Performance, Pigs, and Investment Process
Pigs at the trough
What’s the difference between an independent director and a shopping trolley?
You can load a trolley with grog but can’t push it anywhere you want.
Hat tip to Michael West @MichaelWestBiz for that amusing summary of Peter Swan’s damning report on the performance of independent directors. As Swan’s report was published in October last year, I’m guessing that you need to present your findings at a junket for the media to take note.
Anyway, it’s great to see the pigs at the trough have finally been exposed. The bigger question is why does the ASX governance council require all listed companies to adopt a majority of independent board members? Do they have any empirical or even strong anecdotal evidence to suggest people without skin in the game who often lack industry knowledge are capable stewards of shareholder wealth? Of course they don’t.
It’s time to slaughter the pigs! Have skin in the game or fork off.
6 Signs of a Good Investment Process
I enjoyed this post on the investment process by Todd Wenning at Clear Eyed Investing. Todd’s 6 signs of a good investment process are:
- Stoic: It can endure both good and bad short-term outcomes without getting emotionally swayed in either direction.
- Consistent: It doesn’t adjust to current market sentiment and sticks to core competencies.
- Self-critical: The process is periodically reviewed, includes both pre-mortem and post-mortem analysis on decisions, and is refined as needed.
- Business-focused: Rather than rely on heuristics like “only buy stocks with P/Es below 15,” a good investment process focuses on understanding things like the underlying business’s competitive advantages (if any) and determining whether or not management has integrity and if they are good capital allocators.
- Repeatable: A process gets more valuable with each application — insights are gained, deficiencies are noticed, etc.
- Simple: The less complex, the better. If you can hand off your process to another investor without creating significant confusion, you’re on the right track.
It’s a great list, though I disagree with some of his finer points. Anyway, Todd is well worth following.
With no disrespect to Todd, I always wonder when reading articles like his if the writer is struggling with poor performance. I hope not, but when my performance lags I often find myself reaffirming that it’s process not outcomes that count. Here’s how Michael Mauboussin put it in ‘More Than You Know’, as quoted by Todd.
Results – the bottom line – are what what ultimately matter. And results are typically easier to assess and more objective than evaluating process.
But investors often make the critical mistake of assuming that good outcomes are the result of a good process and that bad outcomes imply a bad process. In contrast, the best long-term performers in any probabilistic field…all emphasize process over outcome.
While I think my process is good, I know my outcomes are great. Give me another ten years and I might also know my process is great.
What a cracking month. The All Ords Total Return Index blasted ahead 4.4 percent. I did slightly better with a 7.2 percent return.
Daily, monthly and even yearly performance mean little to a long term focused process such as mine, but they are the repeatable steps that facilitate review. And hey, if we can’t celebrate our small victories we’ll get mighty thirsty!
As Mauboussin says results are what ultimately matter and naturally in the investment game it’s long term results that really matter.
As the next chart show I continue to do exceeding well over the long term.
Or is it?
I think a better analogy may be beating Mike Tyson when he has both arms tied behind his back. As this asset allocation chart shows when the market is winding up for a punch my cash position increases. The high cash position stops the market from delivering a knockout blow and allows me to continue taking big swings.
I’m not trying to time the market. Our cash balance is more a reflection on both the lack of opportunities and elevated risks in the market. Just because others are prepared to take more risk for less reward doesn’t mean I will.
Here’s some pearls of wisdom on holding cash from Seth Klarman and Warren Buffett as used by Steve Johnson in his article ‘The real reason you should hold cash‘.
One doesn’t need the entire market to become inexpensive to put significant money to work, just a limited number of securities. Klarman
Holding cash gives us optionality. Alice Schroeder, author of the definitive Buffett biography, The Snowball, says this is one of the most important things she learned: “the optionality of cash”.
“[Buffett] thinks of cash as a call option with no expiration date, an option on every asset class, with no strike price.”
As the above asset allocation shows I found an inexpensive security this month, but more on that another day.
One final chart that tells me my process is on the right track and encourages me to keep perfecting it.