Do you have a framework for life? For Investing? For love or at least getting some lovin’. While the guy who posed the first part of that question may have been more interested in how I answered than what I said, all I could think was, great question, I must have an answer for that.

Here it is – written in real time, so I can think more about my writing framework. The framework for this post was written outside on paper while enjoying a bright winter day communing with nature. It should come as no surprise  when I say that Being There is one of the most insightful movies of all time. Gardens and on the grander scale nature contains most answers!

Chip in if you’re reading along. Leave a comment, turn this into a discussion.

Life is a project! Life’s a game. Plan it, have fun with it. Do it! As JLP said “Make it so.”

To plan is to succeed. It was no coincidence I became an authority on SAP business wide integration and SAP Project Systems. Plan=succeed. Mere words to some, but my over arching framework. I see almost everything as a project. From working in the garden to my entire life to most worthwhile endeavors (my kingdom for a u) in business.

My life plan is on a ten year cycle, although I’ve completed the last ten year’s in seven so I’m flexible on that as I am in most things. Within each ten years there’s multiple projects all the way down to writing this post. Most things work and many repeat on multiple scales.

Just do it. Less chat more action. It’s better to take one step forward even if it is on the wrong direction, Bear Grills et al.

See, I can do detail!

Big Picture. Why? Because that’s me. For the major personality traits,  I find innate or at least learnt early the most likely theory. I’m obviously biased to how great big picture thinking is, and reinforce the superiority of my trait by concentrating on the positives (optimist) while still realising there is value in all perspectives. There’s a place for detail and it has to be done and if required I’ll do it, but my value and what I consider most valuable is synthesizing (I give up on correcting this spell checker! At least wordpress is free). Gotta love free. Freeconomics. I still own the domain payconomics, it’s an idea that can wait, as Levitt has already taken my thunder with freakonomics. Great book… but let’s get back to the story.

Synthesizing the big picture is difficult. It requires more effort, more perspective, more layering.I love doing it and do it well, very well.

Analytical

Projects have problems. Come with solutions. Know why they’re solutions and know why several layers deep. In investing, in business, in most of your external conduct in life an analytical approach will serve you well. As will being ethical. Do the right thing, always. As David Sokol recently found all it take is one mis-step to ruin a career. It’s worth re-quoting Munger

“We think there should be a huge area between what you’re willing to do and what you can do without significant risk of criminal penalty or causing losses. We believe you shouldn’t go anywhere near that line. You ought to have an internal compass. So there should be all kinds of things you won’t do even though they are perfectly legal. That’s the way we try to operate.”

Open Minded

Humans are always wrong. It’s a defining fault in this evolutionary step, to be human is a synonymy for failing…’he’s only human‘. Wrong, wrong, wrong. We’re wrong so often that it’s essential to be open minded and inquiring. You must see where we’ve come from, stand on giants shoulders and look both ways. Always question, always doubt. Oh my! Could I still rebelling against my Catholic upbringing? Nah, I think not.

Regularly toss a belief in the trash, for a while at least. Sometimes you have to retrieve discarded beliefs, smooth them out, shakes the crumbs off.

Fusion

It’s about time I did another post on fusion, particularly fusion investing. When I can type faster it’ll be a book. There is good in most things and always opportunities to learn. Take the best, while recognising the best is just your opinion.

Passion

Without certainty of belief you need passion. Passion about ideas, passion for people, for experiences and maybe for some things. I’m passionate about business and investing.

People used to fell ill over my overt passion for my wife and after 23 years that passion still lights my way. Passion in work, love and the rest of the life is essential. I’m lucky to have had so much of it.

Time – Past present future. It’s all there in front of you to see. Like everything the more you practice the better you get. See through time. The past is there and full of examples of how things transpire. Use those examples to look forward in time to see how you get somewhere. It all repeats, just the players are different.

Jump forward in time and look backwards. Do you know how you got to where you are? I sure hope so! It’s easy as you’re looking back over your life. So place yourself in the time and circumstance that you want to be, then look back to see how you got there. If you haven’t done it before, give it a burl, it’s fun. Learning only by your own experience is too slow.

Arbitrage time. Leverage time. Leverage your own time, through education, through inspiration or perspiration.

In investing the short term in crowded, time is more fruitfully deployed or at least has a higher probability of success if you focus on the long term. Though of course if you’re in a hurry the short game has the positive skew. Good luck with that, you’ll need it.  Most importantly do what is right for you. The long game is right for me as is a continuous investment in myself.

Invert alway invert. More broadly look from different perspectives. Solutions are best if simple, so when I can’t see a solution I know it’s time to invert. Hand in hand with perspective and time is seeing beyond things. It is essential to see beyond problems. See beyond the next quarter. See beyond the hurdles.

With the US market down heavily overnight and the Australian market falling, it’s best to invert. Down is good! Down is what you want. You want the opportunity to buy lower.

Focus. Need it. Should come easily if you’re passionate about whatever requires focus.

Capital is scarce – opportunities are plentiful. Scale that idea! From my kids pocket-money all the way to the global monetary system. In investing and in business capital is always scarce and it’s sensible allocation paramount.

Non-fiction. Hat tip to Paul Craigie for that one. Friends were stunned when Paul said he only read non-fiction. I thought how sensible and now limit myself to a couple pieces of fiction a year.

It’s all in front of us. Nature! My Garden. Growth, patience, competition, co-operation, efficiency, focus and more. The right way to do things. Humans replicating nature will be our deliverance from our current over consumption. Growth is my framework, that’s why I’m 6’5″. Growth, value, momentum, fuse them all to profit from both the weighing and voting machines.

See past the distractions to the gems beyond and then visualize the gems bloom and grow. When I look at a garden I don’t simply see the plants in front of me, I see from seedling to maturity, I see the growth. I envisage what the plants will look like and review what they did look like. Great success in investing can be found in a similar fashion.

Enjoy, smile, love, give, be thoughtful and respectful, improve yourself and all and everything around you, laugh, experience…and so much more.

Dean. Self confessed, self aware, hoping to be self actualized, ENTP, A Type who likes to listen.

This post would not be complete without the two quotes from my front page.

“The whole problem with the world is that fools and fanatics are always so certain of themselves, and wiser people so full of doubts.” Bertrand Russell, philosopher, mathematician, author, Nobel laureate (1872 – 1970)

“Too much prosperity makes men greedy and their desires are never controlled sufficiently to stop at the point of attainment.” Seneca

No related posts.

Keep your friends close, and your enemies closer. Sun-tzu Art of War. (~400 BC)

You learn nothing by assuming someone with a different opinion to you is wrong. If you invert your thinking and assume you are wrong then you may gain worthwhile insights. D Morel 2011 and no doubt thousands before me.

Frank Curzio on S&A Investor Radio is my current favourite pod caster. On my bike ride today it felt good to hear him express a similar idea that link those quotes. You learn little from talking to like minded people whereas you learn a lot by listening to those with different opinions.

In investing too many people make the mistake of listening to like minded people, they seek out confirmation of their views, whereas they should be seeking out challenging opinions. Knowing the strengths and weaknesses of your enemy’s thoughts puts you in a strong position.

This all ties in with another favourite quote of mine. Focus on the downside and let the upside take care of itself. The downside is your enemy and you should keep it very close indeed. Knowing the pitfalls of your investments will let you quickly realise when when you about to get tripped up by them.

Know the bear story as well as you know the bull.

The following advice is offered with Matrix Composites & Engineering Limited (MCE) owners in mind, but it applies to all value investors who are holding on to fully valued companies.

I offer this unsolicited advice as I believe there are a number of new “value” investors who are sitting on substantial gains in MCE and my view is they should book those gains and move on.

1. Is there a margin of safety at the current level? I think not, the only way to get see a decent MoS is to use a very low required rate of return and optimistic forecasts. The valuation to the right is from the excellent MyClime service. To get a decent MoS I had to use a ROE of 50% and required return of 11%.
2. True value investors don’t forecast. Basing analysis on what analysts forecast is appropriate for growth investors not value investors. Analysts in general are over-optimistic in the long run.
3. Surely you can find a better MoS else where. If not there is nothing wrong with holding cash, it gives a decent return plus the option of buying when bargains do appear.
4. Who is buying at this level. MoMo (momentum) investors that’s who, there is no-one left to buy after them and they’ll head for the exists quicker than you.
5. You never go broke taking a profit.
6. Don’t fall in love with a position.
7. If you don’t want to sell at least put in place a trailing stop.
8. Mr Market is in a great mood at the moment and that means it is time to sell to him.

Put all the above together and I hope you conclude that taking your profit and looking for an investment with better margin of safety is the prudent path of value investing. I’d love to know if and why you disagree.

Disclosure: No position in MCE.

My favourite quotes of the week come from GMO, with James Montier pipping Jeremy Grantham.

From the perspective of mean reversion, fat tails help to create some of the best opportunities. That is to say, fat tails often create fat pitches.

That is a fantastic reason for understanding skew, I alluded to it in my discussion on skewness, but failed to give deserved emphasis to the fat pitches in those fat tails.

Montier also provided the pick of my summer reading. His 2009 book, Value Investing, Tools and Techniques for Intelligent Investment, is a collection of his articles from Mind Matters written during his years at Société Générale. You could probably find all the articles on the web, but this really is a collection that deserves to be appreciated in hardcover. $26.50 at Amazon.

Montier’s Value Investing is broken up into six parts; why everything you learned in business school is wrong, the behavioural foundations of value investing, the philosophy of value investing, the empirical evidence, the dark side of value investing: short selling and real time value investing. Within those six parts are 36 articles, woven into a coherent and excellent whole.  For me, Montier comes from the lineage of great thinkers; empirical, open minded, layered with the ability to look from difference perspectives (reverse engineer DCF for example) and reduce complex ideas to their key simple form.

Here is one of the chapters to get you started; The tao of investing: the ten tenets of my investment creed.

I wonder if Montier’s views on commodity super cycles have changed since he moved to GMO and within Grantham’s sphere of influence.

My favourite quote from Grantham is immediate rather than timeless like Montiers, but it is a recurring theme and one the master of bubbles knows a lot about.

Be prepared for a strong market and continued outperformance of everything risky.
 But be aware that you are living on borrowed time as a bull; on our data, the market is worth about 910 on the S&P 500, substantially less than current levels, and most risky components are even more overpriced.
 The speed with which you should pull back from the market as it advances into dangerously overpriced territory this year

That’s not really a quote is it, more like confirmation bias in full effect. Grantham sees the possibility of this rallying carrying on past the end of QE2 until October.

Part 2 of Grantham’s Letter is one long quote, fantastic stuff. I’ll quote Grantham quoting himself.

“I’ve also been pretty irritated by Graham-and-Doddites because they have managed to deduce from a great book of 75 years ago, Security Analysis, that somehow bubbles and busts can be ignored. You don’t have to deal with that kind of thing, they argue, you just keep your nose to the grindstone of stock picking. They feel there is something faintly speculative and undesirable about recognizing bubbles. It is this idea, in particular, that I want to attack today, because I am at the other end of the spectrum: I believe the only things that really matter in investing are the bubbles and the busts. And here or there, in some country or in some asset class, there is usually something interesting going on in the bubble business.”

Grantham goes on to discuss career risk, extrapolation, bubbles and as the following graph highlights, P/E ratios and margins.

Grantham explains why the correlation between P/E ratios should be -1, while the correlation at the peaks in +.32.

Disclosure: Long the ideas of Grantham and Montier.

A recently read post by David Merkel made me take stock of my wheelhouse. Here’s the industry breakdown for the SMSF I manage.

Sectors

I’m trying to lighten up on Financials as that weighting is high for us and two stocks are past our target, but I haven’t seen signs of a top yet so see no need to rush.  Though the ominous shorts on the NDX should be noted.  Financials weighting is high due to bargain buying around the banks’ SPP offers last year. I’m  91% invested in this account and will be a net seller of equities on price advances from here.

I sat a three hour Mergers and Value Enhancing Strategies exam yesterday. Despite having plenty of time I didn’t catch my ingrained mistake of answering Earned Value Analysis instead of Economic Value Added. Those years advising on project management are hard to shake.  That lost point won’t be the the only one I dropped. I did well on the quantitative section, but dropped marks on the qualitative side. That’s 2/3rds of my Masters completed, a whole bundle of new knowledge and one semester to go.

I rewarded myself by having the afternoon off to work and think in the garden, before diving headlong into the CFA Level 1 material for my exam on Dec 5th.

Predictions unleashed

I don’t and few can predict short term movements; empirical evidence doesn’t shine brightly on short term predictions. I’m more of a long term wave/cycle guy with demand & supply and mean reversion biases.

Equities are most likely in  a secular bear market, currently enjoying a final bull hurrah. So no broad escape from the coming inflation via the stock market. Stock pickers will do better than indexing. If the market advances into 2011 it will definitely be time to swap into late stage stocks with quality recession proof earnings and good yields. I’ll be going predominately to cash and looking to profit through shorts. I’d love 1500 on the S&P 500 and would be substantially in cash if that eventuates within a year.

Property in Australia can at best enjoy stagnation over the  coming decade. I’ll patiently wait for the stagnation to be entrenched and property to be within spitting distance of it’s long term afford-ability trend before diversifying the superannuation fund into residential property. The Australian market is structurally stronger than many others due to high demand and no oversupply, so stagnation is more likely than a 40+%  correction. The excellent unconventional economist articulates the bear case.

Property in the US. My current best idea. Buying strong USD cash flow properties with the inflating AUD and funding the balance with a low rate USD debt has multiple likely good payoffs over the long term. It’s a a double play, buying weak with strong, it’s buying low sell high.

[Update: In short, I think this is a low risk high reward investment with several good options for free, including, calls on USD and interest rates plus the option to expand. You can get all that in a cash flow positive package for around the price of a decent car.]

Can anyone can tell me how to easily invest directly in residential property in the US. Best places with highest Sharpe ratio, excess return to risk? Ease of doing so through an Australian discretionary trust which can finance out of US trading account? How to get a US bank account if online share investment accounts won’t suffice? Alternative structures I may want to consider? A trusted property manager in an area with high rental returns?

If anyone else is interested in buying historically cheap US property with inflating AUD or NZD then let me know. I think an exploratory trip in the New Year could work well.

Australian dollar may see another 20% up, but we’re heading quickly to the peak. We’re fully exposed to the USD in our investment fund to prices above parity, after hedging up to the mid nineties. Parity has only been breached, not conquered. CEO of Orica said they believe predicting currency is extremely difficult. Yes in the short term it is, so removing variability in company earnings is difficult to achieve through hedging, but investors with a long term perspective can more readily profit from long wave currency movements. When the risk play ends the AUD could fall fast. I’ll get very excited if AUD hits $1.20 and look to profit from reversion.

Gold, if this is a bubble and it certainly has numerous hallmarks of an early stage bubble then gold could go above $3000. The final year of a bubble often sees  prices double, but jack best be nimble. If the bubble is missed then shorting the downside will be another opportunity.

Bonds, I’m about to sell out of our small bond allocation. The position has worked well over the last few years and is less likely to over the next few years.

Inflation will increase. How can I best invest with rising inflation as a theme?

Sometimes it is different.

The guys at Intelligent Investor provide a good if slightly expensive newsletter service for Australian share market punters. I’ve found their advice reasonably sound and unlikely to dash investors against the rocks.

They now offer a couple blogs, Bristlemouth and Doddsville. A comment in the latter got me thinking today.

My suggestion is buy some now (Macquarie) and then buy more if the stock falls later (ie deal with this problem by portfolio allocation). James Greenhalgh

On the face of it that seems like good advice that is unlikely to lead investors astray. I’ve heard that suggestion many times and no doubt even acted upon it myself in the past. However, could that advice simply be a tried and true method for achieving average returns? I think so.

Why not actually use patience and try to outperform the market? Wait and see if Mac goes down and then buy. If it doesn’t go down c’est la vie there are always other opportunities in the investment sea.

The more you swing your bat the more likely you’ll achieve average returns. Each swing forms a tiny part of diversification and diversification is the surest way to achieve average returns. If you want average returns then invest in a index and spend more time playing with your loved ones and kids or yourself.  Swinging at every half decent opportunity and then averaging on the way down is a sure path to AverageVille.

To paraphrase Buffett. The stock market is a no-called-strike game. You don’t have to swing at everything–you can wait for your pitch. The problem when you’re a newsletter writer is that your subscribers keep yelling, ‘Make calls, you bum!’

Whether Macquarie Group is currently one of those pitches you should swing at is another entirely different question. I agree Macquarie looks like good long term value, but it is not a screaming buy, so I see no need to swing. Another old stock market saying to keep in mind is that it is only what you own that can hurt you.

Off Topic: I laughed hard the other morning when my seven year old daughter replied to her mother’s inquiry into why she was having problems buttering her bread, “I don’t know what side to butter it on mum“. My partner had no idea what she was talking about and said either side will do. I was already laughing, when my wonderful daughter said “But, daddy said I didn’t know what side to butter my bread on“.

Two nights before I had said to her, “You don’t know what side your bread is buttered on“. It’s funny how kids process things.

UPDATE: The following is from Charles Kirk’s recent post, 7 things to do to improve your performance in the markets. They are all worth a read.

2. Concentrate your holdings – If you have more than 5 to 10 positions in your portfolio, you are hindering your performance without even realizing it. With the availability of ETFs now, you can diversify as much as you need. Likewise, even if the best of environments, you probably should only be able to find a handful of really good opportunities that offer the most upside with the least amount of risk. Frankly, if you are able to find more than that, then you really don’t understand what it means to find a true low risk/high reward opportunity!

Disclosure: Long MQG.AX (Bought at the height of the GFC)

I started posting the following on the Biota Hot Copper (B-HC) board, then realised that it was unlikely to be of benefit to anyone there so I decided to post here.  It’s possibly not going to be of  benefit to anyone here, but c’est la vie.

I post this now not to purposefully annoy anyone, though many may find it annoying, but to offer some advice that perhaps even just one person can intelligently consider whether there is any merit in it. As always, I also post in the hope that people will give intelligent feedback.

My investing approach changed about 12 years ago when an accomplished investor asked me how often I checked the prices of my holding. I thought he was joking and replied with a half laugh that I checked prices at least once per day. He then asked how often I thought the fundamental story behind my investments changed. As he walked away a dim light flickered in my head. That light now burns bright and despite still checking my quotes too often, I am happy to walk away from the market for weeks on end and largely only check prices when they are around my target prices. Don’t sweat the wiggles. If you’re going to be a lifelong investors then worrying about daily prices moves will grind you down.

Should bots be behind bars?

A bad workman blames his tools. Most readers probably aren’t aware that 90% of the posts on the B-HC board seem to be about bot trading, that is trading by computerised algorithms. In particular posters are sure that bots are manipulating the share price and apparently screwing us retail investors. I’m still not sure how anyone can be sure about anything, let alone something as complicated as the trading patterns of shares. Though let’s throw reason aside and assume bots can manipulate share prices over extended periods of time and have forced the share price of Biota lower. Unless you’re carrying high margin while speculating on volatile shares (namely a complete smeghead) I’d suggest bots forcing the price lower is good news to those retail investors who believe Biota is undervalued, as it provides an opportunity to buy more shares at greater discounts. Any retail investor hould hang up their spurs right away and opt for index fund if they sell based solely on prevailing share prices.

Whether or not the bots are helping or hindering is largely irrelevant and unknowable. What individual investors can do is focus on what they can control. Focus on their investment strategy and implementation, their research and their own investment decisions. Focus on what you can control and drink from the cup of introspection, rather than looking to blame mysterious forces beyond your control.

Other Biota investors are counting on the Japanese approval of LANI to skyrocket Biota’s price higher. While I don’t think the market is totally efficient it is certainly efficient enough to have priced in such an occurrence. At the very least investors should consider the possibility that LANI approval is already priced in. It’s better to be pleasantly surprised based on conservative assumptions, than having your assumptions make an ass of you (I couldn’t work the me in there, but rest assure I am often an ass or arse as us real English speakers say.) It’s also better to be prepared, what would happen to the share price if LANI unexpectedly gets rejected?

Investors should look for sound logical reasons why Biota’s or any other companies’ share price is where it is. If they believe they have some differential insight, fine, write it down and invest based on that belief. My feeling is most of posters on the B-HC board should really be blaming themselves for having got greedy and failing to sell when the share price was above $3, it’s now 88 cents, not blaming bots. I too failed to sell, despite going on record that Biota was overvalued when it was around $3.30. Yes, I have looked at what I can learn from the situation, though sadly I didn’t come up with any fresh insights. Just the same old anchoring issue I always struggle with.

For those interested in Biota, it is noteworthy that their largest shareholder Hunter Hall has upped their stake to 13.14%. LANI approval is due any week now, the annual report was out recently and Biota’s foray into the ASX S&P200 was short and bitter.

Disclosure: Long Biota (BTA.AX)