Pattern Recognition, True Luxury & Failing to Capitalise on Structural Trends
The TLDR: December 2023
New Year, New Segment
Some readers might remember a segment I used to write called Market Talk, where I’d curate a range of articles and sprinkle in some commentary every other week. I ran 78 editions of that segment between 2020 and 2023.
I am resurrecting it under a new name, The TLDR. I discovered that I missed curating, and will send one issue out each month. It won’t be a bumper edition of randomly assorted articles, nor will it be heavily concentrated with news, trends, or market noise. Carefully curated, this issue will only include things I have read and enjoyed. For folks who like context, check out the footnotes1.
Each month you can expect:
5x Favourite Things: 5 favourite reads.
Honourable Mentions: Other worthy reads.
Uncharted Perspective: 5 favourite charts.
Given it’s the holiday season, I am sending December’s issue early. Going forward, you can expect them on the last Thursday of every month.
New Year, New Newsletter
I often scribble shorthand notes to myself every time I read an earnings call, a conference transcript, or an earnings report, or just want to vent. These are often tucked away and I use them to refresh my memory when called for. My main newsletter, Investment Talk, is not an appropriate vehicle for me to write this kind of informal and brief commentary. You can still expect me to write about companies here in the same fashion as I do now.
Notes To Self is a space for myself to write… notes to myself… about companies I own in a concise manner. The format will be brief, and assume prior knowledge of the company if someone happens to read it. No deep dives, just commentary from a shareholder’s perspective. Sporadic brain dumps, ideally no longer than 1,000 words. Readers of Investment Talk are not automatically subscribed, so if you’d like to read NTS, you are welcome to join below.
5x Favourite Things
A hand-picked selection of five things I found particularly insightful or valuable.
The discussion between Leandro from BAS, Sleepwell Capital, and the guys at Chit Chat Money offers a deep dive into the luxury industry, highlighting what defines a luxury company and how such companies maintain their exclusivity and allure. It discusses the importance of heritage and long-term brand building, the distinctive approach to growth versus exclusivity, and the significance of being privately owned. It contrasts group-owned luxury companies with standalone ones, evaluates potential risks, and examines the unique dynamics of the luxury market with examples from iconic brands like Hermes, Rolex, and Ferrari. Available in audio, this is a masterclass in luxury.
“The ability to set a high price is a consequence of being a luxury brand, but it's not an enabler. Just because you're charging a high price, you're not going to become a luxury brand. But if you're a luxury brand - there's much more than price. There's heritage, there's the intangibles. You cannot simply attain all of those characteristics by setting a high price”.
In 1981, 24-year-old Joel Greenblatt authored a paper detailing how individual investors can beat the market by buying stocks trading below their liquidation value. While some dispute its relevance today, it’s a classic paper and nearly impossible to find online for free. In the past, I have written about this paper and Greenblatt’s liquidation value formula, as well as the magic formula he conducted later in his career. It never occurred to me that I should share the PDF as well. You can access it by clicking the title.
“Simply stated, by limiting our investments to stocks that according to fundamental notions of stock valuation appear severely depressed, we were able to locate more than our share of these inefficiently priced, undervalued securities. In other words, there are probably many more undervalued stocks that are not selling below liquidation value”.
The latest paper from Mauboussin and Callahan discusses the application of pattern recognition in financial and investment contexts and its role in decision-making; including its strengths and limitations. The paper emphasises how investors and investment organizations often base actions on recognized patterns, highlighting the potential for both powerful insights and misleading overconfidence. It also explores the differences between intuition and expertise in investment, the conditions under which pattern recognition is effective, and how it can fail in complex and uncertain environments. The authors conclude that base rates are crucial in improving pattern recognition in decision-making. Another one of those papers that is helpful in both investing and life.
"Pattern recognition works at the intersection of intuition and expertise - understanding something without conscious thought. Heuristics are useful because they are fast and often accurate. But heuristics can lead to biases, or departures from an ideal decision-making process. There is some risk to learning the wrong lessons from an inappropriate reference class, but - the bigger risk is a failure to use base rates in the first place".
Nicolai Tangen is the CEO of Norges Bank Investment Management, home to Norwary’s $1.4 trillion wealth fund. The fund owns more than 12,000 stocks, 1.5% of global equity value, and 2.8% of all European equity value. The fund supports a third of Norway’s annual budget. It’s HUGE. He was recently interviewed by Columbia Business School’s podcast and given he has such a unique perspective, the discussion was unsurprisingly fascinating. Loads of quotable soundbites, plenty of solid advice for younger investors, and much commentary on biases, the decision-making process, and pattern recognition. It’s a podcast, but I took the liberty of transcribing it and creating a PDF because I couldn’t find one online. You can access it by clicking the title.
“The fewer decisions you make the better they become. The way to judge yourself is inertia analysis. Run your January 1 portfolio for the full year without any changes and compare it to your actual results. It's awful because some years you realize all you did was subtract value when you went into the office”.
Julian Robertson was a former hedge fund manager and founded Tiger Management, a highly successful fund in the 80s and 90s. He passed away in 2022. He retired in 2000, explaining that “There is no point in subjecting our investors to risk in a market which I frankly do not understand”. On the prospect of retirement, he noted “I always said if a guy was long the best 50 companies he knew and short the 50 worst, if that didn’t work you were in the wrong business”. This short interview except from 2006 highlights how Robertson’s definition of value changed over the years.
“When I started in the business and for a long time, my concept of value was absolute value in terms of a price-earnings ratio. But I would say my concept of value has changed to a more relative sense of valuation, based on the expected growth rate applied against the price of the stock. Something at 30x earnings growing at 25% per year where I have confidence it will grow at that rate for some time can be much cheaper than something at 7x earnings growing at 3%”.