Re: Investing Lessons - A Compilation.

These are what I consider to be “Evergreen” Investing Lessons that I’ve learned throughout my career. I find that re-reading them periodically helps my own process, so I have collated them here.

Many of these Musings have previously appeared as individual Musings on Twitter in the past, but I have cleaned them up and collated them here and plan on keeping this list refreshed.

I find that re-reading them periodically helps my own process, so I have collated them here. Please feel free to bookmark this link and check back every once in a while for updates.

1/29/21:

Re: Investing-Meme Stocks & The Importance of Shorting.

Re: Investing-Meme Stocks & The Importance of Shorting.

3/2/21:

Re: Investing-Deep Dive on SPACS.

Re: Investing-Deep Dive on SPACS.

7/1/21:

Re: Investing Ruminations-Exit Strategies/When To HODL

Re: Investing Ruminations-Exit Strategies/When To HODL.

7/22/21: The Role of Luck

As I get older and wiser, I appreciate the role of luck in investing more and more. In most cases, being in the right asset class at the right time dominates any ability to generate “alpha.”

Of course, the long-term ability to “be in the right place at the right time” can be considered “alpha” in and of itself.

Endless ZIRP/QE has created legions of funds/track records that look like hockey sticks.

Here’s the rub: not everyone can be that good, and only the withdrawal of said stimulus will expose the charlatans usually.

I love this quote one of my old LPs used to say to me to keep me grounded: “You're never as good as everyone tells you when you win, and you're never as bad as they say when you lose.” — Lou Holtz

10/6/21:

Re: Investing/Trading Inspiration--Lessons From Bernard Baruch.

Re: Investing/Trading Inspiration--Lessons From Bernard Baruch.

11/15/21: Things I Used To Tell My Analysts (And Myself)

“The road to financial ruin is paved with unusually positive carry.”

“The market can stay irrational longer than you can stay solvent.”

12/1/21: Do Not Conflate Genius With A Bull Market!

So many people have forgotten how easy it has been to make money when there has been nothing but DECADES OF ENDLESS LOTTERY.

People also forget that DECADES OF ENDLESS LIQUIDITY LOTTERY were enabled by LACK OF STRUCTURAL INFLATION.

Michael Kao @UrbanKaoboy

Musing of the Day: Had lunch yesterday with a very savvy, grizzled ex-HF investor that started his career in 1980. He said to me, “All the $ I ever made was during declining rate environments.” Ponder that.

1/12/22: Negative Selection

My biggest concern in evaluating any investment in any asset class right now is NEGATIVE SELECTION.

Key question I ask myself: why is this extraordinary value in a sea of overvalued assets and why am I so lucky to have uncovered it over everyone else?

1/13/22: Should I Stay or Should I Go?

When you’re fighting every instinct to take profits on a winner that’s running — that’s a sign you should stay put.

When you’re rationalizing a loser into a “long-term hold” and find yourself thinking “I’ll sell on the next pop” or “I’ll get out when I’m back to breakeven” — that’s probably a sign you should be out now.

1/14/22: Lessons From Moby Dick

Investing should not be a “You’re either with us or against us” endeavor. If someone gets testy/defensive because their thesis is challenged, it is a sign that ego has taken over objectivity.

Don’t become Captain Ahab — stay alert and skeptical.

1/21/22: BYOBSS - Believing Your Own BullShit Syndrome

A lot of folks have mistaken winning the Liquidity Lottery for being the next Stan Druckenmiller.

Avoid BYOBBS (Believe Your Own BS Syndrome).

Making $ consistently in the markets is hard work and is likely to get a lot harder.

1/22/22: Skin In The Game Changes Everything

Pontificating from the sidelines is easy; anyone can be an armchair quarterback.

Skin in the game changes everything, however; once real $ is involved, Greed and Fear fuck with you.

To borrow from a favorite hobby: “Plan the dive, and dive the plan.”

1/26/22: How To Identify Zealots

There is nothing wrong with questions that can’t be answered.

There is everything wrong with answers that can’t be questioned.

2/3/22: Hubris Often Comes Before The Fall

The market is a harsh taskmaster.

More often than not, the minute you think you got it licked is when YOU are about to get a lickin’. I think the Liquidity Lottery has caused many to forget that.

2/10/22: There Is (Always) Another

Paraphrasing Yoda, “There is always another opportunity.”

Two lessons I’ve learned about investing over the years that I am reminding myself of in this tape:

1. You don’t need to make $ back the same way you lost it.

In fact, fighting a losing trade can blind you to new opportunities.

2. There will always be new opportunities.

2/12/22: Seth Klarman’s Margin of Safety

Not a bad time to revisit the GOAT of value investing. This book is a true gem because it is capital structure agnostic.

If an asset can’t be analyzed in this framework, it’s a speculation and not an investment.

"There are two times in a man’s life when he should not speculate: when he can’t afford it, and when he can." -- Mark Twain, by way of Seth Klarman

3/20/22: Avoid Echo Chambers

Echo chambers might be soothing for the ego but can be extremely dangerous for the pocketbook.

Healthy debate, on the other hand, can bruise your ego but save your pocketbook.

3/24/22: Sit Out The Chop

When the market has no memory from one day to another, the best trades are probably no trades.

3/31/22: Micro Vs. Macro

The biggest winners of my career have come from finding IDIOSYNCRATIC VALUE often uncovered amidst a MACRO SMACKDOWN.

Right now, I worry about IDIOSYNCRATIC RISK being hidden amidst MACRO EBULLIENCE — especially when I think that ebullience will be ephemeral.

4/5/22: “Patience You Must Learn”

The best investment results I’ve had usually come from a having well-researched thesis with a well-defined exit strategy — and then getting the fuck out of my own way.

Patience to let things unfold is often the hardest thing to do.

4/6/22: Investing The Pelican Way

I found my “totem animal” on a psilocybin retreat in Jamaica, which inspired this:

Spend most of the time chilling on posts/floating on waves, but ALWAYS staying alert for opportunities.

Expend time/energy VERY selectively; abort quickly when prospects aren’t great.

Act swiftly/decisively ONLY when it’s damn near a sure thing.

4/11/22: Indifference Points

The market has an uncanny way of pricing things right to your indifference point.

It’s never easy.

4/14/22: Be Careful “Fishing For Stops”

The problem when you "fish for stops" is that you have to EXPEND CAPITAL either buying highs or selling lows, and when it doesn't work -- YOU become the one stopping out.

5/9/22: Cheap Tail Puts

Cheapest tail puts in a market with exploding volatility can be had in names held artificially aloft by impending events that are subject to rug-pull. (I was referring to TWTR at the time — before Elon Musk threatened to bail).

Sources of “artificial levitation” could be:

-Impending deals

-Takeover/legal event expectations

-Impending bond maturities

6/29/22: Price You Pay MATTERS

Not saying Cathie Wood isn't smart about her insights into innovation, but to paraphrase Howard Marks, the PRICE you pay for an asset MATTERS (perhaps more than what the asset is). She seems to forget this.

I’ve made a lot of money on shitty companies bought at the right price and lost a lot of money on good companies bought at the wrong price.

6/29/22: When Beta Swamps Event Catalysts

This proved true on the way down, but the converse is also true:

Event-driven plays knocked down excessively from beta might be getting interesting, e.g. merger arbitrary plays getting crushed in the wake of beta-driven deleveraging.

I capitalized on this during the LTCM Crisis and again this year (TWTR after it got hammered from Elon’s shenanigans and market beta).

7/7/22: Preferences vs. Constraints

Macro investing/forecasting based on optimal policy PREFERENCES can be deleterious to your financial health; rather, invest/forecast based on what real-world CONSTRAINTS policy-makers face.

8/18/22: Threading The Needle

If you find that your investment thesis requires a threading of the needle of probabilistic outcomes to succeed, it’s probably time to fade yourself.

Corollary: Ignoring your own cognitive dissonance can be perilous to your financial health.

8/23/22: Rationalizing “Hedges”

Here’s a trading psychology question I wrestle with all the time:

When I put on a hedge that loses $, do I keep it and rationalize it as a hedge that’s supposed to lose $, or was it just a bad trade?

This dialogue helped me re-crystallize a couple criteria for hedging:

1. Hedge must be more liquid than underlying.

2. Hedge must be asymmetric (explicit through structure, or implicit through stop-loss).

3. Hedge is meant mainly for UNFORESEEN challenges to core thesis.

4. If Hedge BOLSTERS conviction in core and can be gotten relatively cheaply, it is worth doing.

5. Above all: Hedge MUST help sleep quality!

8/29/22: Precision vs. Accuracy

I’d much rather be generally right than precisely wrong.

10/10/22: Flexibility & Ego

The most important thing in this market right now is to be FLEXIBLE and not ego-attach to outcomes you WANT to happen due to positions you have, the type of job you have, the type of firm/fund you’re at, etc.

10/11/22: Wants vs. Observations

No one should conflate what one WANTS to see happen in the markets with what one OBSERVES is likely to happen.

Positioning should be based on the LATTER, not the former.

10/12/12: Equity Risk For Fixed-Income Return

There is nothing worse than taking Equity Downside Risk for a Fixed-Income Expected Return.

Higher rates will reveal tons of “Short Puts” across ALL Spread-Based Asset Classes (think Credit and RE).

10/20/22: Separating Outcomes From Decisions

"Better Lucky Than Smart"

This term gets bandied about often, and I've used it too, but the truth is much more nuanced.

Being right for the WRONG REASONS is great as long as you don't learn a BAD LESSON from it. Otherwise, you will pay out multiples of those "lucky profits."

Corollary: Being wrong for the RIGHT REASONS should never be a reason for self-flagellation.

LESSON: ALWAYS SEPARATE DECISIONS FROM RESULTS (much easier said than done).

10/23/22: Thinking “Out-Of-The-Box" / My Favorite Interview Question

I think it’s important to hone both your left and right brain hemispheres in the investment business.

Being “data-driven” without an ability to “think out-of-the-box” is dangerous and can give you a false sense of PRECISION without any ACCURACY.

To that end, when I used to interview candidates for my company, I had a 7-question quiz for my second-round all-day interview: 3 analytical finance questions, 1 real-time analysis of an investment, 2 brain-teasers, and 1 open-ended “creative” question.

My favorite analytical question: “Motivate and derive the formula for Bond Duration.”

Demonstrates core understanding of calculus, DCF, time value of money concepts.

My last “creative” question: “How many fish are in the sea?”

I wanted to see an actual calculated number and see how the candidate arrived at it. Was amazing to me how many folks with incredible resumes on paper completely fell apart on this last question.

11/10/22: Do Your Own Homework

Reflecting on my own decisions this month, the best decisions were NOT chasing FOMO trades espoused by others. Sure, you’ll miss some good calls, but it’s the bad calls not backed by your own conviction/homework that are killers.

11/15/22: Know Thyself

Know Thyself from a style perspective.

What works for one person may not work for you. A lot of my fuckups have been trying to emulate trading styles that simply don’t match my emotional makeup.

12/7/22: Accountability Is Determined By Skin In The Game

There are different timeframes for different bets, and SKIN IN THE GAME is the key to accountability.

I’ve had an LT Structural Oil Bull thesis since the depths of 2016 and invested a significant amount with a 10-year horizon. It has grown to be the single largest risk line item on my personal balance sheet outside of real estate.

My point is that if we’re talking accountability, “eating one’s own cooking” trumps everything else. I lived by that mantra when I ran my fund and similarly look for that criterion when I invest with external managers.

1/10/23: Lack of Conviction = Negative Gamma

Lack of conviction is like negative gamma; it makes you buy highs and sell lows.

Big reason why it’s much better to not trade than to trade with low conviction and/or other people’s ideas.

1/25/23: Volatility vs. Leverage

Best quote from last night’s investment dinner:

“As an investor, I love volatility and leverage each individually — never together.”

2/27/23: Far From an Ideal Setup

My favorite investment setup is where I get to sift through idiosyncratic rubble after an adverse macro shock.

The current setup is the OPPOSITE of ideal to me: idiosyncratic anti-value with impending adverse macro and geopolitical overhangs.

3/19/23: Know When To Swing

This is a great variation of my Pelican Investing thoughts (4/6/22).

“A good hitter can hit a pitch that is over the plate three times better than a great hitter with a questionable ball in a tough spot.” - Farnum Street Blog

3/24/23: Simplicity Is Your Friend

As someone who used to be very fond of complex capital structure setups, I will say that these environments are horrendously stressful for HF managers or anyone with complex setups due to mismatched liquidity and basis blowouts.

Simplicity is your friend right now.

5/2/23: The Market Is An Uncompromising Teacher

The market is uncompromising in both its meritocratic and its humbling nature, and it does not care how many followers you have or how much AUM you have.

5/4/23: Jens Parsson, author of Dying of Money, on Inflation:

I paraphrase:

“In the early part of an inflation, everyone benefits/nobody pays.

In the late part of an inflation, no one benefits/everybody pays.”

5/10/23: Pay Attention To Tells

Every now and then, the market gives you a very clear tell on what it deems most important. It happened this am during an earnings call on a stock I own.

Stock went from -12% to -3% after a key question was asked and answered.

This type of info is GOLD.

5/23/23: False Sense of Precision

A big error I see analysts make over and over is deluding themselves into a false sense of precision. I used to always tell my analysts that I’d much rather be GENERALLY ACCURATE than PRECISELY WRONG.

6/6/23: Commodity Stock Value Traps

The thing with Commodity Stocks is that they often look CHEAPEST at the CYCLICAL PEAK and having the wrong Macro framework can VALUE-TRAP you into oblivion.

9/27/23: Price vs. Quality Matrix

My simple Price vs. Quality Investment Matrix:

1. Good business, but priced to perfection

2. Shit business, yet still priced to perfection

3. Good business, but priced well

4. Shit/ailing business, but priced in deep distress

3 is EXTREMELY rare.

My biggest career wins were actually from 4.

We got a whole lotta 1 & 2 right now.

Where Macro comes in is that ZIRP had perpetuated 1 & 2 for a VERY long time, and the STEEP reversal of ZIRP will transition that regime to 3 & 4. And a VERY sloppy transition that will be.

The Pelican awaits.

9/28/23: Hedges vs. Trades

Many (especially amongst the Twitterati) tend to judge a HEDGE as a TRADE.

A HEDGE, if it serves its purpose:

1. Gives you conviction to ride out the bumps in your main TRADE

2. Allows you to sleep at night

3. Is supposed to lose $

That said, I try my best to structure my hedges AND trades asymmetrically with aim to:

1. Make as much as possible on my TRADE if I'm right

2. Lose as little as possible on my HEDGE and possibly have my cake & eat it too with creative hedges that can WIN even as the TRADE wins

A recent example of #2 for me was shorting CNH as an oblique way of hedging my LT Oil PE exposure.