The art of Sprezzatura | Mikael Syding - Sprezza

March 21, 2017April 12, 2018

Adequateness – being pragmatic, analytical; guided by empirical evidence

There is no such thing as supernatural beings

That is an indisputable fact; since everything in nature is natural, and given nature is defined as everything. So. I’m sorry to break it to you, there are no werevolves (for context, see last week’s article on Vampires, Werewolves and Resoluteness). Well, unless werewolves are natural of course.

Which they might be; it’s just that the probability for humans living on Earth in the 21st century ever coming across a true shape shifting werewolf is so close to zero there really are no reasons to take the possibility into account. However, should one happen to fall into your lap…

Facts, facts, facts

(Nope, that’s not the opening scene in “Four weddings and a funeral”)

That’s the gist of Adequateness right there:

1) Reality is what it is. A is A, and all that

2) Be curious in investigate reality; just don’t get ridiculous regarding probability weights*

3) Be open to exactly what reality entails, what the empirical evidence actually tells you

* The probability of the existence of God, a tea kettle orbiting the sun or a spaghetti monster – or intelligent design for that matter – is for all practical purposes zero (at least down to the hundredth decimal place), whereas, e.g., the principles of evolution and the natural law of quantum mechanics have been confirmed in a multitude of clever experiments (and never refuted). There is nothing “50/50” or “You have your view and I mine” about it.

It’s all good and well having a great strategy, being patient enough to wait for the right moment, learning from mistakes, never going all in, being thorough and calm, exploring unexpected vantage points, avoiding hubris and biases, not to mention being rationally resolute.

However, if you fall prey to superstition or start assuming instead of investigating all your hard work will be for naught. It’s the facts that count. It doesn’t matter how great your model is if your input is garbage. You need all your zeal and agility to collect the facts, and all the other psychological facets of TAOS to implement the facts and execute the investment. But first of all you need the facts.

Shit in

Strategy, Patience, Resilience, Endurance, Zeal, Zen, Agility, Temperateness, Unbiasedness, Resoluteness

Shit out

What facts?

I am not a rigid financials and economics professor type, claiming only cash flow and interest rates count as facts. Perhaps a bit surprising, I’m quite open to any kind of empirical evidence of relevant causal correlations in reproducible research; be it HFT trading algorithms mined by machine learning systems, or more down to earth value based methods using publicly available financial reports – or a combination.

I don’t care what kind of facts you use, as long as they are facts – and you are open to those “facts” being wrong, misinterpreted or evolving.

Oil facts?

Maybe the Cushing oil inventory level at one point was a relevant variable for the price of oil. Maybe OPEC production quotas and their communication once was important information. Maybe open speculative interest was. But now or later, maybe they aren’t. Maybe new flexible storage capacity, new exploration technology, new pipelines or zero funding costs are changing the “facts”.

Maybe even the very underlying fundamentals of production, demand, storage, transportation, energy substitutes and human speculation, aren’t that important for a prolonged period of time due to tens of trillions of dollars having been conjured from nothing over the last decade. Perhaps the machines have thrown everything out of whack and are running circles around us mere humans laughing at our feeble attempts to participate in the game.

Perhaps. Perhaps not.

Watch carefully where you are going

Investigate and analyze

the actual evidence; don’t assume

Stop, collaborate and listen

Whether the AI scenario above is relevant yet or not isn’t the issue. My message is that it’s up to you to research the relevant data for your investment style to find facts that hold water, rather than assuming heavy objects fall faster than light ones, or that high density objects fall faster even if there is no air.

If you want to pour a ton of liquid steel, you’d want to check the metallurgical facts thoroughly first. Treat large investments the same way – research what needs to be researched for your style, sizing and risk level.

Sometimes the truth hurts, but better sooner than later, better the ego than the wallet. Or in the above case, better stand corrected before than a statue after.

So, if things don’t evolve as expected, take pause to take stock of the evidence. Listen to your “adversaries” and cooperate if possible to establish the truth. Then you can apply whatever different models and methods you prefer to massage those facts into investment decisions. Your ego, your assumptions, your self-image, your status are all irrelevant to your investment prowess. The only thing that counts is the facts of your entry point and your exit point. To get those things right you have to stand back to reality, be interested in and love reality. It’s there, no matter if you want to or not.

Reality is what it is

Be curious and pragmatic

In my book about 15 years at the best performing hedge fund in Europe over a decade, I list 50 rules of investing.

This post is one in a line of articles detailing and explaining some of my most important insights from that time. Taken together I believe they will make for a useful and inspirational reminder for evolving and consistently improving your investment habits.

Whenever having a bad experience in the markets, or exhibiting signs of hubris after a lucky streak, refer back to these twelve ideas, thus combining your own experience with mine to maximize your investment wisdom.

Don’t be stubborn;

Look for and allow new empirical data

to change your investment thesis

Adequateness means establishing facts and truths, ruthlessly discarding obsolete heuristics, misconceptions and prejudices.

Adequateness means conforming to reality, analyzing what is actually there, rather than what you’d like it to be. You can’t close your eyes to reality. Well, you can, but that won’t stop the train/lion/stock.

If you actively pursue and accept the facts you can analyze them rationally and take action accordingly. But if you stay in the denial phase for too long, panic will sooner or later hamper your ability to do anything about the fact of the hammer hitting you on the head. Hope is not a strategy based on adequateness.

Be analytical while you still can

Ignoring the facts won’t mitigate

the extent of the eventual losses one iota

Adequateness is the eleventh article in my 12-part series of TAOS – The Art Of Sprezzatura. You can buy the artwork here. If you missed the previous ten articles you can find them here: Strategy, Patience, Resilience, Endurance, Zeal, Zen, Agility, Temperateness, Unbiasedness and Resoluteness. One final installment is coming tomorrow.

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March 20, 2017April 12, 2018

Resoluteness – how to foster the rational conviction to swim undeterred against the stream

The resolve of vampires and werevolves

There is an ongoing battle since time immemorial between two seemingly immortal clans of mythic creatures. One sucks its sustenance daily (or nightly), while the other comes out once in a (blue) moon to feast on the weak.

I’m referring to respectively Buy And Hold investors on the one hand and Value investors on the other. The former just keep sucking away at cheap and expensive markets alike, whereas the latter wait for the lure of the full moon before making the effort to attack weak and abandoned companies trading below fair value.

Superstition aside, both investment models have nice track records. They have performed more or less equally well over the last 100 years.

The thing, however, is that even if they are comparable over longer time periods, their performance can differ significantly over half-cycles of, e.g., 5-10 years. An investor lacking the right conviction and resolve could be forgiven for switching from a Value Investing based strategy to Buy And Hold after a long bull market (such as today, in March 2017). He’s in good company. Well, in numerous company at least.

The curse of always being too early

Value investors typically buy too early on the way down and sell too early on the way up. VI investors thus miss out on the last run-up of a bull market, in particular any kind of manias. Thanks to avoiding large parts of downturns, a well calibrated VI system still captures a similar return over time as a BAH:er; with significantly less volatility and draw downs (in theory opening up for leverage).

To get the full benefit of either the VI or BAH style the investor needs to stick to the chosen model. The worst time to switch, by the way, is when your model has performed relatively poorly over several years. If both models are to keep producing the same long term returns, periods of underperformance are followed by overperformance.

At the peak of a bull market, valuations are too high for value investors, whereas BAH:ers couldn’t care less. Right when switching from the poorly performing VI model to the obviously better performing BAH model is the most appetizing, that’s when the timing is worst and your resolve is the only thing standing between you and a market timing disaster. BAH:ers on the other hand could get lucky if they unexpectedly decide to abandon their gleaming ship for the apparently decrepit VI system. Further, adherents of BAH shouldn’t switch half-way through a bull market, persuaded by the VI Cassandras’s cries of (were)wolf (too high P/E ratios) right when the real bull market party is about to get going.

Resoluteness: choosing a method and sticking to it

There are of course many other ways of investing. The point I’m trying to make is simply that, after some length of lean times it takes a certain kind of inner strength and tenacity even to stick to a system you “know” works. Making use of some of my earlier investment principles help in reinforcing that resolve.

Fear and greed should only happen to other people

Sticktoitiveness demands rational conviction

If you don’t know how your system works; if you don’t know why you’re using a certain method; if you don’t base your strategy on a logical and rational solid foundation, any conviction you started out with is both unwarranted and likely to be subject to erosion under pressure. The reason model based hedge funds don’t second guess their models during losing streaks is they trust whatever work they put in to create those models. Their conviction and resolve is rational, and they know it.

That kind of solid base is a prerequisite for lasting psychological strength in the face of financial and verbal insults.

Trust your well-defined and back tested method

enough to base your decisions on sound reasoning

and cold calculation

in pressing times

without second-guessing

-Trade only as scheduled

In my book about 15 years at the best performing hedge fund in Europe over a decade, I list 50 rules of investing.

Resoluteness means staying the course when the times get tough, when your funds are shrinking and you are being ridiculed by fair weather traders.

Resoluteness means swimming undeterred against the stream, secure in the conviction you have a strong strategy that works over time, the right risk management and patience to wait out temporary setbacks. In short, you have a system that insulates from biases, herding and sudden whims; and thus have the rationally based psychological strength that is a prerequisite for independent and successful investing.

A good strategy

is like

a cage for your reptile brain

Resoluteness is the tenth article in my 12-part series of TAOS – The Art Of Sprezzatura. You can buy the artwork here. If you missed the previous nine articles you can find them here: Strategy, Patience, Resilience, Endurance, Zeal, Zen, Agility, Temperateness and Unbiasedness. Two more are coming over the course of the next two weekdays.

Do you like the series? Do you know somebody that should read it? Tell them about it; share this post with them.

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March 17, 2017April 12, 2018

Unbiasedness – making sure nuanced facts rule opinions and wishes

Investing with biases is like playing tennis using your weak side

In investing there are two major groups of enemies:

1) other people

2) yourself

Unbiasedness means focusing on the actual data and established causal relationships, while actively avoiding other people’s power of persuasion, and mitigating adverse affects and cognitive blindness due to psychological biases.

Focus on facts not opinions

With unbiasedness I mean not caring about how and why you came into a holding, only what its future return characteristics are. With unbiasedness I mean not letting your investment process be unduly affected by history, by friendships, by juicy sales pitches, by half-truths, by wishful thinking, by group-think and reluctance to speak up.

With unbiasedness I mean both freedom from external pressure and irrelevant information, and systems for managing your own cognitive biases such as herding/social proof, availability, anchoring, confirmation, hindsight bias etc.

Unbiasedness – the holy grail of investing

I admit I often label traits being of paramount importance or indispensable. Unbiasedness is no exception. If your investment process is biased rather than founded on reality, you inevitably will make worse decisions. Most likely that will in turn lead to lower or even negative returns.

If you let yourself be swayed by charismatic snake oil salesmen, online stock forum “friends”, brokers or incumbent owners you’re more likely than not to be positively biased and paying too much. Sure, you can get lucky, but you can also end up buying IT companies at the peak of the 1999-2000 technology bubble; or mortgage brokers, house builders and banks in 2007.

Similarly, your own biases can play tricks on you. Since you want to be rich, since you want stocks to rise, since you only have limited research resources you hope whatever stocks you investigate will rise. You invest in the first companies you come across and then adjust your models until the stock is a strong buy. You keep adjusting if the price surpasses your initial target…

Unbiasedness is the holy grail of investing, since it’s so difficult to attain. And maintain.

Your mind keeps blinding you, fooling you with plausible narratives, telling you to conserve energy (preserving your homeostasis), encouraging you to pursue the path of least resistance, of following the herd, of always being contrarian, of simply confirming what you already think, of hiding news to the contrary from your attention. Unless you have the right infrastructure in place you won’t even suspect you’re biased. That’s part of the very definition of bias. Even if you do pay lip service to unbiasedness by superficially entertaining the opposite side, you’re most likely to just pat yourself on the back with a congratulatory “I checked so at least I’m not biased”

Carefully weigh all facts and arguments against each other

Form your investment opinion with a minimum of external influences

Make decisions and take action with freedom of mind.

Stand up to yourself your ideas

as long as the data support them

but not longer

In my book about 15 years at the best performing hedge fund in Europe over a decade, I list 50 rules of investing.

Unbiasedness means focusing on facts, actively subduing any psychological biases, using check lists and best practices to counter greed and wishful thinking.

Unbiasedness also means shunning group think, decision by committee and dangerous exposure to biased people with agendas. Unbiasedness means being independent, even of yourself through the use of best practices including checks and balances of yourself.

Be truly independent

Neither a crowd follower

Nor a die-hard contrarian

Unbiasedness is the ninth article in my 12-part series of TAOS – The Art Of Sprezzatura. You can buy the artwork here. If you missed the previous eight articles you can find them here: Strategy, Patience, Resilience, Endurance, Zeal, Zen, Agility and Temperateness. Three more are coming over the course of the next three weekdays.

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