Dumb & Dumber

One of the best presentations I’ve seen from this year’s 8th Annual Value Investing Congress, was Dumb & Dumber, by Zeke Ashton, who provided some insightful perspective into common investment mistakes.  His final thoughts deserve close attention:


  • Do you have a defined process for making decisions?
  • Do you analyze your bad outcomes to pinpoint possible mistakes?
  • Do your mistakes tend to fall on the emotional side or the analytical side most often?


  • Finalize research  and make initial new major purchase decisions outside market hours.
  • For each stock you own, indicate a price at which the next action should be taken or contemplated (add, trim, or sell).
  • For each stock you have researched, indicate a price at which you would consider taking action (i.e., “trigger price”)
  • Make an effort to differentiate process and outcome. Not all bad outcomes are due to mistakes. Accept mistakes as part of the learning process.

In the context of a steadily levitating market with near zero volatility, we suggest investors consider these actions very closely, and be on the lookout for the first sign of Investment Beer Goggles.  Stocks that looked ugly six months ago look like beauty queens when you start to get desperate for ideas. Per Zeke, Beer Goggles:

  • Often occur when good ideas are difficult to find
  • Typically stem from pressure to keep up with a rising market
  • Result in relaxing standards and discipline, and subsequently, in sub-standard ideas entering the portfolio
  • Can also result in holding on to ideas that should be monetized due to concerns about being under-invested

This is an extremely dangerous environment to operate in.  We understand that it is particularly difficult to sell your best ideas as they appreciate toward intrinsic value.  This is especially true when there is a lack of better ideas to replace them with. But this is what disciplined investing requires.  As stock prices continue to appreciate today, tomorrow’s expected returns continue to fall.  Putting a process in place to identify key price levels in advance removes much of the emotion from difficult decisions.

Conventional wisdom advocates remaining “fully invested” as the default choice for investors.  But investors may be better served by viewing cash as their default option and allocating capital to ideas only when the potential reward is substantially greater than the risk.  Operating in this fashion will undoubtedly result in high cash balances from time to time.

Coincidentally, it would seem that today is one of those times as we have monetized a growing portion of our best performing investments and as a result, our equity portfolios hold a cash allocation approaching 40% of assets currently.


This may be an uncomfortable position for some, but we are sleeping quite well at night, as our discipline demands that we are  selling assets that others are chasing higher and buying assets that others are scrambling to sell.  Today is a terrific time to be a seller of assets, but it is much more challenging to find compelling ideas that meet our return requirements.  Tomorrow, we expect to be a buyer of assets as prices ultimately drop toward fair value and expected returns increase.  For our concluding remarks on this topic, we’ll defer to Seth Klarman’s Annual Letter to Baupost Partners.  Enjoy!

“Most U.S. investors today have a clear opinion about what everyone else has no choice but to do. Which is to say, with bonds yielding next to nothing, the only way investors have a chance of earning a return is to buy stocks. Everyone knows this, and is counting on it to remain the case. While economist David Rosenberg at Gluskin Sheff believes government actions could be directly or indirectly responsible for as many as 500 points in the S&P 500, or 30% of its current valuation, traders have confidence in Ben Bernanke because betting that his policies will drive equities higher has been a profitable wager. Bernanke, likewise, is undoubtedly pleased with these speculators for abetting his goal of asset price inflation, though we all know that he will not call them first when he decides to reverse direction on QE. Then, the rush for the exits will be madness, as today’ s “clarity” will have dissolved, leaving only great uncertainty and probably significant losses.”

“Investing, when it looks the easiest, is at its hardest. When just about everyone heavily invested is doing well, it is hard for others to resist jumping in. But a market relentlessly rising in the face of challenging fundamentals – recession in Europe and Japan, slowdown in China, fiscal stalemate and high unemployment in the U.S. – is the riskiest environment of all.”

“Only a small number of investors maintain the fortitude and client confidence to pursue long-term investment success even at the price of short-term underperformance. Most investors feel the hefty weight of short-term performance expectations, forcing them to take up marginal or highly speculative investments that we shun. When markets are rising, such investments may perform well, which means that our unwavering patience and discipline sometimes impairs our results and makes us appear overly cautious. The payoff from a risk-averse, long-term orientation is – just that – long term. It is measurable only over the span of many years, over one or more market cycles.”

“Our willingness to invest amidst failing markets is the best way we know to build positions at great prices, but this strategy, too, can cause short-term underperformance. Buying as prices are falling can look stupid until sellers are exhausted and buyers who held back cannot effectively deploy capital except at much higher prices. Our resolve in holding cash balances – sometimes very large ones – absent compelling opportunity is another potential performance drag. “

“But we know that in a world in which being anti-fragile is good, what doesn’t kill you can make you stronger. Short-term underperforrnance doesn’t trouble us; indeed, because it is the price that must sometimes be paid for longer-term outperformance, it doesn’t even enter into our list of concerns. Patience and discipline can make you look foolishly out of touch until they make you look prudent and even prescient. Holding significant, low or even zero-yielding cash can seem ridiculous until you are one of the few with buying power amidst a sudden downdraft. Avoiding leverage may seem overly conservative until it becomes the only sane course. Concentrating your portfolio in the most compelling opportunities and avoiding over diversification for its own sake may sometimes lead to short-term underperformance, but eventually it pays off in outperformance.”