In their recent episode of the VALUE: After Hours Podcast, Jake Taylor, Bill Brewster, and Tobias Carlisle discussed How Fishing Makes You A Better Investor. Here’s an excerpt from the episode:
Jake: All right. Fish is on the menu today, not veggies.
Tobias: Fish is good for you too.
Jake: Yeah, I think so. I was in Vail, Colorado last week for the VALUEx event that Vitaliy Katsenelson puts on. One of the mornings, we went to this kind of a camp, I guess you would call it, where they had archery, and fly fishing, and ride four wheelers around, all kinds of stuff. I chose to do the fly fishing, and while I was doing it, Vitaliy came over, and he challenged me to come up with a veggie segment for fishing. I thought, “All right, well, I’ll give it a shot.” So, we’ll see how it goes.
I have seven things that might be points related to fishing that might make you a better investor. Without further ado, number one is, of course, we have our main man, Munger, telling us to fish where the fish are. So, it doesn’t get much more on the nose than that. But I think what that really means is, where the fish are can mean multiple things, it can mean tailwinds for that entire industry, or country, or maybe that particular business, or the business model. It could mean competitive dynamics. Maybe there’s not a lot of capital being put into that industry, and so maybe there’s a chance for prices to firm up and profit to be realized. And of course, maybe it’s just valuation based, that’s maybe where the fish are is based on the price of the fish. So, that’s number one.
Number two is fish where the other guys aren’t. That is somewhat related to valuation. If nobody’s interested, that tends to be fetching a lower multiple, whereas if people are very interested, those multiples tend to be quite a bit higher. And there’s also something to be said maybe that means too, if you’re not a professional especially, maybe focus on smaller companies where there’s less attention, there’s not the big guys in there trying to fish with you, because maybe they’ve got better gear than you do, and you need to keep your advantage.
Number three, fishing is, fly fishing especially, is really all about a delicate presentation of the fly so that the fish is attracted to it. A lot of that is sort of like pattern matching for the angler to know like, “Oh, when I’ve done this certain move or made it move a certain way, it’s attractive to the fish.” But you also can’t force it. It’s a very delicate operation. I view that as the one-foot bars that Buffett talks about. Not forcing it, and really waiting for your opportunities, and being not so much brute force, and trying to talk yourself into how you can get over that eight-foot bar. It should be obvious and easy. Toby, in your research and work on this Invincibles idea and book, maybe explain a little bit of the concept of going with the flow, or with nature, or being– How would you explain it.
Tobias: Well, this is all still a little bit inchoate, I haven’t entirely formulated this part. But there is an idea that basically things continue as they are for the most part, and the better you are able to figure out what reality is– I wrote a note for myself just then when you said maybe look at smaller stocks or fish where the fishermen aren’t and I was going to fade that slightly for exactly this reason that probably some of the problem is approaching the problem like you’re trying to beat the market or you’re trying to do something like that, when sometimes I think that the better approach might be– and I’m talking about fundamentals here, not stock price performance. If the fundamentals have been succeeding for a really, really long period of time, and it’s in business, it’s going to be very hard to disrupt, make up or something like that. People get used to buying what they’re used to buying. They’re already buying it for semi-irrational reasons, and they’ve shown a propensity to do it for decades, they’re probably going to keep doing that for decades on. Now, does it really matter if you slightly overpay for those earnings, if you’re confident that– I’m talking about in a market normalized with low interest rates. There are lots of very expensive companies out there, if you’re buying something that you’re very, very confident.
So, I think about this in a non-makeup type thing. Shopify is a business that I think is absolutely spectacular. But it’s always incredibly expensive, and I’ve tried to work out how you get– What you’re waiting for with Shopify maybe we’re going to get a big collapse at some stage and Shopify will be down 90% like Amazon was, and you get your opportunity to buy. But equally, you can’t rely on that happening. I’ve been waiting a long time for that to happen, and-
Tobias: -it’s never happened. But I do think that Shopify is a business that it’s going to be much, much bigger in 5 or 10 years’ time. The stock price might not be much, much bigger in 5 or 10 years’ time. But if I think a business guy, I kind of want to own Shopify at the right price. So, that’s the idea, just that you’re trying to buy stuff that is going to win in the future, is going to be here first. is going to be winning in the future, or is going to be growing, and then you’re secondarily trying to find the right entry point for them.
Bill: I think just to riff on that a little bit, Bill Miller has said that he has an addiction to value stocks, but all his money has been made in growth stocks. I think it’s interesting. Something like Farfetch, something like Etsy, I don’t know. You’ve got to figure out how long you want to or how– I think you can pay a really high price by just being, “Oh, just duration, bro. Just own it forever.” It’s okay, but I do also think that those are very reasonable– They are not objectively crazy to me. I can understand why people buy them here for the reason that you’re speaking about.
Jake: Sure. All right. Number four, you want to find a deep-water pool. That’s where the best biggest fish are. They tend to be down at the bottom. If your fly doesn’t get deep enough, you’ll never really attract them. But if your fly gets too deep and banging along the bottom, you’re likely to get tangled up in the rocks, and weeds, and stuff. I think that’s somewhat similar to the research process where if you don’t get deep enough, you’re not really going to get at what’s important there. But if you get too deep and down and tangled up in the weeds, I think you also reach a suboptimal level. What’s especially dangerous is that, for every unit of information that you add down at that very depth, you probably add more confidence in what you think you understand faster than you are actually understanding. So, I think there’s some sweet spot there, and probably the amount of work that needs to be done on an idea to get that 80% to 90% of the most relevant information before you get diminishing returns, and then overconfidence instead.
Spend Your Research Time On Better Businesses
Tobias: Could I frame the problem as, it’s sort of a classification problem. A deep pool might be something that, it might be worthwhile spending a whole lot of time studying a never sell type business, because that’s the business that you need to understand, and you need to be able to see if that starts fading or something like that, because you’re paying for the premium. But cyclicals and things like that, you need more of a forest for the trees type view where you need to be able to stand back and see where it is in the economy and its cycle rather than– it doesn’t help you to know a great deal about the grade of the ore or something like that. But you need to know that once and then you get a rough idea what this thing will do if the commodity runs, and you’re better off spending some time working out when the commodity is going to run. But it doesn’t really pay to get tangled up in a company like that, cinemas, or whatever the case may be, and I know some people who spend huge amounts of time on these companies that just the businesses just don’t justify the amount of time that they spend on them. I think you’d be better off spending that finding the never sell.
Jake: Maybe the analogy would be there that the better business that you’re researching is a deeper pool. So, if you’re going to really sink a lot of time into it, you want to make sure it’s a good depth.
Tobias: That’s worth spending the time on. Having said that, you made a great point once that if you don’t trust the management team enough that you feel the need to read every single footnote, then it might not be the right business. You need a business where you trust the guys running it so well that you don’t feel like you need to read it like-
Jake: A lawyer?
Tobias: — [crosstalk] contract. Yeah, like a lawyer.
Bill: This is a tangential thought. But the nice thing about studying business is that you only want to own is all the time that you sink into it, that’s not lost time. If you’re just researching a cigar butt, then you’ve got to start all over from zero the next one.
Tobias: Yeah, that’s a good point.
Find Opportunities That Match Your Personality
Jake: Number five, the best anglers, they make their own flies. Really, it’s almost like finding your personality and what works for you, and then matching it with the environment and the opportunity set. So, I think knowing yourself as an investor and knowing what opportunities make sense to you, where you’re likely to succeed, and waiting for those, I think is, I don’t know, a big, big chunk of this game. So, know thyself is really good– and the best anglers, they know themselves by making their own flies.
Tobias: Yeah, I think that’s a good one. You’ve got to be whatever your personality fits. If you–
Jake: Number six. Oh, go ahead.
Tobias: Yeah, I think that’s a good one. That’s all.
Jake: [laughs] This is pretty smart. Really good anglers will check spiderwebs along the banks to see what bugs are currently in bloom, what have recently hatched. That’s what the fish are likely biting on. And they’ll pick a matching fly then that looks like whatever they find in the spiderweb. I think that might be an interesting analogue for stock screening. You want to check that spiderweb to see what’s in there, and what you might pattern match.
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