“I have just three things to teach: simplicity, patience, compassion. These three are your greatest treasures.” – Lao Tzu
Embracing uncertainty
One of the prerequisites of long-term investing is the ability to accept—and embrace—consistent uncertainty. This is also precisely what makes it so challenging. John Jennings, author of The Uncertainty Solution, explores the idea of uncertainty through the lens of human nature—and how our brains have evolved to seek out patterns. “If you were a human living 10 or 100,000 years ago, your ability to recognize patterns gave you a survival advantage,” he says on the recent We Study Billionaires podcast. “Because if you recognize a pattern and then the pattern persists, it allows you to see into the future, which is a huge survival advantage.” He continues:
“So [the goal is to] recognize the patterns of migration of prey or weather patterns or those berries or mushrooms: are they nutritious or are they poisonous? All sorts of patterns give you a survival advantage. So the way we’re evolved is that when we can see a pattern, we feel good about things, and when we can’t recognize a pattern, which is really the very definition of uncertainty, we become antsy, we become anxious, we worry, [and it ca trigger our fight or flight response.”
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A primer on value investing
The investor Jim Grant once said: “Successful investing is about having people agree with you … later.” Michael Fritzell riffs on this idea and takes it a bit further: Value investing is predominantly about being early (but not too early), recognizing the reflexivity in fund flows, and avoiding hype cycles altogether. “You might call this strategy ‘long-term front-running,'” Fritzell writes. “Not front-running in the illegal sense, but rather buying before others do－sometimes years in advance.” He continues:
“As I alluded to above, people invest based on narratives, and price movements can reinforce the perception of the narrative itself. Whenever a particular method of investing becomes popular, fund flows into that strategy start to pick up. The flows can help the strategy perform and attract further inflows. In finance, reflexive processes refer to situations where an increase in the price of a security can lead to further price gains. Perhaps as higher-priced stocks can attract better-quality employees through dilutive stock options. Perhaps through accretive acquisitions financed through high-priced equities. Or just as trend-following investors pile on as a story continues to deliver. But eventually, at Stage 3, the valuation gap becomes too big to ignore, and momentum traders become jittery. Something sparks a shift in investors’ minds and they start selling. The stock will fall much faster than it rose, not forming a bottom until true value investors feel compelled to step in.”
“It’s almost impossible to be successful in business without being both curious and bold – new ideas plus the ability to act on them. Think of what happens when you’re not curious and bold: Either dull and bold – I don’t even know what that looks like – or curious and timid, which is … an academic maybe? But without some sort of brake, curiosity and boldness are so easy to spin into impulsiveness. Part of this is realizing the first rule of very successful people: Those who think in unique ways you admire are likely to also think in unique ways you don’t admire. A lot of people who are admired for thinking, “I wonder what would happen if we tried something different” are the same people who become despised for doing something different that doesn’t work, or loses money, or hurts other people.”
“Buffett used the phrase ‘your savings’ in his annual letter. That subtle phrase tells us a lot about how Buffett thinks. It tells us about his integrity — the immense care he has for the hard-earned money that his shareholders have entrusted to him. The phrase ‘your savings’ has a way of removing any boundary that exists between the corporate entity and the individual (and after all, every share of stock is owned by some individual person somewhere, even if there are corporate entities or institutional gatekeepers in between). It becomes personal.”
“Amazon drives tremendous savings from custom silicon which are hard for competitors to replicate, especially in the standard CPU compute and storage applications. Custom silicon drives 3 core benefits for cloud providers. 1. Engineering the silicon for your unique workloads for higher performance through architectural innovation. 2. Strategic control and lock-in over certain workloads. 3. Cost savings from removing margin stacking of fabless design firms. Amazon was, and still is, run in a very entrepreneurial way when it comes to new business units, segments, or infrastructure changes. Their teams, in many ways, remain nimble and small, but they still have the full backing of the behemoth organization behind them. Our favorite story pertaining to this is their inception into custom silicon.”
This information should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the investments or strategies referenced were or will be profitable, or that investment recommendations or decisions we make in the future will be profitable. This article contains links to 3rd party websites and is used for informational purposes only. This does not constitute as an endorsement of any kind. While Nightview uses sources it considers to be reliable, no guarantee is made regarding the accuracy of information or data provided by third-party sources. Nightview Capital Management, LLC (Nightview Capital) is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Nightview Capital including our investment strategies and objectives can be found in our ADV Part 2, which is available upon request.
Reflection doesn’t come naturally to me, but writing—especially for others—makes it non-negotiable. These aren’t just lessons. They’re pieces of a year that shaped me.
