Ray Dalio

If you really go look, if you go back to the Bridgewater case and Ray Dalio, there’s a unique individual who built the largest and arguably most successful hedge fund in the world. If you go back to his methodology from the time he started his business in his apartment in New York, he wrote down each day his decision about each trade, why he made that trade, and what were his assumptions, and he wrote down the results. The thing about it is he was using thinking rehearsal, or mental rehearsal.

You’ve got to have some processes that slow you down to where you’re thinking about how you think, and thinking about how you relate. Just saying that you’re going to do it is not enough. Good intent is not enough. It works, and everybody that I’ve worked with or talked with that has tried some of these techniques in my book, they work.

The other thing I can’t stress enough is the mental rehearsal, and keeping the journal. Just by doing that, grading yourself in the sense of, “Where can I improve? What happened today? What would I do differently in how I think? What would I do differently in that conversation as to how I relate?”

Over years of doing this, it comes back to, at least for me, to two related things, intellectual humility and quieting my ego. Because if I can quiet my ego, I can listen better. I can be more empathetic. I do suspend judgment. I can inquire. I can actively consider other views. Much of this is a discipline. Much of this is psychological.
----------------------

When I was talking with Ray Dalio about doing this, he very up front said, “I’m going to lay out one condition.” I said, “OK, what is it?” He said, “I want you to agree to take the role of a new recruit coming to join Bridgewater as an employee. I’m going to send you a Bridgewater iPad, and you will basically watch over 10 hours of various films and answer questions, and get graded on your questions, to immerse yourself before you come in having some understanding of the Bridgewater way.”

He said, “In addition, to help you prepare, I’m going to send you lots of other stuff that, da-da-da.” It was a structured and planned immersion. It’s a fascinating place. It vets wonderful people.

You know from my book they allowed me to use quotes and tell their stories. They’re stories that made for change. Genders can sometimes change, too. They’re very compelling stories about how this transformation took place, what Ray calls getting to the other side.

It’s somewhat also analogous to my studies with the United States Marine Corps. As I write in the book, I had the Marine Corps transformation process, where a general once phrased it this way to me. He says, “Take very average people and put them in the most difficult environments and they perform consistently exceptionally well.”

Why? Because of how they, if you will, how they’re trained to think, behave, and the values. When you look at Bridgewater and you look at any organization – whether it’s UPS or someone like W. L. Gore or Pixar – all four of those organizations and the Navy SEALS or the Marine Corps or the Special Forces or the US Army, they all have strong cultures and they all have strong process. They all have a similar, what I call leadership model that is very, very humanistic and people-oriented. I do a lot of this inside companies.

You know. You’ve been around the block, too. There’s a lot of people who talk the talk that don’t walk the walk. I had read Bridgewater’s management principles. I’d used them in my classroom for a couple of years and got a surprising negativity about it all from my students. That also happened when they were used in the Harvard class, which only piqued my interest.

When I went in there and saw it, sat in meetings, and watched the process happen, where people’s thinking was challenged and there were in-sync conversations which were trying to get to the bottom of why certain things were not working, whether it was a process or whether it was a thinking pattern or whether whatever.

Watching that happen, what he writes and what I write is the reality of what they get. The interesting thing is the transformation process. If you think about a firm like Bridgewater, it hires very, very bright people who were then, generally speaking, very successful in school and very successful in extracurricular activities their entire educational life, and are nice people and know how to get along with other people.

They come in there and … it’s the first negative feedback they’d ever received in their life.

How do people change their mental model of what being smart is and change their mental model about mistakes and their emotional defensiveness to, in effect, protect their ego. That’s what it’s all about.

It’s fascinating. Many of the places I’ve studied and got involved in, each of them are different. Gallo has built a learning system. It’s got a culture. It’s got processes, measurements are lower, et cetera, all designed to mitigate…our natural inclination for System 1 thinking and System 1 conversations.

Defend, deny, deflect, protect the ego…The thing that I find amazing is that I think that if you close your eyes and think of 2025, 2030, you think of an operationally excellent company going to be set primarily by smart robots, smart machines with a small human contingent that have got to be the big thinkers. Modelled inside that company of the future is going to be something similar to what the model is in Bridgewater.

-----------------

True that

TPG's Bonderman says Modi euphoria makes Indian companies overvalued

BY  ANURADHA VERMA

TPG has investments in Shriram Group, Vishal Retail and Sutures, among others.

David Bonderman, founding partner at global private equity major TPG (formerly Texas Pacific Group) has said the euphoria surrounding the election of Narendra Modi as the new Prime Minister of India, which has buoyed stock market valuations to new highs, has made India overpriced.

“There are times when places like India are cheap. That isn't the case now; so we have to be cautious," Bonderman said at the annual SuperReturn private equity conference in Hong Kong on Wednesday, according to Reuters.

According to Bonderman, there will be a period of disenchantment as people realise Modi's limitation on what he can fix.

"Most of what ails India can't be fixed by one man and a federal system," he said.

According to Bonderman, the run up in the valuations has affected deal making in the private equity space.

TPG, which had struck two deals last year, is now sealing its first new transaction in the country by investing in BPO firm Sutherland Global.

TPG has two separate teams operating in India. TPG Capital, through its Asia and global buyout funds, looks at large buyouts and strategic transactions. The other unit is under TPG Growth.

The firm's investments in India include buyout of retailer Vishal Megamart (along with Shriram Group), Sutures, Flexituff International, ASG Transact and real estate development company Shriram Properties.

“In India, the public markets are ahead of themselves, as they often are in India. It tends to be the case that prices follow the public markets in India, and they get out of control as they are at the moment, due in part to Modi euphoria,” Bonderman said, while pointing out that power sector of the country is one of the problems the country is facing.

"So India is way underpowered and they can't get their act together to figure out how much they're charging for coal and how much they're charging for natural gas, and definitely you can't get anybody building power plants...Mr Modi can't fix that overnight. Maybe over a decade," he said.

Source: VCCircle

Feynman - Commencement Speech 1974

“… if you're doing an experiment, you should report everything that you think might
make it invalid — not only what you think is right about it; other causes that could
possibly explain your results; and things you thought of that you've eliminated by some
other experiment, and how they worked — to make sure the other fellow can tell they
have been eliminated.” – Richard Feynman, 19742
. 

Jack Ma - Man of the moment!

When I first started Alibaba, I was immediately met with strong opposition from family and friends. Looking back, I realised that the biggest driving force for me then was not my confidence in the Internet and the potential it held, but more of this:  “No matter what one does, regardless of failure or success, the experience is a form of success in itself.” You have got to keep trying, and if it doesn’t work, you always can revert back to what you were doing before. 

As with this quote by T.E. Lawrence – “All men dream: but not equally. Those who dream in the dark recesses of the night awake in the day to find all was vanity. But the dreamers of day are dangerous men, for they may act their dreams with open eyes, and make it possible.”

Seth Klarman Cautions Against The Complacency Bubble [feedly]

 
 

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Seth Klarman Cautions Against The Complacency Bubble

Seth Klarman: We are in a "Goldilocks stock market resulting from a tepid economy, dampened volatility, and relentlessly low interest rates"

In his quarterly letter to investors, Seth Klarman criticized the complacency that has seeped into the global markets. He said that investors have been seduced into a false feeling of calm. With stocks touching new highs, Klarman expressed his fear that the markets are marching straight in the direction of a crisis as this continued up-cycle sows the seeds for the next fall. Warning signs like consistently high inflation, strikingly low volatility and finally the revision of the U.S GDP to -2.9% in Q12014 seem to have gone unnoticed by the market. The letter said,

"Investors have clearly grown weary of worrying about risky scenarios that never seem to materialize or, when they do, don't seem to matter to anyone else.U.S. GDP, for example, was recently restated to minus 2.9% for the first quarter of 2014. Normally, this magnitude drop signals recession. Equities, nevertheless, marched relentlessly higher."

Take a look at our previous coverage of Baupost's second quarter letter here. Sign up for our daily newsletter to ensure you catch all our articles

The Goldilocks stock market

Klarman went on to note that two of the most popular types of investments these days indicate possible danger ahead. One investment is stacking up a portfolio with substandard credit, and the other is leveraging up the portfolio. He cautioned that we might be close to the point where the continued weakness in bond markets spills over into equities and breaks up the party. However, on the other hand, things could go on just as they are now:

"…Or perhaps things can go on forever exactly as they are: a "Goldilocks" stock market resulting from a tepid economy, dampened volatility, and relentlessly low interest rates. Amidst the market rally, complacent investors continue to ignore a growing array of global trouble spots. Contrary to claims from the Obama Administration, the world is not a tranquil place at present. As such, risks facing investors seem to be rising but are not yet priced into the markets."

Possibility of imminent collapse

Klarman was highly apprehensive of the way central banks are implementing the most aggressive kind of easing programs these days. The ECB is championing its unprecedented -.1% deposit rate. Even though bond yields in European countries are at multi-century lows, nobody seems to be concerned. African countries are making record bond issues, even those countries that have recently emerged from default. He said that the issuance of low-grade credit in U.S is also breaking a history in which yields have particularly bottomed out for junk and CCC-rated debt. Klarman said with the amount of risk in such portfolios; even a little instability can throw the markets in turmoil,

"Given changes in regulation, Wall Street has far less capital available to support the trading of this burgeoning junk issuance and the corresponding surge in debt ETFs. A sudden change in rates or sentiment could lead to serious market instability. When is harder to predict than if. While we are not predicting imminent collapse (market timing is not our thing), we are saying that a selloff, greater volatility, and investor losses would hardly be surprising from today's levels."

A bubble in complacency

Klarman believes that the fear of a slowdown appears to have gone out of investors' decision-making process. Klarman quoted John Mauldin to emphasize his point. He once described this scenario as "bubble in complacency." The letter talked about a few more causes for concern as well:

"Investors have become numb to risk because such policies continue, seemingly forever, and new measures (such as European and now even Chinese QE) are regularly threatened and claimed to be costless and reliably effective. We are far from convinced of this; indeed, the higher the level of valuations and the greater the level of complacency, the more there is to be concerned about. Even as reported inflation remains quite subdued, signs of incipient cost increases are increasingly evident. We are seeing them, for example, in apartment rents, construction costs, and salaries of newly minted engineering graduates and oilfield workers."

Klarman also explained how the wealth effect has lulled investors,

How would everything feel if the S&P 500 were suddenly cut by one-third or one-half? Would such a drop drive astonishing bargains, or would the U.S. economy soon falter, with festering problems such as unemployment, the federal, state and local deficits, the long-term fiscal situation, and the creditworthiness of most sovereigns suddenly seeming ominous? It's not hard to reach the conclusion that so many investors feel good not because things are good, but because investors have been seduced into feeling good—otherwise known as "the wealth effect."

Baupost, unlike other hedge funds, is not seeing as many opportunities for investment as risk-takers are, however, the fund is enjoying its fair share of disciplined buying and selling.

The post Seth Klarman Cautions Against The Complacency Bubble appeared first on ValueWalk.

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Munger on WSJ

Mr. Munger continued: “People chronically misappraise the limits of their own knowledge; that’s one of the most basic parts of human nature. Knowing the edge of your circle of competence is one of the most difficult things for a human being to do. Knowing what you don’t know is much more useful in life and business than being brilliant.”

“It’s waiting that helps you as an investor, and a lot of people just can’t stand to wait,” he said. “If you didn’t get the deferred-gratification gene, you’ve got to work very hard to overcome that.”

--------------------

Why did nearly 250 investors converge on Los Angeles this past week to listen to a 90-year-old man address the annual meeting of a tiny legal-publishing and software company? To hear Charles T. Munger—better known as Warren Buffett’s right-hand man—expound on one of his least-known holdings and just about everything else.

Since 1977, Mr. Munger, the vice chairman of Berkshire Hathaway, has also been the chairman of Daily Journal, a peculiar combination of a venture-capital firm and a mutual fund. His public appearances are so rare and his remarks so entertaining and illuminating that investors came from as far away as Alabama, Massachusetts, Minnesota and Ontario to hear him speak.

They weren’t disappointed. Mr. Munger talked almost nonstop for two hours, lambasting the banking and money-management industries, hailing the economic potential of China and, above all, dispensing common-sense advice that anyone can benefit from. His central message: Investors can reach their fullest potential only by thinking for themselves. “If you stay rational yourself,” he told the crowd, “the stupidity of the world helps you.”

I also spoke to Mr. Munger privately after the meeting. Here’s some of what he told me.

He regards 3G Capital, the Brazilian firm with which Berkshire took over H.J. Heinz last year and which is seeking to merge Burger King Worldwide BKW -0.49% with Tim Hortons of Canada, as “probably the best in the world” at making “companies function better at lower cost.”

He added, “Ultimately, I think we don’t do the world a favor by employing more people than we need for companies to run efficiently.”

Fifty years ago next year, Mr. Buffett took control at Berkshire. For that anniversary, Mr. Buffett is asking Mr. Munger to answer two questions: “Why did it work? And will it continue?”

The questions are “very interesting,” said Mr. Munger, “because the actual result at Berkshire is really preposterous.” Even he is a bit puzzled by how two men could take a jumble of dying textile mills, stagnant department stores and a trading-stamp company and turn it into the fifth-biggest firm in America, with a stock-market value of $337 billion.

“How the hell does this thing end up blowing past GE?” asked Mr. Munger, a sense of wonder in his voice. (General Electric’s stock is valued at $260 billion.)

First, he said, other companies like GE “long had a history of moving [division leaders] around internally, and that’s like asking an oboe player in the symphony to perform on the piano and expecting the quality of the music not to suffer.” At Berkshire, Messrs. Buffett and Munger let great managers stay put.

Second, he added, “I think we have had a temperamental advantage: Warren and I know better than most people what we know and what we don’t know. That’s even better than having a lot of extra IQ points.”

Mr. Munger continued: “People chronically misappraise the limits of their own knowledge; that’s one of the most basic parts of human nature. Knowing the edge of your circle of competence is one of the most difficult things for a human being to do. Knowing what you don’t know is much more useful in life and business than being brilliant.”

Mr. Munger had mentioned during the annual meeting that some $120,000, apparently from a retirement-account distribution, had “floated” into his account earlier in the week. He sees nothing worth investing it in right now and hasn’t bought an investment in his personal accounts in at least two years, because he is waiting for an irresistible bargain.

Added Mr. Munger, “One person said to me, ‘I have a list of 300 potentially attractive stocks, and I constantly watch them, waiting for just one of them to become cheap enough to buy.’ Well, that’s a reasonable thing to do. But how many people have that kind of discipline? Not one in 100.”

Successful investing, Mr. Munger told me, requires “this crazy combination of gumption and patience, and then being ready to pounce when the opportunity presents itself, because in this world opportunities just don’t last very long.” Mr. Munger showed that in March 2009, when he bought 1.6 million shares of Wells Fargo for Daily Journal at an average cost he estimates at $8.58 per share. The stock was trading at around $51.50 this week.

“It’s waiting that helps you as an investor, and a lot of people just can’t stand to wait,” he said. “If you didn’t get the deferred-gratification gene, you’ve got to work very hard to overcome that.”

How long can he and Mr. Buffett, 84, continue running their companies? “We’re surrounded by a lot of smart people who will not hesitate to help us make the recognition [that it is time to retire],” Mr. Munger told me. “We won’t have an undiagnosed dotage.”

He added matter-of-factly, “I don’t have that much time relative to Warren, statistically speaking, given the longevity tables.”

But Mr. Munger told me that after speaking to investors for two hours nonstop, then presiding over a board meeting that ran for at least three hours after that. Men half his age would have been ready for a nap, but he shows no signs of slowing down.

Howard Marks Revisited

2008 Memo - Not too bad for an anchor in 2008

Jan 2008:

• “Don’t try to catch a falling knife.” That bit of purported wisdom is being heard a lot nowadays. Like other adages, it can be entirely appropriate in some instances, while in others it’s nothing but an excuse for failing to think independently. Yes, it can be dangerous to jump in after the first price decline. But it’s unprofessional to hang back and refuse to buy when asset prices have fallen greatly, just because it’s less scary to “wait for the dust to settle.” It’s not easy to tell the difference, but that’s our job. We’ve made a lot of money catching falling knives in the last two decades. Certainly we’ll never let that old saw deter us from taking action when our analysis tells us there are bargains to be had. - This in Jan 2008?

Feb 2008:

• Nothing substantial

October 2008:

• We will invest on the assumption that it will go on, that companies will make money, that they’ll have value, and that buying claims on them at low prices will work in the long run. What alternative is there? - Leap of Faith!!!
• Then I went on to create the converse of the above, the three stages of a bear market: 

1.  the first, when just a few prudent investors recognize that, despite the prevailing bullishness, things won’t always be rosy, 
2. the second, when most investors recognize things are deteriorating, and 
3. the third, when everyone’s convinced things can only get worse. 

• In the final stage, you can buy assets at prices that reflect little or no optimism.There can be no doubt that we are in the third stage with regard to many financial institutions. Not necessarily at the bottom, but in a serious period of unremitting pessimism. No one seems able to imagine how the current vicious circle will be interrupted. But I think we must assume it will be. It must be noted that, just like two years ago, people are accepting as true something that has never held true before. Then, it was the proposition that massively levered balance sheets had been rendered safe by the miracle of financial engineering. Today, it’s the non-viability of the essential financial sector and its greatest institutions. Everyone was happy to buy 18-24-36 months ago, when the horizon was cloudless and asset prices were sky-high. Now, with heretofore unimaginable risks on the table and priced in, it’s appropriate to sniff around for bargains: the babies that are being thrown out with the bath water. We’re on the case.

2009 Memo - Procrastination

Jan 2009:

• Nothing substantial

March 2009:

• The only things we have to fall back on at this juncture are intrinsic value, company survival and our own staying power as investors. Of course, even these things mean we have to make judgments about what the future is likely to look like. That requirement, in turn, means nothing can be approached with complete safety or certainty. Nevertheless, we can take action if we think those three elements will be present under most circumstances. That’s the right mindset for today

July 2009:

• With price and value in reasonable balance, the course of security prices will largely be determined by future economic developments that defy prediction. Thus I find it hard to be highly opinionated at this juncture. Few things are compelling sells here, but I wouldn’t be a pedal-to-the-metal buyer either. On balance, I think better buying opportunities lie ahead. 

Nov 2009:

• Nothing substantial

2010 Memo - Decreased Investing

May 2010:

• The bottom line is this: the fact that we don’t know where trouble will come from shouldn’t allow us to feel comfortable in times when prices are full. The higher prices are relative to intrinsic value, the more we should allow for the unknown.Did not Invest or decreased investing

2011 Memo - Increased Investing


July 2011

• Nothing substantial - US debt ceiling

Sept 2011

• Nobody waves a banner when assets have gotten cheap enough, but its incumbent on investors to recognise things like these and react appropriately, rather than follow the herd. Thus right now, I would be a better buyer, albeit in moderation since fundamentals still pose threats

Nov 2011

• Nothing substantial

2012 Memo - 


March 2012

• No particular stance

Howard Marks - "Today I feel its important to pay more attention to loss prevention than the pursuit of gain"

Sept 2014 Memo - Key takeaways

Sources of Investment risk or Permanent Loss are 1) investor's ability to ride out the volatility (excess focus on price) and 2) investing in a company with poor financials/dramatic change in competitive landscape etc.

while 1) is a behavioral aspect of investing 2) is closest to science and errors could be prevented with strong research process and sufficient checks and balances

JKG :) - "We have two classes of forecasters - those who don't know and those who don't know they don't know"

Future should be viewed as range of possibilities - In order to achieve alpha, investors should consistently bet on stocks with asymmetric profit outcomes i.e. lower downsides and higher upsides;

Economic decisions should be based on expected value; not sure about the relationship between return and risk - this is probably the perception of risk vs return and in this seems to be the holy grail of investing i.e. WB's perception of risk at a point in time could be spectacularly different from an above average investor's perception of risk; perhaps risk is just an opinion and cannot be combined at a macro level

Nice:
Risk of low returns vs Risk of FOMO; But between 1968 and 1973, many of the Nifty Fifty lost 80-90% of value - why?

"At Present I consider risk control more important than usual"
"The less prudence with which others are conducting their affairs, the greater prudence we should incorporate in our affairs"

Jason zweig

I was once asked, at a journalism conference, how I defined my job. I said: My job is to write the exact same thing between 50 and 100 times a year in such a way that neither my editors nor my readers will ever think I am repeating myself.

That’s because good advice rarely changes, while markets change constantly. The temptation to pander is almost irresistible. And while people need good advice, what they want is advice that sounds good.

The advice that sounds the best in the short run is always the most dangerous in the long run. Everyone wants the secret, the key, the roadmap to the primrose path that leads to El Dorado: the magical low-risk, high-return investment that can double your money in no time. Everyone wants to chase the returns of whatever has been hottest and to shun whatever has gone cold. Most financial journalism, like most of Wall Street itself, is dedicated to a basic principle of marketing: When the ducks quack, feed ‘em.

It’s no wonder that, as brilliant research by the psychologist Paul Andreassen showed many years ago, people who receive frequent news updates on their investments earn lower returns than those who get no news. It’s also no wonder that the media has ignored those findings. Not many people care to admit that they spend their careers being part of the problem instead of trying to be part of the solution.

My job, as I see it, is to learn from other people’s mistakes and from my own. Above all, it means trying to save people from themselves. As the founder of security analysis, Benjamin Graham, wrote in The Intelligent Investor in 1949: “The investor’s chief problem – and even his worst enemy – is likely to be himself.”

My role is also to remind them constantly that knowing what not to do is much more important than what to do. Approximately 99% of the time, the single most important thing investors should do is absolutely nothing.

There’s no smugness or self-satisfaction in this sort of role. The competitive and psychological pressure to give bad advice is so intense, the demand to produce noise is so unremitting, that I often feel like a performer onstage before a hostile audience that is forever hissing and throwing rotten fruit at him. It’s hard for your head to swell when you spend so much of your time ducking.

Every columnist knows that if you ever write something that didn’t make anybody angry, you blew it. People don’t like having their preconceived notions jolted, and doubt and ambiguity are alien to the way most investors think.

That’s why I’m realistic. I don’t ever expect to convert all my readers to my viewpoint. I would be a fool to think I could. But I’d be a worse fool if I ever stopped trying.

"No individual can assist or save the age. He can only express that it is lost.”