1. Investing While Writing
I hope you’re having a lovely summer. I’ve noticed that, once I established my investing practice, there are seasons to my practice. Sometimes it’s deeply easy and filled with great ideas and interesting things to chase down, and other times life gets in the way.
I’m deep in the midst of writing an course about developing a deep investing practice. I’ve called it Mostly Invested, and it will be out in a few months –and it’s taking most of my time, and pretty much all of my mental energy. It’s like writing a second book. I’ve barely posted on social media in weeks, and my in-depth investing practice is suffering. I’ve said lots of times that there are seasons in life when family, work, stress, health, whatever gets in the way of our investing practices, and this is one for me. There’s something about creative work that takes all of my mental energy, and I found when I was writing Invested, and now again with this course, that I simply don’t have space in my brain for deep thinking about anything else. If I try to squeeze something else in, the writing I need to get done doesn’t get done. I know a lot of writers have this same experience, and that’s great, but frankly doesn’t help much when I’ve canceled every social activity and people in my life forget to invite me to things because I’ve said no so many times, and I forget to buy groceries because that feels like too much of a distraction. It’s a bit ridiculous.
I’m conscious of my investing practice as this is happening, though, which is a beautiful experience because while the milk in the fridge has gone bad and there’s nothing to eat except spaghetti, I do remember and miss my investing every single day. I think that’s a good sign that my investing practice is deeply integrated into my life.
And I have not let it lapse. My deep, in-depth, spending lots of time in focused work sort of practice has disappeared for now; however, my regular investing practice of checking in every single day to the business news and into companies I love is rolling right along. It’s the coolest to be so distracted, so busy, and yet so attached to my practice that I show up for it every day.
How do you show up for your investing practice? When you get busy, stressed, or distracted, what does showing up look like for you?
For me, showing up means opening the front page of the Wall Street Journal website, reading the headlines, and reading a few articles that sound interesting. That’s it. It’s about ten minutes.
Now, that’s not deep investing practice, and it’s not enough to make investing decisions. But in the midst of the rest of life, it’s the bare minimum to show up. It’s the equivalent of lacing up my running shoes, even if I only walk around the block. It’s the equivalent of unrolling my yoga mat and sitting on it, even if all I do is five minutes of practice. It’s showing up.
Showing up regularly, in that simple way of reading the news, creates the space in my mind for investing practice at unusual times and in unusual ways. Sometimes the most joyful, unexpected practice comes from being time-crunched.
2. Ray Dalio’s Principles
I am OBSESSED with listening to Ray Dalio interviews lately.
One of my best friends from childhood – we’ve been friends since eight years old – is now a wine expert and sommelier and wanted to learn more about champagnes. I don’t know the first thing about wine except that I like it, and I like her. So I promised here that since she flew to Europe from the US, I would take the weekend off and hang out with her. I drove six and a half hours from Zurich to the Champagne region in France for a wine tasting weekend with her, and then I drove six and a half hours back. Alone. That’s a long drive, across French fields that look exactly like the rolling rises of Iowa cornfields. Mr. Dalio kept me company.
Ray Dalio is an investor who invests based on macroeconomic predictions. For example, he predicted the housing crisis. Some of the way he invests is long-term and similar to Buffett-style value investing, and some of it is more speculative. He founded what is now the world’s largest hedge fund, called Bridgewater. And he’s a billionaire. So yeah, he’s pretty good at this investing thing.
I listened to him talk about his life’s journey as an investor, from a young one who thought he knew everything, to someone who, now, has made his life’s work noticing his own mistakes andcoming up with ways not to make the same mistakes over again.
He was explaining his experience as an investor, but really, his experience can teach us about life. How to live, and live well. It’s exactly like us here in The Invested Practice: we’re nominally about practicing and experiencing investing, and that matters because it’s a great portal into how to live well, but really we are about how to live well. We’re about making better lives for ourselves and our families. We’re about creating generational wealth with honor, and by supporting wonderful companies making a better world. That’s what this is about and what I’m about.
I think that’s what Ray Dalio is about. Or at least what he’s putting out into the world – who knows what he’s really like, but the content is he’s putting out is great.
So I listened to his Freakonomics podcast interview three times, because each time, I kept missing important bits and wanted to hear it over again. Then I listened to a few other interviews. Every single one was worth listening to. He said pretty much the same talking points in each interview, which means I heard the same points enough times for them to sink in. I still hadn’t read his book, Principles, yet, when I listened to these episodes.
Here are the basics of his bio: Ray Dalio started a hedge fund out of his New York City apartment when he was 26 years old. He hit huge success within a few years by predicting that Mexico was going to default on its debt, and landed on the covers of magazines, lauded by various luminaries, made lots of money. Then, he thought the markets were going to crash even further, and when they didn’t, he lost all of that money. ALL OF IT. He had to lay off his employees and borrow money from his dad.
From there, he built back up. HOW, I don’t know. How he convinced investors to stick around, or come back, or come in for the first time, I don’t know. What he says in each interview is, “that failure was the best thing to ever happen to me,” because it taught him humility.
3. Investor Letters are a Thing
My transition into Conscious Incompetence when it comes to investor letters arrived when, due to our pre-existing relationship (that’s some securities talk right there!), my friend Guy Spier, who runs Aquamarine Fund, shared with me his recent annual letter to his investors.
I’m so glad he did. I was inspired by reading his letter because of how baldly he discusses the ups and the downs, the good year and the bad year, the perspective he shows as a long-term investor, and how he thinks carefully about his investing and its place in the world.
Upon finishing reading, I asked to read last year’s letter. Upon finishing last year’s, it suddenly, geniusly, it occurred to me: other investors besides Mr. Warren Buffett write letters to their investors. OTHER INVESTORS write letters.
Like suddenly realizing that a sushi menu is actually more varied and yummy than the grocery store tuna maki, I had been thinking about investing letters for years without noticing there are a plethora of them to try. One of the first things my dad recommended to me when I started learning about investing was read Warren Buffett’s annual letters to his Berkshire Hathaway shareholders. The Berkshire letters read a little dense, I’m the first to say it, but when you’re comfortable with some investing vocabulary and feel ready to dive in, they’re extraordinary.
My dad also taught me to look for letters to shareholders from CEOs of publicly traded companies. Once I got into creating my own investing practice, I became obsessed with L.J. Rittenhouse’s work deciphering and quantifying shareholder letters in her book Investing Between the Lines. So reading letters from companies to their shareholders was part of my practice, but somehow, in all of that, I was seeing the trees but missing the forest. It didn’t even occur to me that investors also write letters to their fund investors. But THEY DO.
The reason I missed reading investor letters for so long is that I hadn’t developed enough perspective in my investing practice to notice them. Usually my first reaction to a leap forward like that is to wonder why I was so boneheaded to miss it for so long. I take a beat and think “how was I not aware of something so obvious, for years?” And then the other part of me, the part that loves learning, pops up, shrieks with joy, and feels amazing – because it’s a leap forward to a higher level. It means the parts of my practice that felt difficult have now become integrated to the point that they have become easy. My brain is freed up to add more layers.
If you look at it from the perspective of the way my dad describes the Four Levels of Mastery: 1. Unconscious Incompetence, 2. Conscious Incompetence, 3. Conscious Competence, and finally 4. Unconscious Competence. (More details about the Four Levels of Mastery in Chapter 2 of Invested.) I can I can palpably feel my perspective shift from Unconscious Incompetence to Conscious Incompetence. That’s the growth direction.
Discovering investor letters is the growth direction. I feel a bit like the world just became a little bigger. This is, like, a THING. Fund managers write annual, and sometimes quarterly, letters to their own investors. It’s not only CEOs who write letters to their shareholders. Everybody is updating the people who provide them with the funds to do what they do.
Links to letters are at the end of this issue in the Let’s Get Practical section. Let’s get into the letter that started this line of thought.
4. Aquamarine Letter
My foray into investor letters started with Guy Spier’s letters. Guy is the head of Aquamarine Fund and a dear friend, and someone who thinks very deeply and consciously about the ethics and integrity of his fund, about how to do well by doing good, and how to best represent the interests of his investors and maximize investment profits for them. His letters encapsulate those qualities.
The way he begins indicates his priorities: each year, his letter begins by directly stating the return of the fund. He emphasizes the long-term orientation of the fund by stating the compounded annual growth rate and the total return of the fund since inception. He notes that a banner year and a lousy year both require remembering that it goes either way.
The recent 2018 letter, follows suit. “Nonetheless, it’s fair to ask the uncomfortable question of why I haven’t outperformed by a higher margin — and, most important, what that might tell you about the nature of the fund in which you’re invested.”
Who amongst us in our Instagrammy take-credit-for-everything culture would be careful to note that, in a great year, it could have gone the other way? That sets the tone for his entire piece of writing, and in his 2017 letter, he explained the reasons the fund did so well by reminding investors that it was the result of decisions made years before, against the prevailing market wisdom, and then waiting. Most of all, he looks for context and perspective. In his 2018 letter, he writes about his investing process compared to his “built-in tendency to be fearful”. He has, he posits, a natural tendency to be cautious and conservative in his investing. “It’s humbling to see how many talented stockpickers have fallen by the wayside since I started and how few have built funds that have survived for two decades.” (Aquamarine is one of the few with longevity, having now been around for more than two decades.) To his investors: “It helps if I’m brutally honest, so I can work to counteract my flaws and so you can make a balanced assessment of whether or not they are outweighed by my strengths.”
Aaggghhhh I love that so much. Here, let me tell you all who I am, warts and all, so you can decide if I’m someone you want to steward your money. YES. That’s how this should be. There are no perfect people out there, and there are especially are none in the money management business, which doesn’t particularly have the greatest reputation for attracting lovely people. As much as anyone can be aware of their flaws – and that’s a big IF – it’s very hard to be aware of your own flaws. Remember the blinders exercise I went through in Issue #007? That was hard to see beyond my own perspective, and I’m not sure I did a very good job, so I’m impressed by anyone who makes the attempt.
Guy writes that he was swayed by the influence of Warren Buffet, and his reverence for Buffett made him follow Buffett’s lead and avoid tech companies. My father told me the exact same thing when we started talking about investing – that if Buffett wasn’t interested, he wasn’t either. Buffett missed the shift from only certain companies being tech companies to ALL companies being tech companies, and now everyone is running around talking about how obvious a mistake it was when Buffett missed out on buying Google. Guy doesn’t make excuses. He says straight out he was swayed by the influence of an investor he admired, and it clouded his investing judgment. Ladies and gentlemen, that is candor. It is laudable.
I’m massively impressed by Guy’s candid statements to his investors. It’s painful for most of us to think about our flaws inside our own heads. Just as with evaluating a potential investment, writing it down reveals the hidden meanings and logical leaps, and usually more flaws. Sharing that process with investors shows the strong character of the writer. We all have flaws. All of us. None of us can control what an investment does from far away. The only way to handle that with integrity to is to take credit when credit is due, as it often is, and temper it with realism.
I’ll close with what I think is one of the most well-put and concise Mission statements from any investor, from the 2018 Aquamarine letter:
“But our priority is to invest in durable businesses that deliver things that people will need even in a changing world. It’s revealing that Buffett has focused so heavily on companies that meet many basic human needs, such as building materials, carpets, paints, furniture, and energy. Meanwhile, I avoid companies that may be enormously profitable but cause social harm, such as tobacco companies and casinos. Sooner or later, as happened with the tobacco firms, society might make them and their shareholders pay for this harm. Owning businesses that are part of the solution, not part of the problem, has enormous benefits in terms of reducing risk and sailing our ship through whatever storms might arise over the next 21 years. But I don’t consider myself an “impact investor” or a “social investor.” They are often willing to overlook lower (or non-existent) returns while focusing on the social good that their investment is creating. Personally, I find that laudable. But it’s often the case that such investors are fabulously rich or are investing on behalf of someone who is fabulously rich. I believe that my role is to deliver the best long-term investment results I can achieve, instead of trying to achieve non-measurable “social returns.” If I do my job properly, then Aquamarine’s partners can have a tremendous social impact by sharing their wealth with others in all sorts of wonderful ways.”
Owning businesses that are part of the solution, not part of the problem, not only benefits the world, but also Aquamarine Fund. If Aquamarine Fund then does well, it can invest more in owning businesses that are part of the solution, not part of the problem. And so the virtuous cycle goes on, with a rising tide lifting all boats. And, as Guy pointed out in his last line, Aquamarine’s investors will hopefully share their wealth in philanthropic ways as well. Win, win, and win.
To me, it doesn’t get any better than that. To someone else, this Mission statement wouldn’t be remotely enough of a social impact, or it would be far too much. The more I practice investing, the more I notice that my practice is so peculiar to me. Reading the thoughts of great investors, thinking critically about it, and then applying what works to my own personality is the only way to move forward usefully.
You can see why I was so inspired and educated by Guy’s letters that I started reading other investors letters. And we can look them up, in a few seconds, from the couch! What an incredible time this is.
LET’S GET PRACTICAL
If you’re not already on Guy Spier’s email list, I recommend you join. He sends out very rare emails that are highly worth a read with his latest writings, thoughts, and ideas.
I got REALLY stuck into Columbia Business School’s recent value investing newsletter. It’s excellent. Leon Cooperman sounds like a classic Graham-style value investor – focused on long-term, but buys lots of companies and holds different asset classes, and sounds like an absolutely lovely guy. (Munger/Buffett style, by contrast, is to buy a minimal number of wonderful companies and be absolutely lovely guys.) The interviews with the Ruane guys and C.T. Fitzpatrick are also fascinating and well worth your time.
Some funds keep their letter strictly to their investors and those with whom they have pre-existing relationships (e.g., Seth Klarman’s letters at Baupost) and some funds publish theirs online themselves (Howard Marks’s Oaktree letters – so worth reading, especially the current one, “Growing the Pie” which explains how NYC politicians mischaracterized the economics of Amazon’s HQ, either because they didn’t understand it or to stoke resentment).
There are quite a few sources which aggregate investor letters. I don’t particularly have much experience with any of these, nor do I know if they’re reliable, but with those caveats I will list some online aggregators:
Something called Milton Financial Market Research Institute has created a Dropbox folder with an extensive collection of investor letters. Extremely useful.
Reddit has lists with links
Seeking Alpha has an entire section of its website devoted to fund letters
Ownership Disclosure: Danielle Town does not own stock in any of the companies mentioned herein.