14 | Contradictions, Unforced Errors and Zhang Xin

"Get the big things right"


CbK #14. As ya know, keen to share what I’ve been reading, learning, and compressing. A quick quote from old mate Uncle Iroh:

It's important to draw wisdom from many different places... If we take it from only one place it becomes rigid and stale.

Here’s the format of today’s email:

  • Part 1: Contradictions in Investing

  • Part 2: Unforced Errors

  • Part 3: Under the Spotlight: Zhang Xin

  • Part 4: Bonus Quirky Content - Something to Read, Watch, and Listen.

Contradictions in Investing

Investing, like life, has contradictions and paradoxes around every corner.

My personal favourite contradictory trait of investors is:

An ability to remain calm and rational at all times, combined with a state of constant paranoia and worry.

As Morgan Housel mentions in The Psychology of Money, there are a million ways to get rich. But really only one way to stay rich, which is a combination of frugality and paranoia. So you need to be calm and rational enough to stay the course over the long-term, yet be paranoid enough that it can all be taken away at any moment. It’s a hard beam to balance.

I really want to emphasize the below point:

The ability to crunch figures and analyse data, combined with the ability to understand intangible aspects of a business that can't be boiled down to numbers in a spreadsheet.

Over the last couple of years (especially 2020), I’ve thought a fair bit about how numbers and financials can be a good backbone to an investment thesis, but I shouldn’t discount narrative when evaluating it.

Pleeeeeeease don’t get the wrong idea and think I’ve gone full-blown YOLO storyteller investor. I’m just cautious of getting caught on the wrong side of a narrative stock.

Unforced Errors

Is investing about picking winners? Or about avoiding losers?

John Huber’s posted A Few Thoughts on Reducing Unforced Errors [Link] and he links to an Allan Mecham interview with MOI. But for the life of me, I can’t find the original source, so am pulling the quote from his post:

Patience, discipline, and intellectual honest are the main factors in my opinion. Most investors are their own worst enemies—buying and selling too often, ignorning the boundaries of their mental horsepower. I think if investors adopted an ethos of not fooling themselves, and focused on reducing unforced errors as opposed to hitting the next home run, returns would improve dramatically. This is where the individual investor has a huge advantage over the professional; most fund managers don’t have the leeway to patiently wait for the exceptional opportunity.

Howard Marks’ has a neat article in Barron’s [Link] which has some great nuggets:

Consistency and minimization of error are two of the attributes that characterized Yogi’s career, and they can also be key assets for superior investors. They aren’t the only ways for investors to excel: some great ones strike out a lot but hit home runs in bunches the way Reggie Jackson did. Reggie – nicknamed “Mr. October” because of his frequent heroics in the World Series – was one of the top home run hitters of all time. But he also holds the record for the most career strikeouts, and his ratio of strikeouts to home runs was four times Yogi’s: 4.61 versus 1.16. Consistency and minimization of error have always ranked high among my priorities and Oaktree’s, and they still do.

Which leads to the pièce de résistance:

For most participants, success is likely to lie more dependably in discipline, consistency and minimization of error, rather than in bold strokes – high batting average and an absence of strikeouts, not the occasional, sensational home run.

Now, I’m gonna go on a tangent here, and take what I say with a massive grain of salt. But personally, I believe a private investor’s biggest chances of outperformance rest on:

  • Risk Control: Superior performance with less-than-commensurate risk. Above-average gains in good times are not proof of a manager’s skill; it takes superior performance in bad times to prove that those good-time gains were earned through skill, not simply the acceptance of above-average risk. “If we avoid the losers, the winners will take care of themselves.”

  • Psychological edge: Willingness to bear pain and delay gratification; avoidance of (or ability to exploit) fear and greed; lack of interest in one’s popular perception; willingness and ability to go against the crowd when appropriate.

  • Time Edge: Longer time horizon, never have to buy or sell in any situation because of others’ decisions. Ability to let compound interest do its work. Professional money managers often have to provide quarterly or even monthly reports. How hard must it be to focus on long term returns if you have impatient bozos breathing down your neck?

  • Intellectual humility: Acknowledge what you don’t know and stay within a well-defined circle of competence. Imagine being a money manager in the dot-com bubble. Imagine how hard it would have been to acknowledge that you don’t have a damn clue about investing and valuations for internet-related companies. Barron’s writes that you may be losing your magic touch. It’s gotta be hard to stick to your guns, but it pays off. BRK.B has returned 585.77% since Dec 1999 (9.50% annualized). Whereas the S&P500 has returned a total of 168.20% (4.76% annualized) and the NASDAQ 256.44% (6.17%).

  • Enjoyment: Enjoy the process. If you're happy to spend more time researching and reading than others, over time (surely) you’ll turn that wealth of research into a considerable advantage.

Feel free to tell me if and why you disagree. I’m always keen to chat and learn more! And seriously, if I sound like an arrogant wanker, please tell me.

Howard Marks’ talks about four kinds of risk in The Most Important Thing (see graphic below). But to a private investor, (I think?) only the first one should apply to you. Leverage that shit! Be comfortable with some underperformance and don’t panic. Don’t worry about losing your ability to manage money (assuming you don’t blow yourself up and lose it all!). And don’t worry about investing unconventionally! The weaknesses of a professional money manager should be strengths of a private one.

Under the Spotlight: Zhang Xin

Each week I provide a little spotlight on an investor or operator I admire.
Zhang Xin is this weeks focus, in a nutshell:

  • Born in Beijing to second-generation Burmese Chinese just before the Cultural Revolution.

  • Moved to Hong Kong with her mother in 1980 when she was only 14. Worked in factories for 5 years.

  • Saved up ~£3,000, and went to England to study. (Despite speaking zero English). Graduated from Cambridge, then worked for Goldman Sachs, before returning to China.

How an unlikely couple became China’s best-known real-estate moguls [Link]

Great back story article. Also, Zang Xin has an interesting comment the issue of land sales, the pervasiveness of corruption, of “gray areas” in Chinese business and life. I’m just presenting without comment:

Westerners have a simplistic understanding of China: whatever can’t be clarified must be guanxi. The West doesn’t understand that government in China is not as lean and efficient as it is in the West. There are too many governmental bodies: city, county, township, even a neighborhood is a government. It’s all a messy tangle. Many things in China are vague. Some of our clients walk in and buy a dozen apartments in one shot. You don’t know where they got the money. You just know some Chinese have a lot of it. It’s a waste of time to try to clarify everything. I used to argue with Pan about it, because by nature I have a very low level of tolerance for vagueness. I’m not one who can fish in murky water. Pan is totally comfortable with murkiness. That’s his normal state. And I’ve learned to tolerate it.

Misc Thoughts

On being an entrepreneur in China in the ‘80s and ‘90s:

I mean, like no one had an idea how to do anything right. Like no one knew how to do a building right. I didn’t either. But one thing is — I remember I was always getting into a fight with my husband, I said, “Look, I’ve seen buildings better than this. I can do better than this.” So, I was like — I took on the job as working with the architects to do the designs and thinking about how the buildings should be built. So, that’s like every single industry started that way in China, back in the 80s. Today, when you see theses state of the art buildings got build and — just imagine — you know, just remember like 25 years ago, 30 years ago there was none.
- Source: PBS

On competition:

It's healthy to have competition. […] it's not a bad thing to have fierce competition which would enable us each of us to come up with a better product, better service, to benefit the market.
- Source: CGTN

And a nice way to wrap up:

When you look back on your life and think of yourself as a factory girl or living in Beijing with your mom, does it seem to make sense, your trajectory, or do you feel like, wow how did I get here? I really, I mean I just felt like life has taken me to a lot of surprise places, and I was able to always find the fun part of it and get on with it. And so, that's how I feel, that's how I see life. It's just, deal with it and go on.
- Source: Vanity Fair

Bonus Quirky Content

Something to read: How To Live A Full Life (And Leave Nothing On The Table) By 30 [Link]

Some great tidbits. Apparently, Ryan Holiday does these sorts of posts every year. So now I gotta read through the entire backlog!

Get the Big Things Right — There’s the old Benjamin Franklin line about being a penny wise but a pound foolish. It’s the same thing with time management. Most people get the little things right and the big things wrong—and then wonder why they don’t get much done.

And since it’s been a while since I’ve anything mortality wise…

Meditate on Your Mortality — The whole point of this post: Don’t shy away from thinking about death. Think about it a lot. I like Marcus’s line: “Are you afraid of death because you won’t be able to do this anymore?” For “this” plug in so much of the crap we waste our time with.

Something to watch: Who Are We Really? with Tyson Fury I Hotboxin' with Mike Tyson [10 mins]

Fury makes a great point about 5 minutes in that, no matter who you are, successful by standard definitions or not, it’s about how you see and feel yourself. And I need to constantly remind myself about this. Because I love my life. Like really fucking love my life. I have plenty of great friends and family, I play golf a few times a week, my work is fulfilling and I love doing it. But I hang around FinTwit a lot, and it’s hard not getting sucked into the desire of having a super prestigious or high paying job.

I hope I’m wrong, but I don’t know if life can get any better. How could I improve perfection?

The only thing we truly own in this life is moments in time. Now this is a moment in time for me that will never be erased. And no matter what happens, this is always gonna be my time this will be my moment time because I lived here and I was a part of this.

Something to listen to: Radio Garden [Link]

Not a podcast, but listening to radio from around the world is bloody cool! I’m currently learning Indonesian, so this website is super handy. Pro-tip: If you like a station but still want to browse other areas, click on the Lock icon so when you browse it won’t auto-switch stations.

Some of my suggestions:

  • Taiwan Lounge Radio in Taoyuan City plays some good study/background music that I like. Even if they are playing Rockin' Around The Christmas Tree in March at the time of writing.

  • Big B Radio - Kpop in Seoul plays Kpop if that’s your kind of thing.

  • Mix FM in Petaling Jaya, Malaysia is a modern radio station in English. Just reminds me of being on holiday in those KL taxis!

  • Indika FM 91.60 in Jakarta, Indonesia plays modern music, yet gives me a chance to practice my Indonesian language skills.

If you find a station you like, lemme know! Always interested in weird and wonderful new ones.

Final thought for the week:

Quick personal note: I’m launching a podcast (my Notion page of details). And to be honest, I’m struggling with getting guests on. If anyone could point me in the right direction of potential guests, tips on doing cold outreach for podcasts, or can help in any way, I’d be eternally grateful. Also, feel free to view the Notion page and give any critical feedback.

Until next Wednesday, have a good one!
- Kalani

You can find previous issues of Curated by Kalani here. I’m on the web at kscarrott.com and on Twitter @scarrottkalani. Have any feedback? Fill out this form.

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