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The Attention Span. "Eight Investing Gems."

Over the last few years, I’ve been exceptionally lucky to meet some of the finest minds and writers in business and investing. I thought it would be a fun exercise to tap their accumulated experience by asking a single question:

“If you could tell a sophisticated finance audience one thing, what would it be?”

“Eight Investment Gems.”

[7 minute read]

“I believe in the discipline of mastering the best that other people have ever figured out. I don't believe in just sitting down and trying to dream it all up yourself. Nobody's that smart.”

- Charlie Munger

Source: Getty Images

Following Charlie’s lead, here are the answers from some of my favorite people. It’s remarkable how consistent they are.

1) Morgan Housel. His superb book The Psychology of Money just crossed two million copies sold. I think he’s arguably the greatest writer working in finance today. His answer:

“I would echo Charlie Munger: “It’s very common to be utterly brilliant and still think you’re way smarter than you actually are.” [Read more here].

2) Michael Batnick. In his role as Director of Research for Ritholtz Wealth Management, Michael manages to do the rarest of things: write about complex financial topics clearly, honestly, and insightfully.

“People desperately want to be told what to do. That's why there is such a big audience for hucksters and charlatans. I know better than most, but I need to constantly remind myself, especially when I hear opinions that confirm my priors, that nobody can see the future. This sounds incredibly obvious, but it's something that often goes overlooked. As Morgan Housel said, "best story wins." Stop listening to other people's stories.”

3) Kris Abdelmessih. Kris writes the superb Moontower blog. He has traded options for over 20 years, including a long stint at one of the most elite platforms, Susquehanna. He has a deeper understanding of market dynamics than most people I’ve read.

“Markets are biology, not physics, and that's important because every good idea can be ruined by price. For example, real estate with a mortgage might be a good inflation hedge, but if history has taught everyone that lesson then it will be less true going forward. In other words, the price today already incorporates that (imagine paying 3x for your current home... how's that going to work out as an inflation hedge?). My other quip would be that no individual investment matters ex-ante. It's how it contributes to the quality of your entire portfolio. Insurance is negative EV but can be additive to a portfolio's long-term geometric return. The thing most valuable you can learn from quants is portfolio construction.”

4) Frederik Geischen. Frederick writes the Substack Minds of the Market (a blog I pay for). He uses deep research skills to unpack the histories and processes of the world’s finest investors and businessmen.

“There is nothing new under the sun in markets. And yet we often fail to learn from prior generations because their experience is reduced to soundbites. Buffett's reading obsession is an obvious example. Interestingly, both Buffet and Jim Simons are systems builders optimizing for longevity rather than short-term returns. Quants at Renaissance were angry with Simons when he overrode the model to protect the firm. Before him, legendary trading shop Commodities Corporation had to learn the exact same lesson. Byrne Hobart recently wrote about the 'big red' emergency button at trading shop Jane Street (see below). The same principles re-appear in seemingly diametrically opposed domains and the connection is often not immediately apparent.”

5) Barry Bannister. I have worked with Barry Bannister, Stifel’s Chief Equity Strategist, for several years. I have found him insightful and successfully contrarian. He has over 30 years of experience as both an analyst and market strategist. His contribution is brilliant and hilarious.

“The stock market will find your own weakest personal trait, and then do everything in its power to use it against you.”

6) Cedric Chin. Cedric writes the Commonplace blog (another blog I pay for). He has one of the best B.S. filters I’ve encountered (nowhere more important than investing- see Benn Eifert’s article below). One of Ced’s primary focuses is understanding the nature of expertise in business and investing.

“It is commonly understood that much of expertise is tacit - that is, if you have expertise, you can't explain how you know to do things. People then believe that expert intuition is this mysterious, ineffable thing that you can't get at, since experts will give you nonsense answers when you ask them about their decisions. But this is not true. A relatively new class of techniques called 'Cognitive Task Analysis' - primarily created by researchers funded by the military, and developed throughout the 90s - allows you to get at some of the tacit expertise stuck in the heads of experts around you. The military uses CTA to come up with better training methods for their soldiers, so that they may make better decisions in the chaos of the battlefield. I believe we can do the same if we apply it to business and investing decisions.” [More here].

7) Tom Pence. Managing Director here at The KCP Group of Stifel, Tom has had a more than 30-year investment career and currently manages our active equity portfolios.

“Never confuse knowing more with gaining insight. Thoroughness can often be the enemy of insight. One must consider when it is time to stop the input in order to devote sufficient time to contemplation and ultimately making the best decision.”

8) Dave Nadig. Dave has the delightful title of “Financial Futurist” at VettaFi. He is a rare combination of truly balanced left and right brain thinker.

“You’re probably wrong. Whatever your belief system is about how markets and investing works, it’s far more likely you are wrong than that you have discovered some sort of “truth.” Modern Portfolio Theory? Deeply flawed (see Jon Lukomnik’s recent book, Moving Beyond MPT). Basic economic math? Probably wrong (see Ole Peters Ergodicity Economics). Indexing doesn’t impact markets? Probably wrong (see Gabaix and Koijen’s Inelastic Markets Hypothesis). It almost doesn’t matter what your priors are, if you are not constantly, in real time, assuming you’re wrong, then you inevitably will find out at just the wrong time. Recognize you’re wrong early and with humility.”

Pulling it together

It's interesting to see how much consistency there is in these insights. They also fit with a lot of the traits that seem to be common to the best investors and businessmen.

  1. A core principle here at The KCP Group is that a truly valuable expert can tell you precisely what’s happening right now, then their opinion, then their forecast. In that order. Because the first part is already hard enough.
  2. The hallmark of true mastery is rapidly reacting to the right information from the outside world. “Wisdom is knowing what information is important.”
  3. There is always less overlap than you think between sounding smart and being right.

Thanks again for the generosity of these contributors. A huge part of the value of our firm’s work is in our network. So please share any insights or comments.

Related Reading

  • Read. On B.S. in Investing by Benn Eifert for Noahpinion (16 minute read, obviously contains profanity).

  • Why read. This is a fun piece from another great mind in finance writing. Options guru Benn Eifert has written a salty but necessary dissection of the worst kind of investment advice.
    • “The lines between over-optimism, deception, and fraud are not always bright, and investment schemes can move slowly between those categories over time. Common red flags include:
    • Projected returns far above historical equity returns
    • Claims of returns significantly exceeding bond yields with little or no risk
    • Extrapolation of recent extreme investment performance into the future
    • Overly complex investments with non-transparent sources of return
    • Perverse incentives for the people selling the investment.”

  • Read. Understanding Jane Street by Byrne Hobart (25 minute read).

  • Why read. Byrne writes The Diff, one of the most popular Substacks in finance and tech. This examination of secretive quant firm Jane Street was apparently his most popular piece ever. It’s also highly relevant to today’s theme as it once again illustrates to me the importance of knowing the game you’re playing. I believe the incomprehensible level of sophistication in short-term trading make this a field best left to the specialists.
    • Jane Street is in a constant process of finding and extending the efficient frontier of where computers can replace humans in finance.
    • As with all jobs, you can make a selection effects-based generalization about traders: the experienced ones are obsessed with risk, because the ones who aren't obsessed with risk get the experience of being fired.
    • One thing you'll notice about quants is that they do not like to talk in detail about what they work on. Depending on the context, you might hear about an asset class, or a trade frequency, but actual strategies are kept very close to the vest. This is a notable contrast with non-systematic investors, who are all too happy to tell you what they like or don't like (at least once they're done putting on a trade). But this secrecy extends beyond talking about what they're doing—quants are even reluctant to talk about what strategies they used to use, even if those strategies no longer work, or about what they've looked into, even if it didn't produce a profit.

Have a great weekend!

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