It’s been a challenging few years for “Value Investors”.   By traditional definitions “value” has decidedly underperformed “growth” since the equity market depths of 2009.   That’s probably less true in the bond markets where “value” is always in vogue, but nevertheless, its been a bit of a cold shower for the value crew.  We have seen stock pickers start to crawl out of the woodwork from a performance standpoint in fits and starts as central bank control (mostly transmitted through sentiment vs. any real economy effects) has begun to wane.  Asset correlations have dispersed in the last year with various points of re-convergence, such as January – February of this year.  As investors, the hard question is how to sort through this giant pile of data for some toehold on the mountain called REALITY.

I am a big fan of the Farnam Street Blog run by Shane Parrish.  This past week he published a post on “mental models” and the value of interdisciplinary thinking.  I can think of no other discipline where this value is more tangibly realized than that of “investing”.  It is therefore unsurprising that Mr. Parrish turns to a super investor, Charlie Munger, for his commentary on creating a “latticework of theory”.  The idea being to develop a series of mental models for accepting and organizing information as it becomes available to us.  These models must come from a variety of disciplines because the “wisdom of the world is not going to be found in one little academic department”.

Said simply, if we aim together to be better investors at IOI, we must discipline ourselves to read and to learn and then to THINK.  Oftentimes, we are faced with countervailing information – the economy is facing inflationary pressures vs. the economy is on the verge of disinflation – the central bank will need to raise rates vs. the central bank is headed toward negative interest rates – oil prices are going to be $20-$30 / bbl for the foreseeable future vs. oil is heading back to $50 / bbl.  Examples are all around you and these are BIG DEAL kinds of questions to those of us holding financial assets and having to manage them for greater returns.

You can read Mr. Parrish’s piece here.  It’s a valuable and short use of your time.  Let me take a few IOI related “bents” on this topic.

  1. Laziness is our worst enemy as an investor. We must have the energy, curiousity and discipline to pursue answers to our analysis questions.
  2. Read, read, read. – History, Biology, Finance, Religion, Philosophy, if it looks interesting pick it up. Also, check to see what the investors whom we admire are reading.   IOI posted a behavioral finance book last week from the CIA – this is a good example of opening your mind to alternative ways of looking at the world.
  3. We must force ourselves through disciplined thought and questioning when faced with countervailing models. Write it down.  Put the arguments on paper.  Look at the supporting data and then decide.
  4. Post mortem everything. If something important goes right or wrong, let’s not get crazy either way.  Sit down and think carefully about what happened.  What did we believe at the point of decision and what actually happened.  Why did it work out?  Why not?  By doing this repeatedly, we find out how our models are helping or hurting our desired outcomes.  This is as true for investing as it is for maintaining that diet we’ve been pursuing.
  5. For us at IOI, understanding and considering human behavior is an important component of successful investing. Parrish’s review of his mental models starts with the subject of Psychology.  IOI 101 is focused 100% on the behavioral biases Parrish outlines here and how those biases impact the different players in the financial markets.  It is crucial to understand the field of play we are engaging in when we go to market with an investment idea.  Take the class!
  6. Just one thing. For me, when I look at all the possible things to look at, read and learn out there, it gets overwhelming fast.  “How does one eat an elephant? “ the old joke goes.  “One bite at a time.”  Pick just one thing for 15-30 minutes EVERY day and do it.  Everyone has 15-30mins.  Take small bites, each day and you’ll find yourself accomplishing things you never thought possible.
  7. Use others to help you. The effectiveness realized in group projects doesn’t stop at the end of University or at the door of our jobs.  Educated peer groups of members with common goals are super powerful investors.  My Dad reads all the geopolitical news and analysis that I then use to develop a macro-economic story.  I spend ZERO time there.  I call him and ask.  We have developed a good dashboard for understanding what’s happening out there.  Share the work. Share the reading. Then analyze together working from your collective knowledge.

We try to keep SIGNAL short and focused each week so that you can read only the most impactful things.  That same efficiency is reflected in our company and markets research.  Focus on the most important things and apply a “latticework of theory” to these companies and their businesses.  IOI’s investor education is a mental model itself.  The analysis skills we teach often rely on our ability to learn new models (see our piece this week on NOV).

Together we can all help one another be better investors.  That’s what it means to be a member of the Framework Investing community.

Learn More! Contact Us!