Sunday, August 19, 2018

Faber, The Best Investment Writing, vol. 2

If you didn’t read the first volume of Meb Faber’s The Best Investment Writing (and you should have and of course still can), you’re got another crack at learning from a lot of smart folks who collectively manage hundreds of billions of dollars. The second volume of The Best Investment Writing (Harriman House, 2018) includes more than 40 articles, and, since the book runs about 350 pages, the articles are bite-sized. Most of them originally appeared online and were geared to a semi-distracted readership, which increasingly describes all of us.

The articles are organized under four headings: market conditions, risk and returns; investment portfolios, strategies and edges; pricing and valuation; and personal finance, behavioral biases and beyond.

Here I’ll recap two articles that appealed to me and that lent themselves to summary. The second criterion ruled out many excellent contributions. For instance, trying to summarize Barry Ritholtz’s “An Expert’s Guide to Calling a Market Top: The landscape is filled with pundits predicting the demise of the bull market. Here’s how to get in on the action” would be like trying to summarize a Letterman top-10 list. The task would simply produce a pale imitation of the original.

And so, to the two articles I chose. First, “10,000 Hours or 10 Minutes: What Does It Take to Be a ‘World-Class’ Investor?” by Charlie Bilello, originally published on the website of Pension Partners. From the title you can surmise that Bilello will debunk the applicability of the 10,000-hours rule to trading/investing. He argues that luck trumps skill in investment outcomes and that, in looking at the successes of the market wizards of years past, we can’t determine with certainty whether their performance was the result of skill or luck. More important, “even if we concluded that there was some skill involved, doing x, y, and z because a ‘market wizard’ did x, y, and z in the past is a guarantee of nothing. …the environment they operated in no longer exists. … If the wizards themselves were faced with the task of repeating their prior successes, they too would fail—Warren Buffett would not be the next Warren Buffett if he had to start over again today. Paul Tudor Jones would not be the next Paul Tudor Jones. Stanley Druckenmiller would not be the next Stanley Druckenmiller.” The average investor should simply spend ten minutes learning about controlling costs, diversification, and asset allocation. “In a field where the outcome is driven more by luck than by skill, being a master of nothing (diversifying and protecting yourself from the unknowable future) yields the highest probability of success.”

Second, Samuel Lee’s “Waiting for the Market to Crash Is a Terrible Strategy.” We hear over and over that we should be fearful when others are greedy and greedy when others are fearful. But is this really so? Lee shows that putting cash to work in the market only after a crash has been “an abysmal strategy, far worse than buying and holding in both absolute and risk-adjusted terms.” Using monthly U.S. stock market total returns from mid-1926 to the end of 2016, he simulated variations of the “buy after a crash” strategy, “changing both the drawdown thresholds [from -10% to -50% in increments of 5%] before buying and the holding periods [from 12 to 60 months] after a buy.” In all cases the strategy failed. The reasons? “First, the historical equity risk premium was high and decades could pass before a big-enough crash, making it very costly to sit in cash. Second, the market tended to exhibit momentum more than mean reversion over years-long horizons. As strange as it sounds, you would have been better off buying when the market was going up and selling when it was going down, using a trend-following rule.”

Wednesday, August 15, 2018

Bova, Growth IQ

In Growth IQ: Get Smarter about the Choices That Will Make or Break Your Business (Portfolio/Penguin, 2018) Tiffani Bova regales the reader with stories about 30 companies to demonstrate what she considers to be the only 10 paths to growth. Although this book is written for entrepreneurs and managers, it’s a worthwhile read for investors who want to assess the growth strategies of companies on their radar screen.

Without the stories, the paths to growth—customer experience, customer base penetration, acceleration, product expansion, customer and product diversification, sales optimization, churn, partnerships, co-opetition, and unconventional strategies—would seem either abstract or, in many cases, obvious. Moreover, taken in isolation, they probably wouldn’t even work. As Bova writes, “It isn’t enough to have the ‘right’ new growth strategy. You must fully understand what the current market context is prior to making any moves.” And then you need to select key actions that can positively influence outcomes and establish a priority, order, and timing to those actions. In sum, “Growth IQ is a holistic approach to finding the right path, in the right market context, in the right combination and sequence—creating a multiplier effect that is far more powerful than just focusing on one or two efforts in isolation.”

Almost all of the companies Bova writes about are publicly traded, though not all of them are stock market darlings. Some companies, such as Sears, Blockbuster, Wells Fargo, and Blue Apron, are fodder for cautionary tales. Even those that Bova selected to illustrate a particular path to growth may not have executed especially well in another domain, at another time.

Growing a company is not a mechanical exercise, as Bova points out again and again in her examples. But intelligently pursuing multiple paths to growth will pay off. “Amazon has pursued all ten possible growth paths in little more than two decades.” It is “the very embodiment of Growth IQ.”

Wednesday, August 8, 2018

Effron, 8 Steps to High Performance

We all start our careers with attributes (e.g., intelligence, personality, physical attractiveness) and socioeconomic backgrounds that are “largely unchangeable once we become adults.” These combined items “predict up to 50 percent of anyone’s individual performance” and give some people a clear advantage over others. But that leaves the other 50+ percent that people can control and shape at will.

In 8 Steps to High Performance: Focus on What You Can Change (Ignore the Rest) (Harvard Business Review Press, 2018) Marc Effron shares “scientifically proven” things you can do to help yourself be a high performer. They are, in a nutshell: (1) set big goals, (2) behave to perform, (3) grow yourself faster, (4) connect, (5) maximize your fit, (6) fake it, (7) commit your body, and (8) avoid distractions.

These behaviors have been shown to work within a corporate environment. They are not necessarily behaviors that propel people to be successful entrepreneurs, not even behaviors that top CEOs exhibit. For instance, top performing CEOs seem to be high on general ability (fast, aggressive, persistent, efficient, proactive, high standards) and low on interpersonal skills (respectful, open to criticism, good listening skills, teamwork). But, writes Effron, “if you’re not already at the top, I’d suggest that both great results and great interpersonal behaviors are essential ingredients for high performance.”

“Grow yourself faster” is a step worth pausing at. “[R]oughly 70 percent of your professional growth will come from the work experiences you have, 20 percent will come from your interactions with others, and 10 percent will come from formal education.” Formal education “that may seem critical to success often isn’t. Only thirty-nine Fortune 100 CEOs have an MBA, and many of those leaders didn’t earn them at top-ranked schools.” (And, yes, this book was published by a wholly-owned subsidiary of Harvard University that reports to the Harvard Business School.)

Growth, Effron contends, is “a cycle—perform, get feedback, perform again better…. The faster and more often you move through that cycle, the faster you’ll develop and get the next opportunity to learn a new skill, test a new behavior, and get more helpful feedback. Each cycle you move through should make you more competent and more competitive.”

Effron’s chapter on how you can prime your body to perform better at work is something of a myth buster. “Surprisingly little science,” he writes, “makes a direct link between our bodies and individual high performance at work. The science that does exist says that sleep matters most, exercise has some minor and specific effects, and diet has no direct effect. That doesn’t mean that exercise and diet don’t matter in your life, but neither has much power to boost your performance at work.” As for sleep, quality impacts performance more than quantity.

The final step, avoid distractions, is not about smart phones and email. Instead, Effron tells the reader to “avoid the fads that distract you from what’s scientifically proven to improve your performance. Many of these fads present advice that would seem to make your life easier (focus on your strengths), quickly increase your performance (adopt a growth mindset), or give you instant self-confidence (strike a power pose).” But this advice is misguided. For instance, focusing on your strengths “will help you be better at the exact same things you’re good at today, but won’t help you to be good at anything else.”

“If you want to accomplish more than you thought you could or break through a performance barrier,” the author concludes, don’t follow fads but follow the eight steps given in this book.