Feynman on Curiosity

"But it is not complicated. It is just a lot of it. And if you start at the beginning, which nobody wants to do – I mean, you come in to me now for an interview, and you ask me about the latest discoveries that are made. Nobody ever asks about a simple, ordinary phenomenon in the street."

"It has to do with curiosity. It has to do with people wondering what makes something do something. And then to discover, if you try to get answers, that they are related to each other(...)"

Be skeptical.

Mauboussin on Three Steps to Effective Decision Making

Baupost's Klarman on Holding Cash - 2004 Letter Excerpt

Seth Klarman on the Painful Decision to Hold Cash by Igor Chalhub

Mauboussin on Complex Adaptive Systems

Mauboussin was recently invited to seat at the Santa Fe Institute board, a research and education center which praises diversity to solve complex problems (by the way, there are tons of top notch materials and events to be checked out there). I found this interview with Mauboussin via compoundingmyinterests. Below, I highlighted and commented on some quotes:

#1. "The problem is that modeling complex adaptive systems is a lot messier than those other approaches." 

Although, financial analysts focus on modelling EPS and finding out if it's going to be . I'd argue the best research practice is understand capital allocators incentives & agenda.

#2. "This work showed that under some conditions returns actually move sharply away from the mean. This is counter to classic microeconomic thinking that assumes returns are mean-reverting."

This reinforces the previous post on quality investing. 54% of companies tend to remain in the 1st quartile after a long period of time, assuring their moat is wide and deep enough to bear multiple attacks.

#3. "Diversity is essential, both in nature and in markets, and the system has to be able to take advantage of that diversity. On the flip side, when you lose diversity the system can become very inefficient. And that’s also what we see in markets—diversity loss leads to booms and crashes."

Now let's frame the diversity in investment teams. Or even in Santa Fe Institute, which is exactly how it's done by the way. Different backgrounds working on the same problem is the knowledge leap.

#4. "Many businesses are being defined less by their specific market segment and more by the ecosystem they create. And it is often the case that in a battle of ecosystems, one will come out on top. So this set of steps provides a mental model to understand the process of increasing returns and, as important, how to identify them in real time."

The concept is beautiful, but applying it is tough. When it comes to the environment/value chain businesses are in, the spectrum is too wide for a quick research project. Actually, it can be the work of a lifetime. The "knowable" facts are scattered in open field and the “unknown unknowns” are also out there. For those interested, critical thinking might be an useful vertical for you to dive in.

#5. "First, it’s essential to provide your mind with good raw material. That means exposing yourself to a lot of disciplines and learning the key tenets. It also means spending time with people who think differently than you do. Second, you have to be willing and able to make connections."

I liked this quote because it uses plain language. Nothing better than that.

Capital Stewardship: from Clients to Portfolio Managers to Executives

No matter the position within the value chain, we are always outsourcing capital allocation in some instance. In this way, looking for outstanding capital stewards is of top priority for funds' clients (looking for great funds), portfolio managers (looking for great companies) and executives (looking for great projects).

In this paper, it's argued that no matter the insider ownership, one must analyze and trace the profile of key people. Stating the obvious: no matter if the key executive has 90% ownership in a company if he's a gambler who loves leverage willing to bet his entire fortune in one eccentric new segment. Right?

Analyzing people, their behaviors and habits, their principles and goals, their formal and informal incentives, is of main importance. We must remember businesses are run by people, so let's put "number crushing" a little aside.

Is the corporate culture appropriate? Is a repeatable mechanism entrenched in employees routine? Are leaders' personal goals aligned with the company's formal strategy? Which are the perverse incentives in place? What are the executives/board members' personal agenda main items? Do they conflict with the company's path? How?

Can you think of more questions?

Food for thought.

Quality Investing: Quantitative Endorsement

We likely share the qualitative view of what I call quality investing, but the below article helps us have some quantitative info. The top quartile companies ranked by profitability tend to remain in the first quartile 54% of the time.  28% of the time they slip to the second quartile, but very rarely those companies go to the laggards division. Thus mean reversion is likely to be against-the-odds investing. Try to search for "boring" companies: those are the best investments or what some call "compounders". Read the full article.