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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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  • 3 Ways To Spend Your Time… And 1 Way Not To 11 comments
    Oct 7, 2013 10:14 AM

    Idea Generation (9%)

    Where to begin? The first category is more about the questions than the answers as we start with premises before reaching conclusions. Of all of the ideas we can think about, what are the first questions? Is it legal? Analyzable? Is it within our core competency? Using the crudest of assumptions, does it have a positive expected value in percentage terms? In terms of scale and liquidity, would even a success make enough dollars to justify the constrained resources of time, energy, and money that would need to be assigned to the project? Is it reasonably likely to involve topics where we could get edgy information and make edgy judgments? If we don't start with the right questions, then even good answers are not going to save us. Once the key questions are laid out and placeholder answers are hypothesized, we can break down ideas into crude upsides, downsides, and probabilities. How good can these be? They can represent common sense based upon readily available information as it relates to relevant precedents. This is incomplete, but better than nothing. How long does it take? An hour per day should suffice. This is quick, easy, and largely redundant with paying attention to the daily news and triaging the most important, actionable data from a day's worth of SEC filings on corporate events.

    Premise Testing (90%)

    Whereas idea generation is largely theoretical in that we have to use theories to break down the larger investable universe, premise testing is a yeomanly, practical endeavor. Idea generation often leaves you with a half dozen prospects a day and each begs about a half dozen salient questions each. Now, it is time to get the answers. My shorthand for premise testing is "work." The work is finding out answers to potentially lucrative questions before the market does. I once worked at a hedge fund with at least a dozen employees and got complaints that my phone calls were responsible for over half of the firm's monthly phone bill. They were mostly questioning how that could possibly be. The answer is that each company has board members, managers, lawyers, and bankers as well as customers, competitors, and vendors. Merger proxies have background sections with alternative bidders. I want to talk with all of them on a regular basis. When there is a minor change in inflection, I want to be on the line. When there is a change in verbiage - for example between preliminary and definitive proxies - I want to identify and understand it and want to immediately get help from the people who drafted the changes whenever I have questions (which is always).

    This process takes me at least ten intense hours per day for me to do well. I know of people who do this better or faster, but most people simply do this less. I own zero positions that one should be comfortable owning without this kind of work. In addition to the time, this research relies on sources that cumulatively cost millions of dollars each year.

    Position Sizing (1%)

    Position sizing should take under ten minutes per day. Want a crude system? For each $100 million, put $10 million into perfect ideas - ideas in which the expectancy is wildly positive and the premises are nearly certain after constant refreshing all underlying information (this does not assure perfect outcomes, but only that the idea is as good as it gets). Imperfect ideas but those that still rate as best current ideas get half of that or $5 million, great expectancies but otherwise flawed investments get half of that or $2.5 bucks, and run of the mill positive expected values get $1.25. If it is not worth at least that, then invest zero. Invest only $1.25 with the hope/expectation that future price drops or positive checks justify doubling the position size as many as three times.

    Are there more complex or subtle systems? Sure. Do they really matter? Probably not. Others can spend as much time and energy as they want, but as Charlie Munger says, "include me out." Think of it as a salad - fresh, good ingredients can be tossed together (within reason) to make something good, but stale, bad ingredients cannot make something good regardless of the precise proportions.

    Extraneous Uncategorized Distractions (0%)

    This is the most important time allocation: If you are not generating ideas, testing premises, or sizing positions, then get out of the office. Every minute of distractions steals one for one from time spent sleeping, exercising, spending time with your kids, traveling, or whatever you find to be intrinsically valuable. If it is not making you money (and I don't know how to do so without the above prioritization) ask yourself whether this water cooler conversation or that meeting is literally the most fun thing in the whole world (that your resources give you access to; it should only involve Christy Turlington if you are married to Christy Turlington).

    Denominate wasted time in terms of your best and highest use - whatever economic or non-economic value your optimized time is worth to the market and to you. Your time, capital, and psychological energy are all constrained resources and no one else will assign them any value if you don't. Within the bounds of civility, kill waste. Somebody should love what you're doing - you should love it because it is fun, your future self should love it because it is lucrative, or someone else because of some positive externality. There is so much that fits neatly within that description (I typically have to triage a week or two worth of things I'd love to do each day), that there is no need for anything else.

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Comments (11)
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  • nclsamy
    , contributor
    Comments (119) | Send Message
    Wonderful written! Thank you!
    7 Oct 2013, 10:29 AM Reply Like
  • jaginger
    , contributor
    Comments (667) | Send Message
    Fantastic advice; I love the bits on sizing and distractions. Good inspiration for spending time the RIGHT way instead of wasting the short hours we're given.


    Thanks, Chris.
    7 Oct 2013, 10:37 AM Reply Like
  • sheldond
    , contributor
    Comments (1248) | Send Message
    Good advice....I hope seeking alpha counts as one or two occasionally or I am out of balance. ;)


    I might need to spend more time premise testing. (True)


    "Within the bounds of civility" Ha This line is a "classic" and I love it.
    Is it rude to tell someone that their trivial polite conversation muddled with colloquialisms bore me or that if it don't make money don't make sense...and I could care less? I guess it depends on location.


    What if you enjoy the occasional witty side bar conversations about the game or talking about Johnny "small hands" from accounting? I think people love to waste time. It is obvious when you look at productivity. Typically these are reactions and adaptions to work place codes.


    Imagine if a worker spent 10 hours doing the same amount of work it took his peers to do 40 hours. So when the worker was done he left the building. How would management and his peers react? Management would ask why can't everyone do more work or how can we pay less if he leaves early? People would say he doesn't care about the business. Not very motivating unless your work on commissions. Human systems are fraught with error. Sadly, many places punish efficiency and reward those that follow the codes.


    This is one of the core reasons I started my own business. It would be nice if people could adopt these principals but most of the sheeple punch their time cards and try to pass the days in any mundane manner that others will accept. The only way to do what you say is to be the boss or find the right environment. If your tired of other people wasting your time, take control of your life both personally and professionally and don't give it back.


    I hope I didn't waste too much of your or my time. Entertaining myself for free.....priceless.


    I kid because I totally agree.


    Great thoughts.


    7 Oct 2013, 10:46 PM Reply Like
    , contributor
    Comments (10) | Send Message
    I totally agree.What you said almost happens everywhere. If you are too efficient at what you are doing, you ll be called "perform unfairly". I'm sure if one is even much more efficient, he probably would be called "unethical".
    10 Oct 2014, 06:24 PM Reply Like
  • Tadpoles_UK
    , contributor
    Comments (612) | Send Message
    For us old farts, this article leaves out a very important factor: Enjoyment.
    As a retiree who is also an investor, I'll spend enough time to make some decent investment decisions, but I'll also spend hours every day doing what I enjoy doing.
    I probably shouldn't say this (especially since I've already received one warning from Seeking Alpha,) but when you're young, spend your time actively producing something. Making money off of others' production is only something you do when you get too old to do otherwise.
    8 Oct 2013, 01:04 AM Reply Like
  • connellybarnes
    , contributor
    Comments (394) | Send Message
    My investment process is run by Igor who is good with machinery. He is obsessed with designing machines that pack as many sardines as possible into cans. I just shoot the cans.


    My favorite investments are ones for which the Kelly sizing criterion gives > 100% for sizing. Usually this is because negative payoffs are low probability, small in absolute value, or impossible.
    14 Oct 2013, 11:44 PM Reply Like
  • bazooooka
    , contributor
    Comments (3430) | Send Message
    Do you still find an edge by moving behind reading the filings and hitting the phones today?


    ""I once worked at a hedge fund with at least a dozen employees and got complaints that my phone calls were responsible for over half of the firm's monthly phone bill. "'
    11 Mar, 02:31 AM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (5267) | Send Message
    Author’s reply » bazooooka, I don't know. I still try. It is certainly less likely when focused on larger, more liquid topics. Phone calls and filings are probably sources of edge, but it is not constant. I probably sit down and dig dry holes for many hours each day (which is why it is key to enjoy this work intrinsically; it is too much work otherwise). Then, something pops up that makes a big difference, but maybe only a few times a year or, if fortunate, something actionable a few times a month.
    11 Mar, 06:56 AM Reply Like
  • John N
    , contributor
    Comments (36) | Send Message
    Great article and great advice. Curious, if you "don't know" if phone calls and filings are giving you an edge (bazooka's question) what else are you doing for that edge? Thanks for the post. As always, great stuff.
    18 Mar, 02:46 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (5267) | Send Message
    Author’s reply » Not giving it away on the internet!


    But generally, looking for opportunities where I am not pitting my judgement against someone else's in the market but instead have found non-economic players.
    18 Mar, 02:51 PM Reply Like
  • John N
    , contributor
    Comments (36) | Send Message
    Thanks. Enjoyed reading that UU paper you referenced elsewhere on SA. Going to read again...
    19 Mar, 10:54 AM Reply Like
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