Two ideas from Taleb which I’ll always consider regardless of investing style: (1) your approach should never expose you to blowup/bankruptcy; and (2) you should look for optionality (e.g., companies with great skill/capacity re product invention, capital allocation, etc.)
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Bill Esbenshade
@bill_esbenshade
Investor, attorney; comments not intended as investment advice; on Mastodon at @bill_esbenshade@mas.to
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I guess I come back to Buffett and concentration in handful of great, wide moat businesses that I understand and can purchase at fair price. I feel like this gives me better shot of outrunning inflation while still avoiding blowup, and doesn’t require great timing/trading skills
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Does investment approach structured around taking advantage of rare events that may never happen — as inflation grinds on — make sense? Taleb offers Barbell solution (one end highly risky, other end cash/low risk assets), but my skills don’t include great timing/trading instincts
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Taken to its limit, absolute avoidance of rare events would arguably preclude equity investing — it would also expose the investor to the too-common risk of not keeping up with inflation and not having enough to retire. So avoid rare Black Swans but incur risk of no retirement
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Dr. Taleb - Below is “Volatility Tax” thread that says “expected stock price” of more volatile vs. less volatile stock can be same, even though “expected CAGR” of less volatile stock is higher w/better LT return. Any thoughts? Thank you!
For me, one way to address this problem is to shift from traditional value metrics/factors and try to value companies based on a range of DCF estimates (recognizing that few companies have the earnings predictability needed for a meaningful DCF analysis )
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It’s difficult to tell if strong backtested results using a financial factor are due to a random/lucky/coincidental/temporary alignment between the factor and the specific market cycle, or if the factor can be reliably/repeatedly used to identify undervalued positions
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Should caveat comment below by saying that when you buy a company, even one you plan on holding for decades, you need to purchase at fair value or less based on wide range of discounted FCFs. You don’t want to overpay, although return impacts of purchase price diminish over time
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Everyone considers 11% ROE really poor (and I admit it doesn’t sound great), but important to remember that this 11% is post-tax. If company is reinvesting this return, and can do so for a long time, you end up with a very favorable LT result — length of runway very important
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If an investor can find and hold companies likely to survive for decades, and these companies can reinvest earnings at even modest (11%) returns on equity (which are post-tax), then he can match/surpass impressive pre-tax returns (15%) from an asset manager with modest turnover
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I know that shareholder could then sell the company that reinvests/compounds at 11% ROE at end of 20 yrs, paying a cap gains tax, but he could also continue to hold and defer taxes and get big compounding benefits going out 20+ yrs
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Company that reinvests/compounds 11% ROE internally does it post-tax. PM who compounds portfolio at 15% does it pre-tax, w/cap gains taxes varying w/turnover. 20% turnover & 30% cap gains rate then equalizes 20 yr value from 11% ROE reinvested & 15% pre-tax portfolio return
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I recently wrote an article that kind of gets at the point you’re making: valuingdisruption.com/home/2020/12/2 Have been hyper-focused lately on the benefits of long term compounding
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If company focuses on virtuous circle & building customer loyalty, while also staying adaptable re new technologies & business models, it seems like there’s a good chance they can keep customers & survive; e.g., imagine if Intel hadn’t tried to ignore/blow-off the impacts of ARM
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Re adaptability — love Buffett quote: “the time to address a problem is now.” Stay rational & never ignore problems — BRK has always been great at adapting its business — e.g., GEICO and its embrace of the Internet, or way Buffett quickly changes mind re positions (airlines)
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