Published on:7 August, 2019
The Government of India allowed Marcellus to incorporate as a private limited company on 7th August 2018. We have enjoyed serving our 500 clients – in India and abroad – over the past year. We thank our clients for their support and aim to continue compounding their wealth for many years to come. On our first anniversary, we felt it was appropriate to share with you a significant element of our mental transition over the past year.
“Our job is to find a few intelligent things to do, not to keep up with every damn thing in the world.” – Charlie Munger
Epiphany at an investment conference
Last week someone made the mistake of inviting me to speak at an investment conference in Mumbai. Once I had suitably riled the audience, I exited the venue only to find myself pursued by a salesman from one the financial data vending shops. The salesman was under the misapprehension that I was still the CEO of an investment bank which was spending well in excess of US$150K per annum on financial data. I disabused him of this notion and disappointed him with the factoid that Marcellus’ financial data budget is $1.5K per annum, a figure which would just about pay for the smartphone which the salesman was sporting.
Once the salesman had abandoned me for more fruitful quarries, I pondered during my taxi ride home as to why with a 99% drop in my colleagues’ financial data spend we at Marcellus actually feel happier in terms of our relationship with the stockmarket and why the drop in financial data spend had not impacted our investment performance (so far).
My conclusion – self-serving as it might be for a group which is more interested in psychology, forensic accounting, history, economics and corporate strategy – is that being on top of whatever it is that is happening in financial markets actually doesn’t count for much. Whilst it probably makes one feel busy as one peers into those big screens, it rarely generates investment insight. So, why is this the case?
Being market savvy is the least important driver of investment success
The English poet DH Lawrence once noted that if we stare at a map long enough “The map appears to us more real than the land”. Extending the metaphor to market data, if one stares at share prices, P/E multiples, central bank pronouncements and quarterly results long enough, the financial market appears to be more real (and more relevant) to an investor than the real world. Taken to its extreme, the obsession with prices and high frequency data becomes a kind of psychological disorder wherein investor loses all sense of perspective of the real world and builds algorithms to trade basis smoke signals being generated tick-by-tick by the financial market.
In their different ways, Buffett, Munger and John Bogle understood this form of psychosis earlier than other investors and built varied investment methods to capitalise on this insight (that focusing on financial markets per se does not generate wealth). Buffett & Munger popularised the notion of delving deep into the sustainable competitive advantages of a company and understanding the quality of its accounts. Bogle’s insight was even more profound.
Bogle took Paul Samuelson’s Efficient Markets theory to heart and was amongst the first executives in the mutual fund industry to fully understand its profound implication, namely, it makes little or no sense to pay juicy fees to a fund manager to manage your money given that the fund manager has little or no chance of consistently beating the market. Thus was born Bogle’s breakthrough idea – in 1975 Vanguard launched the world’s first index mutual fund. Instead of beating the index and charging high fees, the index fund would mimic the index performance over the long run—thus achieving higher returns with lower costs than the costs associated with actively managed funds.
Daniel Kahneman’s famous “System 1 vs System 2” framework (from ‘Thinking, Fast and Slow’ (2011)) can also be used to understand why being on top of stockmarket data does little to generate wealth or happiness. Brian Portnoy in his enjoyable book ‘The Geometry of Wealth: How to shape a life of money & meaning’ (2018) explains why System 1 – which he calls our fast brain i.e. the part of the brain most exposed to financial market data – leads to poor decision making:
“The fast brain loves consistency. It is biased to confirm beliefs and see patterns even when they don’t exist. It shies away from ambiguity and doubt. It accepts given categories and isn’t fond of thinking in terms of probability, preferring specific predictions. It anchors on what you already think you know and ignores evidence that is hard to find. In Kahneman’s terms, ‘what you see is all there is’.”
Notice the similarity between Kahneman’s insight (highlighted by last sentence of Portnoy’s para) and the DH Lawrence quote cited earlier in the note – financial markets create an illusory world which can drown those who immerse themselves in market data. This in turn leads to investment mirages such as the one we had highlighted in our 20th October 2018 blog on Indian NBFCs – see https://marcellus.in/blogs/fooled-by-probabilities-and-by-indian-nbfcs/
I don’t have a single financial market app or social media app on my phone (which itself is a battered four year old thing). When I need to check prices I go to the stock exchange website using my phone and that process takes 20-30 seconds. That time lag switches off my fast brain/System 1. Most of my colleagues access stock price data using similar techniques. Only our trader has ready access to real time prices.
Our five analysts (plus the three interns who work with us) share one terminal from a Indian financial data provider. The terminal’s main function is to give us in digital form financial statements for around 5000 Indian companies going back around 20 years. My colleagues take turns to use this terminal. The delay in accessing the terminal in turn slows down the impulse to drown in data.
All of this gives us ample time to read Annual Reports and books. Not only does that make bookworms like me happy, it also gives us a better chance of generating insights. We believe insights which make money tend to come from extensive reading, thinking and in-depth discussions with well-informed people (ideally people who see the world from a different vantage point from our own).
We have also invested in a hot water kettle, a big jar of coffee and noise cancelling headsets as we find that these are more useful than financial market data in generating investment insights. In contrast, absorbing loads of market data and crunching massive datasets is a good way to spend time but as highlighted in my 18th July blog, that rarely generate insights which people like us can use to make money for our 500 clients: see https://marcellus.in/blogs/small-data-is-more-important-than-big-data/
The Government of India allowed Marcellus Investment Managers to incorporate as a private limited company on 7th August 2018. We have had the time of our lives serving our 500 clients – in India and abroad – over the past 12 months. We thank our clients for their support and aim to continue compounding their wealth for many years to come.
To read our other published material, please visit https://marcellus.in/blog/
Saurabh Mukherjea is the author of “The Unusual Billionaires” and “Coffee Can Investing: the Low Risk Route to Stupendous Wealth”.
Note: the above material is neither investment research, nor investment advice. Marcellus does not seek payment for or business from this publication in any shape or form. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India as a provider of Portfolio Management Services and as an Investment Advisor.
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