activist investors, autodidactism, books, Bruce Kovner, consensus, contrarianism, fear and greed, Howard Marks, investing, Isaiah Berlin, latticework of mental models, literature, Magic Eye, mosaic theory, Nosce Te Ipsum, reading, Warren Buffett
OK, back in June & July, I covered two key benefits of reading:
Knowledge, Experience & Inspiration – a constant & wide-ranging diet of non-fiction reading’s essential for any investor, and something you’ll find all the great investors practice & recommend.
Nosce Te Ipsum – I believe reading literature’s equally important, it’s one of the few ways you can truly know thyself (& other people). And painful self-awareness & examination offer the best hope of avoiding the potentially devastating impact of fear & greed on your portfolio.
It’s been a long time coming – let’s tackle the final benefit of reading, which I call: Magic Eye. It’s definitely the most exciting – I guess I’d classify it as offensive, versus the rather defensive nature of the other benefits. But some context would be useful – let’s first talk a little about how I actually read:
Ever since I was a kid, I’ve always found it incredible how the entire world (even multiple worlds) can be encapsulated in a single book. And there’s almost never-ending mountains of them, just waiting to be discovered! In fact, they really are never-ending: In the UK, for example, 150,000 new titles are published each year! Faced with those kinds of numbers, I’ve always felt an overwhelming sense of urgency – how can I ever bloody read quickly & widely enough to ever make a dent in such a mountain?!
But that’s exactly what I’ve always tried to do – to read voraciously, as many pages & as many books as possible. If I read a hundred pages or two, and need a break, I crack open a fresh book instead – preferably something very different. I find my mood’s changed, I’ll reach for another book. If I want to kick back & put my feet up – well, that might deserve yet another book. It’s a bit like running a marathon – your mood changes, or your energy level, or maybe your pace slackens – but you never stop running. I usually end up reading a half-dozen, maybe even a dozen, different books at a time. And even if I gallop through them, I was astonished long ago to discover it all gets filed away, somewhere in my subconscious – the dross sinks into the depths, leaving the best writing & the best books to float back to the surface.
And I’ve fortunately kept up these reading habits over the years. But I recall a huge change when I started to take investing seriously – I’ve never been sure if it was deliberate, or simply unintentional. I began to treat anything related to finance & investing, no matter how mundane, like a sacred text – something to mine for info, and then pore over for any scrap of insight. Hmm, sounds kinda admirable, eh?! Well perhaps, there’s always something new to learn. But therein lurked a potentially lethal problem – one I didn’t even realize I faced for many years…
I think Howard Marks explains it best in ‘The Most Important Thing’ – he describes it as first-level versus second-level thinking. Every day, investors are bombarded with huge amounts of info & commentary (from multiple sources). There is useful analysis & opinion buried in this avalanche, but mash it all together & it’s nigh impossible to avoid being seduced by the general consensus. This is first-level thinking. But all too often, the consensus is simply the best narrative that seems to fit the current facts. Which offers no guarantee it’s actually correct! In fact, the consensus will often amplify fallacious thinking, especially with bubble stocks & markets. Which is a reminder of a bigger risk – everything’s priced in! So, even when the consensus is correct, it’s almost impossible to out-perform – but when it’s wrong, it’s all too easy to go over the cliff.
Second-level thinking’s the response to this problem. When an investor looks at a stock, or the market, they should treat the general consensus (in fact, all conventional thinking) with suspicion. Is it right? And if it is, is it priced in? Or if it’s wrong, does that mean something’s mispriced? And so on… But that’s a daunting task for any investor, where on earth do you even start? And if we assume you possess the necessary skills & experience, could you keep doing it day in, day out? What if you slip into contrarianism, simply for the sake of it – that’s just a different way to lose money!
As usual, Buffett may offer the perfect solution. Read this awesome Farnam Street piece, for instance. He sticks rigorously to facts & figures – by simply working his way through a daily stack of annual reports, filings, trade journals, railway shipping stats, and a myriad of other obscure corporate & economic data. He has no desire to hear from eager brokers, watch talking heads, read analyst reports, subscribe to stock newsletters, trawl the message boards…or even read blogs! He doesn’t want to know the general consensus, or even second-guess it, he simply does his own analysis & forms his own opinion. Like most things Buffett, it sounds simple…but how do we actually emulate him? Anyway, as mere mortals, who among us even has the confidence to try? And even if you did, how lonely a life would that be?
Realizing all this, I think I ended up in a bad place for quite some time as an investor. I recognized the problem, I even found a solution, but I wasn’t at all sure I had the ability or the confidence to execute on it. ‘Til I realized I had the bloody answer all along… I’d already spent my life happily extracting the good stuff from my reading, without ever really thinking or worrying about it! My personal version of ‘Don’t think, just do’, or perhaps ‘Be the ball’. 😉 So, I gave it a whirl – I mean, when all else fails, why not try something that works?!
Soon, I gave up on deciding the best material to read (just read it all). I gave up on analyzing everything I read to death. I gave up on filing & taking notes. I even gave up on finding a distinction between reading for pleasure & reading for profit. Because you simply never know which facts, figures & ideas will prove useful, or when. Because you’re seeking to create cognitive dissonance – which your mind will hate & will insist on resolving. Because two plus two sometimes turns into five. Because the fluff & the junk fades away, and perhaps some gold remains. Because I want to be a fox, not a hedgehog.
Most of all, because very occasionally I see patterns. Or a brand new investment idea or theme unexpectedly rises from the depths. Or a seemingly dull company keeps nagging & lingering just out of reach, and suddenly one day a totally different company & perspective snaps into focus. Yes, I call it the Magic Eye – for me, it works in exactly the same fashion as those Magic Eye pictures we were all crazy about. Maybe it’s not deliberate, maybe it’s not smart, but it’s the only way I can see past all the noise & find something exceptional.
It’s also why I’d describe myself as an activist investor – which has very little to do with actual activism. It’s really about focusing on a company (or a sector, or the market), and suddenly seeing a very different enterprise or opportunity than others might see. Which could very well mean it’s also wildly mispriced. And that kind of perspective can definitely offer you low risk multi-bagger potential.
Now, like most things in investing, I can’t tell if this approach will also work for you. But I think you’ll agree I’m talking about territory where the greatest opportunities, and the greatest investors & traders, reside. To get there, they gained the necessary knowledge & experience, they successfully controlled their fear & greed, and they learned how to see the world around them re-configured in a very different way. For them, you can probably chalk it up to pure innate talent. For the rest of us, I think huge swathes of reading is the inevitable toll you pay to get there – however you go about it:
But reading annual reports will give you the figures. Reading non-fiction gives you the facts (& the right context). And most importantly, reading fiction allows you to recognize the fear & greed in yourself (& others), and enables you to see & imagine the world very differently.
Why not give it a go? At the very least, it’s a grand experiment that’s well worth trying. I’ll leave you with the following quote – it’s always been an aspiration for me as an investor. It’s from Bruce Kovner, of Caxton Associates, who has produced one of the best long-term trading/investing records ever. I first read it years ago, in ‘Market Wizards’, and it’s resonated with me ever since. In fact, as you can tell from these posts, it ultimately motivated my whole approach to reading & investing:
‘I’m not sure one can really define why some traders make it, while others do not. For myself, I can think of two important elements. First, I have the ability to imagine configurations of the world different from today and really believe it can happen. I can imagine that soybean prices can double or that the dollar can fall to 100 yen. Second, I stay rational and disciplined under pressure.’