Value vs. Growth Investing

Often, specifically in the genesis of an investing career, we come across two common investing terms that can be very confusing: value investing, and growth investing. Both strategies seek to produce the best returns; both claim to be the best investment decision. Why the difference in name? Like most goals there are several different approaches to get where you’re going.

Growth investing, as the name suggests, is the approach that attempts to seek out companies that will experience faster than average growth. Growth can be measured by revenues, earnings, or cash flow. The way the business is managed is also very important. For example, many growth-styled companies are more likely than value-styled companies to utilize profits for capital expenditures; this can be the purchasing of additional factories, company acquisitions, or other projects.  This is seen as more beneficial than simply using profits to buy back stock or pay out dividends to shareholders.

The goal may be to outperform the market by identifying these growth-type companies, but it is important to understand that there is no free lunch; it is impossible to get something for nothing. Growth companies tend to represent a greater risk than value companies. That is why if one plans on investing in growth companies, mutual funds, whatever; it should be clear that often a higher risk tolerance is required.  

Value investing on the other hand attempts to find the “diamonds in the rough”; this meaning companies that are trading at levels below their fundamental worth; there are many reasons this could be the case. Often entire industries fall on hard times, companies have awful earnings reports, or there is just a horrible perception about the company; these are just a few reasons that a company could be trading at a discount.

In general, value companies tend to be perceived as less risky than growth, often value companies are mature names that are paying consistent dividends to their shareholders.  

This is of course the tip of the iceberg; analysts use complex models and forecasting techniques to best ascertain the future performance of both growth and value names. That is probably not your job as an investor; but it is your job to understand to the best of your ability what you’re investing in.

 

-Luke

Wisdom From Nassim Taleb

Nassim Taleb recently created a document titled Additional Aphorisms, Rules, and Heuristics which I find contains many pieces of insightful wisdom. Here are a few parts that stood out to me:

Never read a book review written by an author whose books you wouldn't read.

If someone is making an effort to ignore you, he is not ignoring you.

Never hire an A student unless it is to take exams.

Business wars are typically lost by both parties, academic wars are won by both sides.

The only way you can ascertain that you are really rich is if you prefer to drive a slightly beaten nondescript car, without feeling compelled to let others know that you are doing it "by choice."

People tend to whisper when they say the truth and raise their voice when they lie.

A good book gets better at the second reading. A great book at the third. Any book not worth rereading isn't worth reading.

A heuristic on whether you have control of your life: can you take naps?

The longest book I've ever read was 205 pages. 
One of the shortest books I've ever read had 745 pages.

If the professor is not capable of giving of class without preparation, don't attend. People should only teach what they have learned organically, through experience and curiosity... or get another job.

If you don't feel that you haven't read enough, you haven't read enough.

To understand how something works, figure out how to break it.

It is a sign of weakness to avoid showing signs of weakness.

An enemy who becomes a friend will always be a friend; a friend turned enemy will remain so forever.

If you are not familiar with Nassim Taleb, I would recommend looking into some of his books and ideas.

-Joe

Premortem

I recently finished reading Thinking, Fast and Slow by Daniel Kahneman. In the book Kahneman touches on a managerial strategy called premortem, during which he references the thought-leader of the subject, Gary Klein. Essentially, premortem is the opposite of postmortem. Gary Klein describes "Performing a Project Premortem" in the Harvard Business Review and goes into detail on the concept, which can be read here. However, this excerpt from Thinking, Fast and Slow paints a vivid picture of the idea as well:

The procedure is simple: when the organization has almost come to an important decision but has not formally committed itself, Klein proposes gathering for a brief session a group of individuals who are knowledgeable about the decision. The premise of the session is a short speech: "Imagine that we are a year into the future. We implemented the plan as it now exists. The outcome was a disaster. Please take 5 to 10 minutes to write a brief history of that disaster."

I can immediately envision many useful applications of this exercise. Mainly, it can help both proponents and opponents of a decision brainstorm using prospective hindsight, which can improve accuracy in identifying reasons for future outcomes.

While Thinking, Fast and Slow contained many excellent thoughts and ideas, this concept of premortem stood out to me because of the hindsight aspect which offers benefits that other risk analysis methods do not.

- Joe

The Most Efficient Predator You Don't Know

Via the National Wildlife Federation August/September 2014 Edition by Natalie Angier:

African lions roar and strut and act the apex carnivore, but they're lucky to catch 25 percent of the prey they pursue. Great white sharks have 300 slashing teeth and that ominous movie sound track, and still nearly half their hunts fail. Dragonflies, by contrast, look dainty, glittery and fun, like a bubble bath or costume jewelry, and they're often grouped with butterflies and ladybugs on the very short list of "Insects People Like." Yet they are also voracious aerial predators,  and new research suggests they may well be the most brutally effective hunters in the animal kingdom.

Compared to the aforementioned predators, dragonflies statistically hunt much more productively.

Dragonflies manage to snatch their targets in midair more than 95 percent of the time.

There are three key factors that enable dragonflies to hunt so successfully: their nervous system, eyes, and wings.

Nervous system:
One research team has determined that the nervous system of a dragonfly displays an almost human capacity for selective attention, able to focus on a single prey as it flies amid a cloud of similarly fluttering insects, just as a guest at a party can attend to a friend's words while ignoring the background chatter.

Eyes:
Dragonflies also are true visionaries. Their eyes are the largest and possibly the keenest in the insect world, a pair of giant spheres each built of some 30,000 pixel-like facets that together take up pretty much the entire head.

Dragonflies... have a full 360-degree of vision.

Wings:
Dragonflies are magnificent aerialists, able to hover, dive, fly backward and upside down, pivot 360 degrees with three tiny wing beats, and reach speeds of 30 miles per hour - lightening fast for an arthropod. 

In the dragonfly, the four transparent, ultra-flexible wings are attached to the thorax by separate muscles and can each be maneuvered independently, lending the insect an extraordinary range of flight options. "A dragonfly can be missing an entire wing and still capture prey," Stacey Combes, who studies the biomechanics of dragonfly flight at Harvard University, says.

While the dragonfly is a well-liked insect that people tend to enjoy seeing, it is also one of the most fascinating and efficient predators in nature, catching prey unlike any other.

-Joe

The Power of Simplicity and Subtraction As It Relates to a Winner's Game Versus a Loser's Game

“It is not a daily increase, but a daily decrease. Hack away at the inessentials.” 

- Bruce Lee

Simple is greater than complex. Similarly, subtraction can be as useful as addition. Often we seek improvement by addition. However, subtraction is a viable option that often gets overlooked as it promotes simplicity.

When Steve Jobs created the line of Apple products, such as the iPhone, iPad, and iPod, he did not choose to make the most developed and complicated technology. Rather, one of the appeals of these gadgets is their simplicity; they all have one main button.

"The difference between successful people and very successful people is that very successful people say 'no' to almost everything."

- Warren Buffet

Shane Parrish recently had an interesting blog post discussing Jim Collins and a few of his books. The title of the blog post is "Forget The 'To-Do' List, You Need A ‘Stop Doing’ List," which I think is a very interesting concept. As Shane Parrish eludes to in the post, while writing his books Jim Collins noted the following:

(This) lesson came back to me a number of years later while puzzling over the research data on 11 companies that turned themselves from mediocrity to excellence, from good to great. In cataloguing the key steps that ignited the transformations, my research team and I were struck by how many of the big decisions were not what to do, but what to stop doing.

Steve Jobs said something similar on focus, mentioned in another Shane Parrish blog post:

"People think focus means saying yes to the thing you’ve got to focus on. But that’s not what it means at all. It means saying no to the 100 other good ideas that there are. You have to pick carefully. I’m actually as proud of the many things we haven’t done as the things we have done.

One of my favorite heuristics, (techniques for problem solving, learning, and discovery that give a solution which is not guaranteed to be optimal), is referred to as occam's razor. Basically, occam's razor states that when deciding between two theories that make the same prediction, the simpler one is superior. Again, keep things simple.

While simplicity and subtraction are not entirely the same thing, they do go hand in hand. Eliminate the urge to add more and instead look to subtract in order to simplify.

In order to truly understand the power of simplicity and subtraction, it is crucial to understand the difference between a "winner's game" and a "loser's game."

In The Loser's Game by Charles D. Ellis he distinguishes the difference between the two. Essentially, in a winner’s game the final outcome is determined by the activities of the winner. In a loser’s game the final outcome is determined by the activities of the loser.

According to Ellis, "Dr. Simon Ramo identified the crucial difference between a winner's game and a loser's game in his excellent book on playing strategy, Extraordinary Tennis for the Ordinary Tennis Player." Ellis writes:

After extensive scientific and statistical analysis, Dr. Ramo summed it up this way: Professionals win points, amateurs lose points. Professional tennis players stroke the ball with strong, well aimed shots, through long and often exciting rallies, until one player is able to drive the ball just beyond the reach of his opponent. Errors are seldom made by these splendid players.

Amateur tennis, Ramo found, is almost entirely different. Brilliant shots, long and exciting rallies and seemingly miraculous recoveries are few and far between. On the other hand, the ball is fairly often hit into the net or out of bounds, and double faults at service are not uncommon. The amateur duffer seldom beats his opponent, but he beats himself all the time. The victor in this game of tennis gets a higher score than the opponent, but he gets that higher score because his opponent is losing even more points.

As a scientist and statistician, Dr. Ramo gathered data to test his hypothesis. And he did it in a very clever way. Instead of keeping conventional game scores – "Love," "Fifteen All." "Thirty- Fifteen." etc. – Ramo simply counted points won versus points lost. And here is what he found. In expert tennis, about 80 percent of the points are won; in amateur tennis, about 80 percent of the points are lost. In other words, professional tennis is a Winner’s Game – the final outcome is determined by the activities of the winner – and amateur tennis is a Loser’s Game – the final outcome is determined by the activities of the loser. The two games are, in their fundamental characteristic, not at all the same. They are opposites.

So if you are an amateur tennis player, the best strategy for winning a loser's game is by minimizing mistakes and letting the opponent beat themselves. Ellis writes the following about Dr. Ramo's book:

Dr. Ramo explains that if you choose to win at tennis – as opposed to having a good time – the strategy for winning is to avoid mistakes. The way to avoid mistakes is to be conservative and keep the ball in play, letting the other fellow have plenty of room in which to blunder his way to defeat, because he, being an amateur (and probably not having read Ramo's book) will play a losing game and not know it.

He will make errors. He will make too many errors. Once in a while he may hit a serve you cannot possibly handle, but much more frequently he will double fault. Occasionally, he may volley balls past you at the net, but more often than not they will sail far out of bounds. He will slam balls into the net from the front court and from the back court. His game will be a routine catalogue of gaffes, goofs and grief.

He will try to beat you by winning, but he is not good enough to overcome the many inherent adversities of the game itself. The situation does not allow him to win with an activist strategy and he will instead lose. His efforts to win more points will, unfortunately for him, only increase his error rate. As Ramo instructs us in his book, the strategy for winning in a loser's game is to lose less. Avoid trying too hard. By keeping the ball in play, give the opponent as many opportunities as possible to make mistakes and blunder his, way to defeat. In brief, by losing less become the victor. 

Many others have spoken and written on this same concept.

Admiral Morrison writes in Strategy and Compromise, “Other things being equal, the side that makes the fewest strategic errors wins the war."

Likewise, Charlie Munger notes "It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent."

Furthermore, Shane Parrish says in his blog post of the same title, "avoiding stupidity is easier than seeking brilliance"

This concept of a winner's game versus a loser's game and avoiding errors ties back to the simplicity and subtraction discussion. A majority of activities (unless you are a professional or expert) are loser's games, including not only war, golf, tennis, etc but also intellectual pursuits, judgements, and decision making. As a result, keeping things simple through subtraction in order to minimize mistakes is an essential part of winning the loser's game.

-Joe

Why People Do Not Read

My friend, Max, recently posed the question on Facebook, "What do you think is the main reason/s that kids don't like to read?" I found it to be a very interesting and thought provoking question. I have grappled with a similar question for some time now.

However, before I attempt to give my opinion on the answer, it is important to make some key distinctions. One, there is a difference between "What do you think is the main reason/s that kids don't like to read?" and "What do you think is the main reason/s that kids don't read?" I will not attempt to answer why kids don't like to read because that would be speculation on my part; rather, I will attempt to answer the latter. Second, I will replace the word "kids" with "people." Kids do not always have the same freedom of choices compared to adults. Therefore, I believe it to be more exploratory to answer the question as it applies to "people." So to clarify, the question I will attempt to answer is as follows:

"What do I think is the main reason/s that people don't read?"

My answer to this question is surprisingly simple. It is not important to them. Everyone has the same hours in the day. We make time for things that are important to us and we do not make time for the things that are unimportant. This is true for everything, not just reading. It is as simple as that. Rather than reading we choose to text, play video games, browse the internet, watch SportsCenter, etc.  I am not insinuating that these are bad things. If we choose to do these things rather than read, we are deciding that they are more important to us. Again, if it is important, we will make time. My co-author of this blog wakes up early each day to read before going to work. When I was reading 15+ books a month, I would read at least an hour every day. No matter what my day consisted off, I would read for one hour. I could continue to cite numerous examples regarding prioritizing but hopefully the point is understood. We make time for what is important to us and we do not make time for what is unimportant. If people do not read, it is because it is not important to them.

-Joe