My Investment Rationale
We spend our lives trying to learn new things, but then sometimes reminisce and understand that only a limited level of learning has reshaped how we behave, and thereafter, derive most of what we accept as gospel.
A number of key lessons that had a big impact on how I think about investing:
We should not believe in risk without also accepting the influence of luck: If we accept that we are one individual in a near 8 billion global population, then the natural occurrence of other people’s behaviour can be more influential than your own. Yet the path of least resistance is to be avidly aware of danger or downside when it affects you and to ignore luck when it aids you. As investors, we typically tend to adjust our ROI expectation due to perceived risk but never for being fortunate. Organisations declare obvious risks in their yearly accounts summaries; yet where do we see the declaration of being fortuitous? It is of course part of human and corporate nature that assessing risk or downside potential decreases confidence when it should actually be framing the reality. In turn, this should make decisions more conservative than they should be. Being fortunate or lucky should actually improve confidence without improving one’s ability, which makes companies and the people within refocus on removing errors. Accepting that risk and luck are standard conditions of life in general and in business, makes you accept that not everything is in your control, which is then a great way to identify what actually is in your control.
I have a great example of this that I hope people do not take the wrong way. I am sensitive to loss, in business and in life, as we all are of course. The example is the pandemic we have experienced for nearly 2 years now. My PPE business was very lucky that we have had to endure this horrible experience of the CVD-19 virus. The demand for our key products skyrocketed and the growth has been quite incredible, yet the obvious risk was there for global health. I find this rather apt.
There is a skill and science to investment: A key element of diligent investment is simply seeing the trends in consumers’ behaviours, and those consumers, being people, of course, take buying decisions supported by facts and indeed a degree of feel-good factor. It’s a blend of the science of monetary values, being income, discount levels, borrowing spreads and debt ratios whilst intertwined with consumer behaviours inside the understanding of human nature, such traits like ‘fear of missing out, understanding the product, emotional reactions and fear of loss. We, of course, think it’s fine to make decisions for ourselves and assume others will make decisions for themselves, based on elements we can’t fully understand, even if supported by data and facts.
Whether we appreciate it or not, that is how the consumer markets largely operate . As an example, if we believe the world is all science, we will not appreciate how consumer behaviours tend to opt for the fastest path, are sold by only what they want to be sold by, and have to deal with elements that are too convoluted for them to digest within a statistic or data driven environment. However, if we believe the world is all creative flair, we are oblivious to how much can be too convoluted to think about it intuitively, using data points or statistics.
Alternatively, we can consider that investment is not physics, which is guided by structured, unchangeable guidelines. Actually, investment is more like biology, guided by the unstructured adaptations and the path of evolution, constantly changing and sometimes turning logic on its head. After all, how many of us, 20 years ago, would believe one day we could invest in a coin that was not in our pocket, rather housed on a blockchain mined by a computer somewhere on the other side of the world? The answer is most likely, very few.
There are different information considerations when it comes to investing: There are elements we will still believe are relevant in the longer term and elements that hold less relevance the more time passes. We can classify this as long-term value versus expiring knowledge. There’s is clearly an overload of information in this era of the internet, and it’s worth asking the question of how much value do we actually take in the long term from most of that information? As an example in equity holdings, the earnings of the company are initially perceived to be important, but their relevance decreases over time, and expires when we fast forward our position a few years down the track. A similar view can be taken with economic data, industry news, and many companies’ strategic mistakes. Questioning whether the news of the day is crucial misses the more important scenario of, “How long will this news or report be critical given my overall strategy and desired exit?” I have a general investment principle: Read more books and fewer news articles. It’s not that the daily news is a bad thing, it’s more that books tend to be about timeless components whereas daily news is rooted in sensationalism. My mentor used to say, ”Learn from books, buy the rumour, sell the news”. The reason being is he knew that the average consumer would do the exact opposite. His retiring wealth proved him to be rather accurate.
Retaining wealth is generally harder than generating wealth: So I fundamentally disagree with the term ‘money makes money’ for most people. We can become wealthy by being fortunate, yet retaining wealth is generally due to judgement and making the right decisions, consistently. The skillset characteristics required for generating wealth and remaining wealthy are quite frequently opposed, such as being brave, then diversifying and remaining paranoid at all times. Then there’s the mental fortitude that generating wealth creates that staying wealthy has to step in and try to block for fear of loss. It often occurs with certain patterns, like the more successful you are at X, the more sure you become that you’re doing it the best way. The more sure you are that you’re doing it the best way, the less flexible you are to evolution. The less flexible you are to evolution, the more likely you are to fail in a market and world that evolves all the time. The Times Rich List in the UK would be more impressive if the 500 were listed by not only the amount of wealth but the time they had held it!