Investing is simple but not easy is a quote attributed to the great Warren Buffet. But among the many things that make it difficult is the need to find that careful balance between humility and conviction. This is because whilst without the former we won’t learn and without the latter we won’t be able to act and worse hold through the inevitable ups and downs of the market. Which is why this short piece from Vitaliy Katsenelson is such a powerful read to understand how conviction bordering on arrogance is a necessary trait, except he distinguishes arrogance with thoughtful arrogance i.e, conviction underpinned by deep research.
“Investing is an act of arrogance. You are basically saying, “I am right and the person on the other side of the transaction, who is buying a stock from me or selling it to me, is wrong.” Value investing takes that arrogance to an even greater extreme, as you are often buying unloved, if not hated, stocks.
However, arrogance comes in different forms. Plain vanilla arrogance is very dangerous in investing. Softbank CEO Masayoshi Son built Softbank out of nothing. He is one of the richest people in Japan, he is a visionary, and he has had one of the best multi-decade investment track records. (I wrote about him when we bought Softbank a long time ago.)
However, today his Vision Funds are at the tip of the spear of dotcom 2.0 as it shatters against the rock-hard wall of economic reality, losing his investors tens of billions of dollars this year. Mr. Son is solely responsible for it. He recently admitted, “When we were turning out big profits, I become somewhat delirious.” Success went to his head. He started thinking that he had the Midas touch. This is why temperament is so important in investing: We are our own biggest enemy.
And then there is thoughtful arrogance.
This arrogance requires amnesia of your past successes and failures; it is earned with your current sweat, through thorough research. Your research leads you to conclusions that often disagree but sometimes agree with the prevailing trends in the market. Arrogance – belief in your process and research – allows you to follow through on your conclusions, even if the market scorns them.
This is how we try to close the gap between theory and practice created by volatility. We continuously build and update our financial models, talk to companies and their competitors and to industry insiders, do a lot of reading, and debate companies with our peers. We have to keep earning the right to be thoughtfully arrogant through our hard work. When time passes, facts change, and new information comes out, we have to have the flexibility to change our minds. (I did this with Softbank when we sold it a few years ago.)
When you are making thoughtfully arrogant decisions, you are ignoring both what the crowd thinks and, just as important, your past successes. You are arrogant (I am paraphrasing Seneca here) because through your research you have discovered the truth (what the company is worth) before time did.”
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Note: The above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. The information provided is intended for educational purposes only. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India (SEBI) and is also an FME (Non-Retail) with the International Financial Services Centres Authority (IFSCA) as a provider of Portfolio Management Services. Additionally, Marcellus is also registered with US Securities and Exchange Commission (“US SEC”) as an Investment Advisor.
