Punchcards, Miami, Unpopular Large Caps, and the King of Buy & Hold
The TLDR: March 2024
Hey everyone, welcome to another edition of the TLDR.
It’s been a great month. I had the pleasure of visiting the US for the first time. As a lover of tropical weather and great food, Miami was a fantastic city to begin my American voyage. It was a trip of many firsts. I attended my first NBA basketball game, tried Joe’s pizza and Chipotle for the first time, and even got to experience American-rules beer pong. Most importantly, and the reason for being in Miami, was that I got to meet the Koyfin team, in person, for the first time. While fun, it was a work week; one that turned out to be incredibly productive and motivating.
On a related note, I’ve been working on a project at Koyfin over the last few months that is nearing completion (well, v1 anyway). We’ll shortly release this to the public, but I will offer readers early access to play around with the feature before anyone else. It’s a project I was passionate about building because it solved a problem I have personally, and I am sure many of you do too. More to come on that soon.
Each month in the TLDR you can expect:
5x Favourite Things: 5 favourite reads.
Honourable Mentions: Other worthy reads.
Uncharted Perspective: 5 favourite charts.
5x Favourite Things
A hand-picked selection of five things I found particularly insightful or valuable.
1) Investing is an Act of Faith
I greatly enjoyed this recent interview with Aswath Damodaran, the dean of valuation. With inflation still present but receding and rates now “where we ought to be”, Damodaran provides a typically interesting perspective on equity valuations in 2024; emphasizing the dynamic between rates, earnings, cash flows, and the equity risk premium. Feeling the market has found a “sweet spot”, he fears that earnings pose the weakest link for potential disruption of the equilibrium. The discussion also covers valuation methodology and philosophy, signs of excess, and the likelihood of a correction. The context on regret minimisation and active investing on pages 4 and 5 is sublime. It’s concise and dense enough to be an enlightening 5-minute read.
“I’m going to say something that’s going to sound weird: a market with a T-bond rate of 4 per cent is much healthier than a market with a T-bond rate of 1.5 per cent. People don’t feel the urge to do stupid things. People search for yield, and you can’t blame them — they need the cash flows. So the fact that the T-bond rate is 4 per cent is a good sign for the markets and for the economy. All this talk about “when will the Fed lower rates?” completely misses the point. This is where we ought to be”.
2) Practicing a “Punch Card” Approach to Investing
Warren Buffett’s punchcard analogy might be somewhat dated. For those who don’t know, a punchcard is a stiff piece of card, with a sequence of circular holes on it, used to process data into computers and was obsolete by the 1980s. The imagery is antiquated but the lesson, which conveys the idea of making only a limited number of investment decisions in one’s life, is evergreen. Here is how Buffett describes punchcard investing:
“I always tell students in business school they’d be better off when they got out of business school to have a punch card with 20 punches on it. And every time they made an investment decision, they used up one of their punches, because they aren’t going to get 20 great ideas in their lifetime. They’re going to get five or three or seven, and you can get rich off five or three or seven. But what you can’t get rich doing is trying to get one every day”.
Investors struggle with this idea because they have a bias towards action. Perhaps they watch too much news or they feel activity is a form of justification. Maybe they have the self-confidence to think they can find 300 great opportunities in a lifetime; I don’t know. This piece from 2016, by John Huber, addresses this punchcard practice, what it entails, and the bias towards activity.
“Recognizing the “over-activity” bias is most of the battle - if you understand that you, as an investment manager, are going to be prone to activity and over-trading in an effort to justify your existence, then you at least have a chance to guard against it. It’s those who “don’t know that they don’t know” are the ones who don’t have a chance”.