Stoicism for Value Investors

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During their recent episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle discussed Stoicism for Value Investors. Here’s an excerpt from the episode:

Jake: I am doing, how to invest like a stoic. What’s amazing about it is that, like you said, these guys were mostly from 2000 years ago. And what you come to realize is that all the same problems that we have now, things bother us, they bother these guys too. What’s interesting is that they develop this philosophy of life that actually you could call The Aspirin of Philosophy. For 2500 years, people knew that the willow tree, for whatever reason, had healing properties for someone. It wasn’t until much, much later that we understood that it was acetylsalicylic acid.

Tobias: That is paracetamol, right? I forget what the– Tylenol. No?

Jake: Tylenol is ibuprofen, I think. Anyway–

Tobias: What is it then? What’s the brand name? Sorry, I’ve totally derailed you already.

Jake: Bear, I think was real early on in the Aspirin world.

Tobias: Is it aspirin?

Jake: Yeah, aspirin. We know now that that’s the compound that also is found in willow bark that is healing. Now, these guys 2000 years ago stumbled upon an operating system for how you view the world that they couldn’t tell you the psychology research that would support that particular finding but it worked for them as well. So, almost empirically, they have this a good result from it. I find that to be interesting. Now, what this whole segment is inspired by is a lovely little book by William Irvine that’s called A Guide to the Good Life. If you haven’t done much research, if you haven’t read the original materials of Seneca or Marcus Aurelius, this is a really approachable book for getting some of the tenets of stoic philosophy. It’s relatively short and it’s easily digestible in a couple of sessions for the reading.

Tobias: It’s very hard to read those translations, I’ve found. I found a couple of translations for free online. Haven’t gone all the way through it. Can you give it to me in 10 bullet points?

Jake: Right. Yeah, exactly. Well, I have eight tips for you today.

Tobias: That’s even better.

Jake: Yeah.

Bill: Just the tips, please.

Jake: Six-minutes abs. What about five-minute abs? Tip number one. The first thing about having a philosophy of life is that you really should have some sort of bigger goal, some kind of grand goal. And in the investing world, maybe that for you is setting yourself up for retirement or financial independence or maybe there’s charitable endeavors that you’re interested in–

Tobias: World domination.

Jake: –or maybe it’s [crosstalk] world domination is another option.

Bill: Yeah.

Jake: But the risk of not having a philosophy, of just drifting through is that you get to the end and you realize that you wasted so much time. It is important, I think, to have some sort of bigger– what you’re trying to accomplish. I was thinking about for this segment, by the way, eight tips is a lot, so I’m going to try to move quickly and you guys just jump in after. Okay?

Tobias: Perfect.

Jake: Don’t be shy. Tip number two is this idea of negative visualization. What you’re doing there is you’re picturing what is the worst-case scenario. Value guys, in general, I think are pretty good at this in that you’re always worried– take care of the downside and the upside will take care of itself. We have a lot of maxims that have developed from that. A margin of safety is another way of sort of predicting what’s the worst possible thing.

The other place where that’s helpful is that by imagining that negative visualization, you’re creating an immunization to when bad things actually do end up happening because you’ve already thought that something bad’s going to happen. It’s when you’re surprised is when it’s extra hard to control your emotions.

Bill: Shout out to the Wells Fargo shareholders.

Jake: [chuckles] Too soon.

Tobias: To all value investors out there.

Bill: Well, I’m talking about negative surprises. Finding out your CEO didn’t do anything for two years was a negative surprise, but that’s different.

Jake: All right. Tip number three, is this idea called the trichotomy of control. What that means is you can basically break up the world into three buckets. Bucket number one, things that you have complete control over, things you have no control over, and the things that you have partial control over. Now, what you want to focus most of your efforts on are is obviously the things that you have complete control over. The goals that you set for yourself, that’s the values that you adopt, like how you want to live your life.

I do a fair amount of coaching for my kids’ baseball teams. One of the things that we always talk about, almost every game, is that when you’re at bat, there’s only two things that you have control over. You can control which pitch that you swing at. So, pitch selection. And number two, you could control how you swing, like did you take your good swing or not? Those are the only two things that you have any control over. In the investment context, obviously choosing the pitches that you swing at is investment selection. And then, how you swing, like taking your good swing, how well did you work your process to come up with what you’re doing?

Now, what do you have no control over? Almost everything else. The outcomes are very, very– number one, difficult to predict. But also, there’s so much stuff out there that you just can’t know, and luck is still a very big factor, especially over shorter periods of time. We end up doing a lot of resulting, I think, because of that.

And then the things that you have partial control over. In baseball context, you don’t want to pick external goals, necessarily. You could say we want to beat that other team. Well, not everything you’re going to be able to do to beat that other team. You can, however, set an internal goal of wanting to play the best that you’re capable of. Winning the external game might be like, I want to have the best returns ever. Okay, well, good luck with that. But the internal goal might be like I want to produce the best investment process that I’m capable of doing. That is an internalized goal that you have some partial control over.

Okay? Nothing? We’ll keep moving on?

Bill: Yeah, no, that makes sense.

Jake: Tip number four is welcome your fate. You want to be fatalistic about the past. You can’t change it. There’s no sense in really ruminating about it. I think that’s self-explanatory. A lot of times we like to sit there and lick our wounds about our losses.

Number five is you want to welcome discomfort and practice poverty. That one’s been very easy for value guys to internalize for the last five years.

[laughter]

Jake: In the stoic context, they would purposely maybe a couple of days a month wear rough clothes and eat really poor food, poor like low nutrition, not fancy foods, just so that you would resensitize yourself to the other good things that you have around your life.

Tip number six, meditate and be self-aware. How that shows up in the investment context is really doing a postmortem on all of your investments. You want to improve, keep an investment journal, keep track, learn from your mistakes. At bedtime, one of the philosophers said, “You should ask yourself what ailment of yours have you cured today, and where can you show improvement?” For us, that’s basically where could I have improved in my process? Where did things go wrong? Maybe if it didn’t work out, where did I get lucky? Potentially, if it did work out, even though you missed something important? They say even to count injury is profitable, because it’s a chance for you to test yourself, to prove yourself, and to prove your virtues. I think another way of saying that would be like learn from your losses.

Tip number seven would be, and this one is pretty common in the investing world or the value world, is following your inner scorecard. If your goal is to win the admiration of others in this game, then almost by definition, you have to be willing to adopt their values, or maybe even set another way their benchmarks. If you’re following your own inner scorecard, it’s much easier to be a little bit detached and not take on everyone else’s baggage.

And then finally, tip number eight is, there are two primary sources of human misery. Number one is insatiability. We could almost call it greed, maybe in the investment context. And then, number two is then worrying about things that are beyond your control, so what Andy Duke would call resulting.

Roll all those things up together, in summary, I would say the advices to stoically work your process, try to improve every day, ignore the crowd, and then accept your fate.

Tobias: Yeah, that’s great. I love that list. Good aspirational list.

Bill: Just remember, if you underperform, you visualize this, continue the process.

Tobias: What other choice have you got? I guess you could change though.

Bill: Well, I don’t know. I had a really good conversation with somebody about Wells who thinks I’m early on it and I think he’s got a lot of really good points. But that’s not really the game that I’m trying to play. I’m trying to buy an asset base that I see that I think can generate cash for a reasonable price. I might underperform for a while on that. But I told him I don’t care because that’s not really how I’m going to be measured. Over time, I certainly hope it all takes care of itself. But in a year and a half, that’s super easy to say, the day you’re buying the position like, “Oh, I don’t care if it’s dead money for a little while.” But it sucks after a while. To be able to constantly look at it, and maybe part of the answer is don’t constantly look at it. But it’s similar to COVID, preparing mentally and then living it emotionally are two different things.

Jake: What are the odds that you are going to bottom-ticking anyway?

Bill: Yeah, none. I’m not a genius. I’m just some dude.

Tobias: That’s luck anyway. Bottom-ticking is luck.

Jake: There’s no genius [crosstalk] bottom ticking.

Bill: Unless you’re Munger, man. Ah, Munger pulling over to the freeway, knowing he’s bottom ticking.

Jake: No, he didn’t.

Bill: He did. No, he didn’t. But it’s so legendary if we say he did.

Tobias: [unintelligible [00:15:58] to the month, probably.

Jake: Look at Munger-Wheelers LP results, and they’re all over the place. That’s an indication. Over the longer sweep, they’re good. But interyear volatility was like off the charts. That’s a sign of not being able to bottom tick.

Tobias: Sometimes, it’s also like– you can only play the opportunity set that you’re presented with. Just to steal it for my own topic, but I look at that long sweep of that 195-year history that we have, and it’s just striking. Graham gets famous running from basically post the Great Depression for 20 years. And then, Buffett picks up 56 to– Buffett partnership ’56 to ;69. That’s 13 years, it’s like nothing in that four period, but it’s some of the best years in that period. If you’re just a value guy at the right time and you outperform even value, all of a sudden, you’re Benjamin Graham or Warren Buffett, but you don’t hear of a lot of guys who are–

Jake: How about that 2000 to 2006 period? That’s a short time.

Tobias: Well, then there’s Einhorn. He captures ’96 to 2006, and he also captures 2006 to date. It’s almost like he’s two different guys. Finkle and Einhorn.

Bill: Yeah. I saw you put that tweet out the other– It was earlier this morning, right?

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