What got you interested in investing, and how you’ve evolved over time as an investor?

JJ: My dad is a trader and I witnessed the emotional highs and lows he experienced from making and losing a huge amount of money. At an early age, I concluded that investing in the stock market was equivalent to gambling.

After having lost everything that I put into the life insurance investment account, the initial anger was a huge motivator for me to put aside my biases about the stock market and to really learn how it worked.

My wife (girlfriend at the time) had a book called “The Intelligent Investor” which was recommended to her because she too wanted to become a life insurance saleswoman.
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BookWorm: The Success Equation

In the last fifty years, Warren Buffett has recommended quite a few books in his lectures and writings. But there is one book that can boldly claim to have found its way to Warren Buffett’s reading desk. And that book is The Success Equation, authored by Michael Mauboussin.

Michael belongs to the breed of those rare investment strategists who have spent their life puzzling over the really crucial questions in the world of decision making. He is an expert in one of the most debatable topic in the field of business strategy i.e., role of luck in defining the success for an individual as well as an organization.

Apart from being a successful investor, Michael also teaches at Columbia Graduate School of Business. He has authored three other books out of which I have read two and found both of them equally insightful.

Let’s dive straight into the book first.

Many of us have heard the biblical story of David and Goliath. It tells how David, a young shepherd was pitted against a ferocious warrior named Goliath. David accepted the challenge when Goliath invited him for one to one fight. David was clearly an underdog. However, everybody was stunned when David killed the giant Goliath with a slingshot.

The truth is that it’s not easy to recognize the remarkable war strategy hidden inside the story. What strategy?

I’ll let you live with the curiosity for few more minutes and reveal the secret little later in this article.

The world we live in today has become terribly interconnected. This introduces a high degree of complexity which in turn leads to lot of randomness and unpredictability in the outcomes of events. When this randomness operates at an individual level, it translates to either good or bad luck.
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