Monday, November 7, 2011


If you're so smart, why aren't you rich?

A short video by Bill Ackman, summarised below.

To be a successful investor you need to be able to avoid natural human tendencies to follow the herd. If the stock market is going down every day, your natural reaction is to tend to want to sell. But you should probably be a buyer. You also need to be able to withstand volatility. The way you do this is:
  1. be financially secure
  2. don't get spooked by short-term fluctuations. Just because a stock goes down after you buy it, doesn't mean you've made a mistake.
  3. do your own work
  4. invest at a reasonable price

Hugh Hendry

There are a series of videos from curmudgeony hedgie Hugh Hendry. Worth a listen if you've got the time.

In part 2, he makes what I think is a key point about China, something that you almost never hear being mentioned: "if you're spending money without the intent of any economic return, then you're spending money poorly". He points out that GDP doesn't necessarily mean wealth. If you make a building, then that contributes to GDP, but if that building remains empty, then it doesn't constitute real wealth.

In part 3, he talks about shorting. He says that you can be burnt bad. An interesting comment he makes that if you want to make a contrarian bet, and he talks specifically about shorting China, he says you can't do it directly; because you're so likely to get burnt (reminds me of Whitney Tilson's ill-fated short on Netflix). What he does is to take an indirect route, by shorting Japanese stocks, which are heavily dependent on trade with China.

In part 4, he says: "We spend so much time, resources and money trying to see the future - really we're spending money trying to delude ourself. You have no chance of seeing the future, it's better to recognise that". At around the 09:39 mark, he talks about how he was reading the story of another hedge fund manager, who was running a statistical merger arbitrage fund. Hendry was deeply impressed by the intellectual rigour of the manager. When he was considering an investment in an oil business, he even took an engineering course at university, such was his detailed knowledge of his positions. BUT, in 2008, both of those funds disappeared . "They had been driving too fast", as Hendry put it. He was also talking about how someone came to him with some fantastic insights on a pharmaceutical company. Hendy became excited about this, and instead of taking a 50bp position, he took a 250bp position. After investing, he said "and of course it had a profit warning and  dropped 40%". He said that he had deluded himself with the notion that he had seen the future. He said that, in some respects, he doesn't want to know, he doesn't want to do stock research; he wants to have a trepidation where he doesn't want to know the complete picture. He would rather watch the charts like a hawk, and trade if it breaks down. His final words on hedge fund management: "proctrastination kills you in a business determined by risk".

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