Street Capitalist: Event Driven Value Investments

(from one of my favorite films: Searching for Bobby Fischer)

In 2009, Charlie Munger recommended Malcolm Gladwell’s book Outliers which studiers outliers throughout history and discipline to find commonalities. One of the ideas professed by Gladwell is a 10,000 hour rule, where if you want to master something you must practice it for at least 10,000 hours. Gladwell uses the Beatles as evidence of this rule, pointing out that their time in Germany was spent constantly performing live which helped them gain the mastery needed to become great musicians when playing concerts and on TV.

The folks over at Study Hacks find that in chess, to become a grandmaster, you do not just need to spend 10,000 hours practicing chess. You must also spend those hours doing the right kind of work or deliberate practice.

1. It’s designed to improve performance. “The essence of deliberate practice is continually stretching an individual just beyond his or her current abilities. That may sound obvious, but most of us don’t do it in the activities we think of as practice.”

2. It’s repeated a lot. “High repetition is the most important difference between deliberate practice of a task and performing the task for real, when it counts.”

3. Feedback on results is continuously available. “You may think that your rehearsal of a job interview was flawless, but your opinion isn’t what counts.”

4. It’s highly demanding mentally. “Deliberate practice is above all an effort of focus and concentration. That is what makes it ‘deliberate,’ as distinct from the mindless playing of scales or hitting of tennis balls that most people engage in.”

5. It’s hard. “Doing things we know how to do well is enjoyable, and that’s exactly the opposite of what deliberate practice demands.”

6. It requires (good) goals. “The best performers set goals that are not about the outcome but rather about the process of reaching the outcome.”

If you’re in a field that has clear rules and objective measures of success — like playing chess, golf, or the violin — you can’t escape thousands of hours of DP if you want to be a star. But what if you’re in a field without these clear structures, such as knowledge work, writing, or growing a student club?

…It seems, then, that if you integrate any amount of DP into your regular schedule, you’ll be able to punch through the acceptable-level plateau holding back your peers. And breaking through this plateau is exactly what is required to train an ability that’s both rare and valuable (which, as I’ve argued, is the key to building a remarkable life).

This motivates a crucial question: What does DP look like for fields that don’t have a tradition of performance-optimization, such as knowledge work, freelance writing, entrepreneurship, or, of course, college?

The Grandmaster in the Corner Office: What the Study of Chess Experts Teaches Us about Building a Remarkable Life (Study Hacks)

For any investor seeking to become better, deliberate practice is essential. The key is figuring out what deliberate practice should consist of in investing. Most of us read newspapers and blogs daily. This helps keep up to date with what is going on in the world. But is that enough? I am not too sure.

I think that taking a more active approach with news reading would be helpful. Recently, the Wall Street Journal ran an article about how David Tepper bought Bank of America stock at its low. A good exercise would be to actually sit around and try to reverse engineer that investment. Eddie Lampert has said that in college he reverse engineered many of Warren Buffett’s investment. This kind of activity would not only increase your understanding of investing but also build a model for you to look at if you ever find a similar investment.

Other investors strive to read one 10K a day. This can help build your circle of competence, but I believe it has some shortcomings. A more targeted approach with 10Ks will be more beneficial than simply jumping from reading about Exxon to reading about Bank of America. You should define goals where you are mastering knowledge of a specific industry or area of the market.

Maybe you want to learn the billboard/outdoor advertising business. Instead of looking at just Lamar Advertising (NASDAQ:LAMR) you would look at Clear Channel Outdoors (NYSE:CCO) as well. If you want to master restaurants, you would maybe start at a fast food company like McDonalds (NYSE:MCD) which is the best in its class. Then seek out Chipotle (reputed to have the best economics in the fast food business) and branch out so that you build familiarity with the industry which will help you evaluate lesser known companies like Steak N Shake (NYSE:SNS).

Feel free to use the comments or e-mail me with suggestions for implementing deliberate practice in investing.

Jared Diamond’s Guns, Germs, and Steel is yet another book that I read after hearing it garnered a recommendation by Charlie Munger (and a Pulitzer). It’s a great book that helps provide an explanation based in science for why Europe conquered and colonized most of the world. The book’s theories are often debated and even controversial, but it’s well worth taking the time to read. I was pleased to see Jared Diamond as the feature of this week’s Lunch with the FT (one of my favorite features of the newspaper):

“There is a parallel based on the same fundamental mechanisms of the economic collapse that we’re seeing now and the collapse of past civilisations such as the Maya,” he continues. “The message is that when you have a large society that consumes lots of resources, that society is likely to collapse once it hits its peak.”

He helps himself to a mouthful of vegetables, bought from the supermarket but as fresh-tasting as if he had dug them from the garden. Chewing slowly, he continues: “The Maya collapse began in the late 700s, and then simply the most advanced society in the New World collapsed over the course of several decades. They were mostly gone a century later,” he says wistfully. “When a complex structure like that starts collapsing, you are pulling out dominoes in the whole structure.”

I ask whether Lehman Brothers is such a domino. “The events of last October have crept up seemingly so suddenly,” he replies: “I say ‘seemingly’ because, in a sense, it is not at all sudden. Any idiot knows that if you are drawing more money out of your bank than you are paying into your bank, then eventually something is going to happen. Somehow this lesson escaped the decision-makers in the US government.”

Lunch With The FT: Jared Diamond (FT.com)

As always, be sure to read the rest of the article.

Charlie Munger often talks about his hero, Benjamin Franklin and sometimes offers his perspective on what Franklin would do in certain situations. I found the following series by Maira Kalman at the New York Times to be pretty interesting:

I also liked this bit at the end:

Be sure to view the whole thing: Can Do – And the Pursuit of Happiness (NYTimes)

Most of you have probably read some book by Robert Ciladini, whose books on psychology are often recommended by Charlie Munger. His latest book Yes!: 50 Scientifically Proven Ways tobbe Persuasive is great because 50 different models of human psychology and persuasion are broken out into an easy to understand manner. If you’re too lazy to read the book though, check out this link where you’ll find a good summary.

Today’s WSJ though had a good article by Carl Bialik on how these “Most Popular” lists create positive feedback loops and influence our perception. There is a great bit with Cialdini in the article:

Other recent studies have quantified the popularity of popularity in other settings. Signs telling guests at a hotel in the Phoenix area that towel reuse was the No. 1 choice among their peers increased the rate of this practice by 34%, compared with other signs with messages stressing the impact on the environment. Arizona State University psychology Prof. Robert Cialdini and colleagues found that rates went even higher when the signs specified that most prior guests in the same room reused towels.

“To the extent you can convince that, not just a lot of people are doing this, but a lot of people like [them] are doing this,” you’ll get greater buy-in, Prof. Cialdini says.

Another group of researchers demonstrated this with restaurant diners in Beijing. Table cards at Mei Zhou Dong Po, a Szechuan restaurant chain, touting the five most popular items boosted ordering of these items by 13% to 20%, according to a forthcoming paper by a team from Peking University and Duke University. “Part of it is reassurance that something is good and worth buying,” says Bill Paul, a restaurant-menu designer.

Calling these items popular is crucial, the researchers found, because other table cards that highlighted five sample items but made no claim on their popularity had little effect on sales. And the diners liked following the pack: “Diners who were exposed to the popularity information treatment are more satisfied,” says co-author Hanming Fang, a Duke economist.

Look at This Article. It’s One of Our Most Popular (WSJ)

That’s just an excerpt, be sure to check out the rest of the article. There are some other good examples of popularity being used to persuade us.

Check out this fantastic interview with Charlie Munger at the Stanford Lawyer.

Here are some great quotes:

Harry Markopolos, a hedge fund expert, sent a detailed memo to the Securities and Exchange Commission (SEC) articulating why Madoff must have been a fraud. The SEC did nothing with it. We don’t know the reason why, but I’m willing to suggest that the lawyers who received Markopolos’s warning simply didn’t understand the finance or math that Markopolos relied on.

Lawyers who only know a mass of legal doctrine and very little about the disciplines that are intertwined with that doctrine are a menace to the wider civilization.

Why didn’t the SEC understand the warning that was clearly placed at its door?

The SEC is pretty good at going after some little scumbag whom everybody regards as a scumbag. But once a person becomes respectable and has a high position in life, there’s a great reticence to act. And Madoff was such a person.

Why aren’t our regulators capable of addressing many of the issues that we confront in the market today?

Most of them plan to go back to living off money made in the system they are supposed to regulate. You can argue that financial regulation is so important that no one in such a position should ever be allowed to do as you partially did—serve and then leave to make money in the regulated field. Such considerations led to lifetime appointments for federal judges. And we got better judges with that system.

So government service should be a little like a monastery from which you can never escape?

What you can opt to do is retire, which is pretty much what our judges do.

What about the idea that investors should be able to fend for themselves?

We want the sophisticated investor to protect himself, but we also want a system that identifies crooks and comes down like the wrath of God on them. We need both.

Q&A: Legal Matters with Charles T. Munger (Stanford Lawyer)

Be sure to read the full interview.

Yesterday, Liz Claman at Fox Business had a really great interview/roundtable with Warren Buffett, Charlie Munger, and Bill Gates. It was awesome to see and hear Munger, since out of the three, he’s much less exposed in the media. They cover a wide range of topics, so it was nice to see the different perspectives.

If you missed the interview, they’ll be re-airing it this weekend. Saturday at 9PM EST and Sunday at 10PM EST.

Rather than embed the videos and slow the blog’s loading time, I’ve provided direct links to each one of them.

1. Buffett: Right time to Buy Stocks

2. Buffett: Had Best Year in a Recession

3. Buffett on Banks, Ratings Downgrade

4. Buffett and Gates on the Future of Capitalism

5. Buffett and Bill Gates on the Estate Tax

6. Charlie Munger on Citi Bonuses

7. Charlie Munger on BYD

8. On Succession, the Future

I don’t know if anyone’s ever asked Bill Gates about Google, but it was nice to get his thoughts on the company’s competitive advantages — or in this case it’s wide, shark filled moat. As he said in the interview, Microsoft is not deterred by the moat or the sharks and will continue to charge ahead.

Munger’s views on harnessing solar power were pretty optimistic. I like that Buffett and Munger were quick to point out that it isn’t a space they would invest in. Simply because it’s too difficult to pick winners. I remember reading about John D. Rockfeller’s Standard Oil, and how before it, the refinery space was fragmented and situated atop shaky financial foundations. Many, many, many refineries failed. That’s how I view the solar / renewable space right now. There’s still more experimenting that has to be done in terms of getting the actual business right.

I wonder why Berkshire didn’t just sell Moody’s. It seems like both Buffett and Munger believed that Moody’s actions were incorrect. In the past, when this has happened, the security was simply sold. But it cold be that the position in Moody’s was too big to unwind, or more likely — Buffett believes that the ratings agencies will have to continue their existence. It may be impractical to do away with the ratings agencies all together, so the demand for their services will continue to persist.

One of the things I always like to hear from Buffett and Munger are their book recommendations. The topic didn’t appear to come up during the annual meeting, but yesterday Claman asked them the question.

Buffett:
1. Poor Charlie’s Almanack
2. Personal History: Katharine Graham

Munger:
3. Outliers by Malcolm Gladwell

Gates:
4. Showing Up For Life by Bill Gates Sr.

Unfortunately I haven’t read any of these, but I know that Bill Gates and his father were on Charlie Rose a few days ago talking about the book. Malcolm Gladwell always pens a good article for the New Yorker, but sometimes his concepts seem a bit fluffy. I’ve never read any of his books, but I think I may take a look at Outliers because of Munger’s recommendation.

It looks like the people at Bloomberg intend on splitting the interview into snippets and spreading them across the afternoon broadcast. I’ll update this post as I see more from it. But I just caught this:

Bloomberg: What do you think about the recent AAA ratings change by Fitch and Moody’s?
Charlie Munger: We would naturally prefer the rating that we formerly had. Berkshire is of marvelous credit. If you asked my if I agreed with the ratings change I would say.

Bloomberg: What kind of reform for CDS market?
Charlie Munger: I’ll give you an answer that will surprise you. If I were the governor of the world I would eliminate it entirely. 100%. That’s the best solution. It isn’t as though the economic world didn’t function quite well without it. And it isn’t as though what has happened has been so wonderfully desirable that we should logically want more of it.

You’ve got to love the fact that Munger doesn’t mince any words. Also, be sure to check out Scott Patterson of the WSJ’s article which many of you have probably already read.

CNBC also did an interview with Munger: