What Does An Astronaut Has To Teach Investors? - Part I

Actually, a lot. First off, these guys spend their whole lives preparing themselves to go to a space mission - unfortunately, not always all of them go on a space mission (just like an investor studying a company until it finds out it isn't suitable for an investment). Not only their lives alone, but also their families lives. They go through extensive physical and mental training, mastering their engineering skills, conducting pre-mortem and post-mortem analysis, learning how to be a team player and so on.

According to Col. Chris Hadfield,

“An astronaut is someone who’s able to make good decisions quickly, with incomplete information, when the consequences really matter. I didn't miraculously become one either, after just eight days in space. But I did get in touch with the fact that I didn't even know what I didn't know. I still had a lot to learn, and I’d have to learn in the same place everyone learns to be an astronaut: right here on Earth.” 

Who investors are after all but professionals making good decisions quickly and with incomplete information, mastering their knowledge base for years?

Thinking about how an investor has to be prepared through learning, here is Col. Hadfield take on learning:

“I was in an enrichment program that year and the next, where we were taught to think more critically and analytically, to question rather than simply try to get the right answers. (…) Really, we learned how to learn." 

Also, there's no boring investment case task:

“I viewed it as a plum assignment, one learning opportunity after another.”

Definitely someone must compare things when thinking critically and analytically, otherwise how could someone judge if it's either a good or bad thing? Col. Hadfield shares his experience on that:

“Astronauts have these qualities not because we’re smarter than everyone else. It’s because we are taught to view the world – and ourselves – differently. My shorthand for it is “thinking like an astronaut”. But you don’t have to go to space to learn that. It’s mostly a matter of changing your perspective.”

“Operational awareness – being able to see the big picture and focus on what could kill me next – is what kept me safe after I regained consciousness. (…) If you’re focused on the wrong things, you are likely to miss the very narrow window of opportunity to correct a bad situation.”

And yes, separating the signal from the noise comes with a large enough knowledge base, which comes with experience:

“Training in Houston, I hadn't been able to separate out the vital from the trivial, to differentiate between what was going to keep me alive in an emergency and what was esoteric and interesting but not crucial. There had been so much to learn, I’d just been trying to cram it all into my brain. During the mission, too, I was in receive mode: tell me everything, keep teaching me, I’m going to soak up every last drop.” 

“I spent a lot of time on PTTs looking at the symptoms of false alarms versus actual system failures: pressure regulation, atmospheric constituent controls, the rendezvous sensing system – the list is long. Through this process I started to figure out what to pay attention to and what to disregard, which risks were the greatest and which would trigger the most negative consequences, and then I was ready for the actual Soyuz simulator, to see what the whole picture looked like.”

In order to learn, naturally, investors need to be great questioners, even for the obvious ones since you work with incomplete/biased information:

“What were the best answers to the obvious questions?”

Many times investors are "1st-level-correlated" to money-making opportunists, although

“It takes years of serious, sustained effort, because you need to build a new knowledge base, develop your physical capabilities and dramatically expand your technical skill set. But the most important thing you need to change? Your mind. You need to learn to think like an astronaut.”

Simply change "physical" for "mental" and "astronaut" for "investor".

And when you get what's needed to go "all-in", have a sizable position in your portfolio in your great idea, it's when you know

“Knowledge and experience have made it possible for me to be relatively comfortable with heights, whether I’m flying a biplane or doing a spacewalk or jumping into a mountain of corn. In each case, I fully understand the challenge, the physics, the mechanics, and I know from personal experience that I’m not helpless. I do have some control. (…) But in order to stay calm in a high-stress, high-stakes situation, all you really need is knowledge.” 

Another interesting metaphor is how austronauts' (g)ravity is correlated to investors' (g)rowth. As the space rocket is coming down to space (a 54-minute long trip!), (g)-force receives a multiplier attached to it, so astronauts get dizzy and feel so weak they can't even stand up when they get down to Earth. After they arrive home again, they spend months with physicians monitoring their recovery. Isn't it pretty much how investors feel with high multiples attached to companies with strong (g)rowth prospects when they are de-rated? High-growth indeed is foggy.

There's a lot more we can learn from astronauts, which I shall share with you in the next coming post.

Scaling Laws in Biology and Other Complex Systems & the Read-through for Investing

It seems the whole universe is designed based on the principle of economy of scale, from metabolic rates, to vascular systems, cancer growth, aging, mortality, etc. Those are log (x) correlated (<1.00) - metabolic rates, for instance, stand at 0.75. When it comes to cities, economies of scale still apply. Examples are less paved roads and gas stations per capita. Those are super-linear correlated (e(x) or >1.00) at 1.15 on average.

The question which pops out thus is "Is our system sustainable?!". Society and companies have to innovate in a regular, but accelerated, fashion. Clearly this isn't sustainable, at least not in the required pace for the long term. This is straightforwardly applied to the technology sector and that's why disruptive innovation exists. The curious part is that the below speech took place at Google!

But what about Coca-Cola company? What make those companies "moats", as Buffett would put it, large enough for generations to see? In hindsight it would be an easier call, but what can we look for when trying to identify ex ante such a great 100-year business? Food for thought.

Warren Buffett’s Meeting with University of Maryland MBA Students Nov '13

This is likely to be the last post of the year and it couldn't end any better. I have highlighted what got my attention from Buffett's latest talk to MBA students. I'd also like to thank those who indicated this to me.

• On "quality investing":

It’s better to buy wonderful businesses at fair prices than so-so businesses at low prices.

After exposure to Fisher and Charlie, I started looking for better companies.

• On candor: After reading many annual letters, it's hard to find one more clear and candid than Berkshire's. After all Rittenhouse is right indeed.

I try to think of my shareholders as my partners. I try to think of the information I would want them to send me if they were running the place, and I was the shareholder. What would I want to know? This is what I tell them.  In my first draft, I address it to my sisters who don’t know a lot about finance. “Dear sisters”- I explain to them what they would want to know in their position. I also like to write one section that is a general teaching lesson that doesn’t directly apply to Berkshire.

This is what I can do, this is what I can’t do, this is how I intend to go about it, and this is how I measure my success.

• On cash and human behavior: 

BRK always has $20 billion or more in cash. It sounds crazy, never need anything like it, but some day in the next 100 years when the world stops again, we will be ready. There will be some incident, it could be tomorrow.  At that time, you need cash. Cash at that time is like oxygen. When you don’t need it, you don’t notice it. When you do need it, it’s the only thing you need.

Fear spreads fast, it is contagious. Doesn’t have anything to do with IQ. Confidence only comes back one at a time, not en masse. There are periods when fear paralyzes the investment world. You don’t want to owe money at that time, and if you have money then you want to buy at those times.

• On assessing executives:

But will they behave the same after they get the money and I get the stock certificate? Will they work just as hard when they’re putting money in their own pocket? 3/4 of our managers are independently wealthy. These people don’t need to go to work, but they are putting the work in. If I give him 4 billion dollars, will it be the same results next month? Next year? I don’t deal with contracts; I have to size up whether management is going to continue working that same way. Generally, I’ve been right in my assessments and I’ve gotten better. They don’t need me, I need them. Why do I come to work? I can do anything I want to do, and yet I come out every morning and can’t wait to get into work. I enjoy working Saturdays, talking to students. Why do I do it? I get to paint my own painting. Berkshire Hathaway is my painting. People love creating things. I think I’m Michelangelo, painting the Sistine Chapel but it could look like a blob to someone else. Second thing – I want applause. I like it when people appreciate my painting. If others have their own paintings, then who am I to tell them how to paint it? (Just like management) I appreciate what they do. I know the game, so when I praise them, they know they’re getting approval from a critic they like. I have their stock certificate, but it’s still their business. It’s a good culture when managers really care about the business.

• On investing:

I like running businesses better than investing.  It is more fun building businesses than moving money around.

• On moats:

You need 2 things – a moat around the castle, and you need a knight in the castle who is trying to widen the moat around the castle. How did Coca-Cola build their moat? They deepened the thought in people’s minds that Coca-Cola is where happiness is. The moat is what’s in your mind. Railroad moats are barriers to entry. Geico’s moat is low prices. Every day we try to widen the moat.  See’s Candies creates a moat in the minds of consumers.  It is a more effective gift on Valentine’s Day than Russell Stover.  See’s Candies has raised its price every year on December 26 for 41 years.  BRK bought See’s Candies for $25 million in 1972.  Today it earns $80 million.

• On balancing your life:

The most important decision you’re going make is who you’re going to marry. What’s important is that what your thoughts are on big things, must make sure that your spouse has the same thoughts on the same big things. Don’t marry someone to change them. Marry someone who is a better person than you are. Always associate yourself with people who are better than you.

• On negotiation:

Bargaining with people you love is a terrible mistake. It’s destructive. The most powerful force in the world is unconditional love.

• On mistakes:

It is better to learn from other people’s mistakes rather than your own. Look at all kinds of business failures. I don’t believe in beating yourself over it, you’re going to make mistakes. My biggest mistake was buying Berkshire Hathaway and trying to make it better. 

• On his risk profile:

I try to operate in a way where I can’t lose significant sums over time. I might not make the most money this way, but I will minimize the risk of permanent loss. If there’s 1 in 1000 chance that an investment decision can threaten permanent loss to other people, I just won’t do it.

Full credit to Dr. David Kass, who has taken notes on the entire interview. You may find the entire piece by clicking here. 

Broad Run: Repetitive Advantage

Broad Run's suggestive name says (almost) it all: looking for long term compounders, i.e., for companies which can allocate capital at attractive rates of return over the long term (10 year test). These managers focuses on buying U$0.80 cents on at least U$3.00 instead of U$0.50 on U$1.00. Since they can't find many names, they are a concentrated fund and, thus, have more than one analyst looking into a company in order to mitigate untapped risks and ignorance. Other tidbits are (i) preference for conservative leverage and consequently high ROA instead of high ROIC on top of a mountain of cheap debt and (ii) executives' skin in the game. You shall allocate your time well by reading the article below.

Broad Run VII Profile Nov 2013 by Igor Chalhub

Munger's Quotes

“Three rules for a career: 1) Don’t sell anything you wouldn’t buy yourself; 2) Don’t work for anyone you don’t respect and admire; and 3) Work only with people you enjoy.”

“In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time – none, zero. You’d be amazed at how much Warren reads – and at how much I read. My children laugh at me. They think I’m a book with a couple of legs sticking out.”

“It never ceases to amaze me to see how much territory can be grasped if one merely masters and consistently uses all the obvious and easily learned principles.”

“I'm not entitled to have an opinion unless I can state the arguments against my position better than the people who are in opposition. I think that I am qualified to speak only when I've reached that state.”

“We don’t claim to have perfect morals, but at least we have a huge area of things that, while legal, are beneath us. We won’t do them. Currently, there’s a culture in America that says that anything that won’t send you to prison is okay. We believe there should be a huge area between everything you should do and everything you can do without getting into legal trouble. I don’t think you should come anywhere near that line. We don’t deserve much credit for this. It helps us make more money. I’d like to believe that we’d behave well even if it didn’t work. But more often, we’ve made extra money from doing the right thing.”