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Chris DeMuth Jr.
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"It's not given to human beings to have such talent that they can just know everything about everything all the time. But it is given to human beings who work hard at it - who look and sift the world for a misplaced bet - that they can occasionally find one." - Charlie Munger I look... More
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  • Some Things “Just Aren't Done”.  9 comments
    Aug 16, 2013 2:41 PM

    What wouldn't you invest in?

    To define the question a bit further, I want to place some constraints: legal, honest, financials written in a common language, and accounting under a common standard. I am thinking only of investments that are both permissible and analyzable. Within that universe of opportunities, what wouldn't you invest in, were a given security trading at a price that appears to meaningfully diverge from its value? I ask in order to get the lay of the land in terms of what "just isn't done". Bankrupt companies? Tobacco? Gaming? Firearms? Stocks under $5 per share? Leveraged companies? Late filings?

    My answer: nothing. There is nothing that I would not buy for the right price (under the constraints enumerated above). The expected value of one's portfolio is a result of outcomes and sizing but it is also limited - voluntarily limited - by your mandate. As for me and mine, I want to maximize expectancy and therefore minimize the arbitrary limitations on our mandate. At the same time, we love counterparties with constrained mandates. What are your constraints? Stated another way: if you could invest in whatever you like, what would you dedicate your time, energy, and money towards? In practice, how does that diverge from what you spend your resources on today?

    In polling friends at large money managers, the typical response is that they spend between 5-20% of their money under management on investments that they think are the best (had they no audience but their selves and no goal but +EV). The rest is for institutional reasons, typically career preservation and reputation management. The problem with investing is that many of the investments that are most institutionally defensible have virtues that are the most obvious and priced in.

    Happily, I've been able to preserve an environment that is dictated by expectancy: first and foremost our downside, then our upside and probability of each potential outcome. The simple task of trying to make sense of the world is hard enough work. It is nearly impossible to do it while simultaneously trying to appease arbitrary irrelevant goals simultaneously. Trying to actually make sense can be so different than trying to look like you are making sense that the two will frequently end up on opposite sides of a trade. We will end up liquidity providers for counterparties who have to show that they are in the latest fad or out of the latest scare, because that is what they are paid to do. Some things just aren't done… and we love to do them for the right price.

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Comments (9)
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  • "legal, honest"


    These, especially the later, are more fuzzy than at first glance. Take Tobacco, who lied about the effects of tobacco for decades. How about the big banks who withheld significant off-balance sheet arrangements leading up to the crash? Legal - yes; honest - maybe not??? On the former, what about companies doing business in China, as virtually all them are involved in some form of quasi-illegal corruption. All companies are hiding something (internal financials!) so perhaps honesty should be treated as a spectrum rather than a binary. Buffet has commented that he uses degree of management honesty as a criteria.


    My big category really falls under "analyzable". I'm not a full time analyst (I have a much more interesting day-job). So there are large swaths of companies where I don't have the time/knowledge to understand the risks. I file these as "I don't know" - I choose not to spend the time to understand them - and avoid them.
    16 Aug 2013, 03:37 PM Reply Like
  • My answer is the same: nothing. In fact, it annoys me immensely when I hear people argue that others should not invest in, or should sell out of a stock, because of some misguided moral judgment that has nothing to do with a sound investment thesis.


    The problem I see with that approach is not only that it flies in the face of one of the most basic tenets of investing (removing emotional factors from the investment thesis), but it also assumes that companies with flowery reputations are somehow better than the ones without. Based on my personal experiences, it is often the case that companies with reputations as perfect "corporate citizens" (although I hate that phrase since companies are not people) are actually worse from a morality standpoint. In other words, it sometimes only means that lots of practice has just made them better at hiding improprieties.


    As long as a business is legal, it's fair game from an investment standpoint. Beyond that, politics is the appropriate channel to solicit change ... investments are for making money. In fact, I would argue that most of our societal problems stem from individuals confusing their desire to make money with a pretense to serve the public interest (aka politics). To me, it seems obvious that works both ways ... trying to impart societal change through investment markets is equally perilous.
    16 Aug 2013, 03:44 PM Reply Like
  • Author’s reply » Good points.
    16 Aug 2013, 03:44 PM Reply Like
  • I don't invest in "sin stocks" (tobacco, alcohol, other) for personal reasons, but will invest in anything else at the right price. That said, it's not a hard rule - the only sector I would absolutely never invest in is tobacco. If Anheuser-Busch was cheap enough, I'd at least consider it.
    16 Aug 2013, 04:10 PM Reply Like
  • Amen
    16 Aug 2013, 07:17 PM Reply Like
  • As a kid what I really hated was moving the lawn. So the kind of investment I would most dislike would be one analogous to mowing the lawn -- a perfectly predictable and boring investment that pays well but for some reason you can't automate it. Push the red button and get $100. (Even worse of course is the black button that you push and you lose $100!).


    I like investments in areas I can understand, or which can be automated. I like investment which requires some coding or statistical research. Or somewhat confusing, unique, snowflake investments, but not so confusing that they extend beyond what I understand. For example, some complex tech company going through corporate events, that could be fun. But some complex real estate or bank, I have no idea what the words even mean.


    I am inherently more of a "creator" or "novelty seeking researcher" than an "investor" since I like creating new interesting stuff. I used to just make art in my spare time, but people didn't seem that excited about art. I didn't know what to do with money so I started looking for something challenging and interesting to do with it and that led me to investment.


    It can be fun but it also has a lot of red and black button moments. The most interesting part is probably the cognitive and behavioral biases.


    I'm not sure it makes sense to say "everything has a price," to an investor. I could probably float many arcane math theorems on a betting market, that almost no one could price. Given that people have bounded rationality, maybe a better rule would be "make a price on everything that you can understand." And then given that, the logical areas to invest in would be the areas you understand, and that are totally incomprehensible to everyone else. Reminds me of Buffett saying if he were young, he would have put 100% of his money in obscure South Korean companies such as flour mills. I certainly don't understand South Korean flour mills.
    16 Aug 2013, 09:57 PM Reply Like
  • Probably a new investor could get the highest returns by finding countries and sectors that are extremely hated, illiquid, and incomprehensible, learning everything there is to know about that area, buying undervalued businesses, and then periodically rotating on. A career in Kuwait bonds during 1990s Kuwait invasion, then failed S&L companies, then broken dot com companies in the early 2000s, then real estate in 2008 followed by Japanese nuclear power plants and Greek banks, and some Libya mortgage swaptions now :-)
    16 Aug 2013, 10:23 PM Reply Like
  • Author’s reply » That would actually be a great plan.
    17 Aug 2013, 07:52 AM Reply Like
  • I buy anything at the "right price."


    However, I don't like dealing with corrupt management/fake accounting. Pay me to give me those and I wouldn't dare to take them.
    16 Aug 2013, 10:48 PM Reply Like
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