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Five Things You Need to Know: Curiosity, Hanging in There, Myth and Wall Street, The One Question, The Will to Change


Where is your own capital?


Editor's Note: While we congregate in Vail for Minyans in The Mountains 3, we asked each Professor to prepare some thoughts on fiscal literacy, how to listen to the market and their area of expertise.

1) My area of expertise is an acknowledgement that one does not exist, at least for us. But since that would make a rather short page here, I'll elaborate.

2) What has separated my (and my partner's) performance and our enjoyment in this business from many of our peers has been one key variable - curiosity.

We are entirely unemployable as a result of questions we like to ask, so we built our own firm based on our own ideas, most of which were unpopular on Wall Street because they are not based on convincing investors to "hang in there."

That myth is good for Wall Street, not investors.

We think one question could trump all others for investors seeking better advice, wherever they go: "Where is your own capital?"

Random Thoughts

  • Global: We own more international equities than most are willing to, based on the melting dominance of the U.S., whose stock market is home to as much of the world's investments as the other 100+ markets around the world, combined. Our reasons for that division to be more balanced going forward are far longer than the reasons for more imbalance. Most U.S. investors have 95% of their money in the U.S. where 5% of the world lives.

  • Quantitative Niche: Domestically, we are significantly overweight small and mid-sized companies with specific areas of natural growth. We want a company nimble enough to not need any tailwind to turn, with enough of a unique niche to create margins, not volumes. Wall Street's shrinking analyst community and quality should create even more pronounced inefficient pricing for their shares. We built a quantitative system based on capturing the "turn" of what IS happening, instead of trying to decide what SHOULD happen. We then consistently retest them instead of respect them.

  • Hard Assets in Limited Supply: We believe we are five years into a 15-20 year cycle where paper assets with unlimited supply are outperformed by hard assets in limited supply. From the right futures contract to the right piece of real estate, demand is likely to overwhelm many natural resources whose capacity cannot quickly adjust, if at all.

  • Change: If we are right about a very flat market in the U.S. (seven years and counting), a result will be remarkably faster rotations from faster money seeking a return from trading instead of investing. Money will cascade from traditional investments into bullish bets on hot markets. Capturing moves within a market as opposed to from a market will be key and will require both long and short positions in our view. Our trading longs seek Kaizen, (Japanese for improvement) against shorts built on Complacency. Our most valuable tool is a willingness to change positions.
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No positions in stocks mentioned.
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