Welcome to Words with Wynn! If this is your first time perusing my content and you’d like more of my weekly musings, subscribe below:
During my prior life as an young aspiring financier, I consumed my fair share of investing tomes. I learned a few things about efficient markets this and underpriced assets that, but as I now revisit the scraps I saved, I believe that a few of these quotes offer wisdom beyond merely slinging stonks. This week we’ll explore a few quotations about investing (in life).
Contrarian Thinking
To begin, a wine and cheese pairing for you. Of the many writings I’ve consumed from Howard Marks (a veritable investing legend), there are two succinct takeaways that always stuck with me:
"... in order to strive for performance which is far different from the norm and better, you must do things which expose you to the possibility of being far different from the norm and worse. " - Howard Marks, "The Route to Performance" (10/12/1990)
“By definition, the average fund manager performs average.” - Howard Marks [paraphrasing]
These two ideas compliment each other and have direct implications for more than your portfolio. The former speaks to the importance of risk and the possibilities of failure that accompany any daring pursuit. In stock market investing, the name of the game is ‘beating the index’ (an accepted benchmark for the average performance of the market, usually the S&P 500). In order to outperform the ‘average’ basket of stocks, you must do something different and (usually) riskier, whether that be buying out of favor businesses or innovative/under-appreciated products. Said another way, you only outperform life by being both contrarian and right. It is not enough to zig when your peer group is zagging; you must move differently and correctly.
As this applies to our own lives, you can not expect to exceed your peers in following a cookie-cutter, standardized approach to life. To do something different and great will require risk and an accompanying possibility of serious failure. This is the exciting and challenging thing about life; nothing great comes without the possibility of falling short, and often these shortcomings set your stage for the next opportunity.
Building upon this idea, we come to the latter quote. It’s a short and sweet reminder that everyone believes themself to be an exceptional, important, unique little snowflake (me included. You’re literally reading my writing. I am important) and will try their hardest to sell you on precisely this idea. But the reality of life is that the average performer is, definitionally, average. Everyone in the NBA isn’t Lebron James, and everyone in your company will not be an A+ employee. It is imperative that you seek out mentors and partners that are different and exceptional in a life where everyone is incentivized to proclaim themself as such, regardless of the truth of their self-opinion.
And with the uncertainty of such assessments and information generally…
"First, I had dinner with Warren Buffet about a year ago, and he pointed out that for a piece of information to be worth pursuing, it should be important, and it should be knowable. These days, investors are clamoring more than ever for insights regarding the macro future, because it's important: it moves markets. But there's a hitch: Warren and I both consider these things largely unknowable. He rarely bases his investment actions on them, and neither does Oaktree." - Howard Marks, "Expert Opinion" (1/10/2017)
Every day, in life and business, we are faced with myriad decisions shrouded in uncertainty. The job of an executive is to make effective decisions with limited information, and this quotation nails that on the head. But to me this little nugget of wisdom can be applied on a personal level as well. We all stress ourselves unnecessarily about decisions, outcomes, and futures that will be important, but which are completely unknowable. If it is possible to gather more or better information to help inform your decisions, then do that directly. But if it is not, then one should accept the limitations of reality and move forward as expediently as possible. So much of our suffering is derived from pining over possibilities that are irrelevant to reality. I suppose this idea of letting go is an element of stoicism, the currently celebrated philosophical flavor of the month for Silicon Valley bros and self-improvement gurus. And when you make the best decision you can and it doesn’t play out…
“I like to say, ‘Experience is what you got when you didn’t get what you wanted.’” - Howard Marks
Avoiding Ruin
Yet with the finality of the decisions we make, one should always keep in mind their gravity. Are they existential in nature? I preface the next thought with another pairing, one of Bezos’s famous decision-making frameworks with another Marks quotation:
Some decisions are consequential and irreversible or nearly irreversible – one-way doors – and these decisions must be made methodically, carefully, slowly, with great deliberation and consultation. If you walk through and don’t like what you see on the other side, you can’t get back to where you were before. We can call these Type 1 decisions. But most decisions aren’t like that – they are changeable, reversible – they’re two-way doors. If you’ve made a suboptimal Type 2 decision, you don’t have to live with the consequences for that long. You can reopen the door and go back through. Type 2 decisions can and should be made quickly by high judgment individuals or small groups.
As organizations get larger, there seems to be a tendency to use the heavy-weight Type 1 decision-making process on most decisions, including many Type 2 decisions. The end result of this is slowness, unthoughtful risk aversion, failure to experiment sufficiently, and consequently diminished invention. We’ll have to figure out how to fight that tendency.
Quotation from an Amazon shareholder letter, uncovered in this great Farnham Street Article, and an accompanying visualization:
"I believe most strongly that this holds true in my group's opportunistic niches as well-- that the best foundation for above-average long term performance is an absence of disasters. It is for this reason that a quest for consistency and protection, not single-year greatness is a common thread underlying all of our investment products..." - Howard Marks, "The Route to Performance" (10/12/1990)
Tie these two together for a knot of durability. In order to ‘win the war’, you must survive the battle. In investing, this means avoiding tail (“blow up”) risks that could represent an existential threat to your fund (ex: going to zero in ‘08/’09 meant that you missed the entire decade-long bull run of exceptional economic growth that followed).
An especially poignant, and classic, Statistics 101 riddle I remember to exemplify this point is to “Never forget the 6 foot tall man who drowned fording the river that was 5 feet deep on average.” (also referenced in a Marks memo somewhere). That said, you can’t capitalize on good times if you’re blown out in bad times. We can only harvest the rewards of exponential growth in both relationships and businesses if we are around long enough to see them blossom.
Which ties nicely when considering your own intelligence and that of the company you keep:
"As Charlie [Munger] says, it's great to have a manager with a 160 IQ- unless he thinks it's 180." - Warren Buffet, Letter to Investors 2016
Staying humble and self-aware is one of the best defenses against the kind of exuberance that will take you ‘out of the game’. Confidence is key, arrogance is ruin. This idea was cemented in my financier days when looking around my workplace while reading the following (also a very short, impactful piece in the stoicism vein):
In addition to ego, we should also remember the fleeting, fickle nature of human memory:
"There can be few fields of human endeavor in which history counts for so little as in the world of finance. Past experience, to the extent that it is part of memory at all, is dismissed as the primitive refuge of those who do not have the insight to appreciate the incredible wonders of the present." - John Kenneth Galbraith, A Short History of Financial Euphoria
The most dangerous words in investing are ‘this time it’s different’, but I think that also has broader applications. History may not repeat itself, but it quite frequently rhymes (also a Marks aphorism). We see innovations emerge, markets change, and people ‘grow' every day in our life, but it’s important to take all new wonders with a grain of salt.
Stay safe out there.
- W