Michael Batnick is the Director of Research at Ritholtz Wealth Management. He is also the author of a new book Big Mistakes: The Best Investors and Their Worst Investments “which explores the ways in which the biggest names have failed, and reveals the lessons learned that shaped more successful strategies going forward.”
- “A book that influenced my thinking was Nobody Wants to Read Your Sh*t by Steven Pressfield. This quote is burned into my memory: ‘When you understand that nobody wants to read your shit, your mind becomes powerfully concentrated.’”
I have already written a blog post about what it is like to write and publish a book. Anyone who writes a book for anyone other than themselves has never written a book before or is one of the very small number of people who strike gold writing their first book. For almost everyone who writes, that “nobody wants to read you shit” could not be more true. Of course, a few people will read your stuff (for example your mom and a few of your friends). Some of you friends will read some of your writing, but no one will read all of it. The posts that make up this 25IQ blog add up to more than one million words. I doubt anyone but me has read them all. Once you grasp this reality, it is easier to get the work done and your writing gets better since you are writing for yourself. Anthony Bourdain once made a point that is very similar to the point made above by Batnick:
“The absolute certainty that nobody was going to care about, read or buy ‘Kitchen Confidential’ was what allowed me to write it. I didn’t have to think about what people expected. I didn’t care. As a result, I was able to write the book, quickly and without tormenting myself. That was in many ways a very liberating place to be. I’ve kind of tried to stick with that business model since.”
One of the great things about publishing a book is that you get access to editors which I do not have when writing my blog post each week. I feel terrible when I miss typos, but that happens when you don’t have an editor. Mistakes will happen. THe best way to start writing is to start typing. As David Carr, the New York Times’ veteran media reporter and columnist said once: “Keep typing until it turns into writing.”
- “The other day I said to my wife, ‘Wow, I really did it. I wrote a book.’ She replied, ‘What’s the Netflix password?’”
Batnick is making a point about how hard it is to get people interested in financial topics. If you write books, blog posts or tweets on finance and business topics you should not be surprised if they are not read or understood by people in your own family, let alone the general public. This is a major societal problem since the systems in many countries delegate saving and investing decisions to individuals. The standard of living of these people when they retire will be determined based on how much and well they save and invest and yet they often will spend less time on these tasks than they do picking out a new stove or reading about their favorite football team. This dysfunctional behavior creates massive negative spillovers for society as a whole. What can be done about that? I favor a system that has a higher mandatory savings rate, but that is a complex topic that I could discuss in another blog post.
Many important phenomena have resulted from the shift from print to digital media. What is underlying many of these changes is well described by Ben Thompson in this succinct way: “Zero distribution costs. Zero marginal costs. Zero transactions. This is what the Internet enables, and it is completely transforming not just technology companies but companies in every single industry.” One of the best examples of this change is actually the crew of thinkers, researchers and writers that have been assembled at Ritholtz Wealth Management which includes Batnick. These people consistently and regularly put out some of the very best writing on investing and business and yet most all of it is available for free. Their success has encouraged others in the financial industry to do the same thing. Why is this advice free? Every business must find a way to acquire customers in a cost-effective way. What people quickly learned about the digital world is that you can write words and put them on the internet and use that process as a substitute for spending on marketing. If you engage in what is called “content marketing” in the right way and in the right markets, you can turn that writing into positive unit economics for a business. Or not. That it is possible to use content marketing as a substitute for marketing does not mean that it is easy to do or will be successful.
A positive externality of this shift from print to digital is that people are getting better advice. This free educational material is not very good for unscrupulous people who want to make a living selling high fee financial products. Promoters who try to do things like sell high fee variable annuities that destroy value for buyers are far more quickly chased off by an active crew of people on services like financial Twitter. The work that people like Jim Chanos have done for years in uncovering the scams of unscrupulous promoters is now routinely supplemented by people like Batnick. As another example of this positive externality, the ugly outcomes of high fees and the beautiful outcomes of compounding are becoming much better and more widely known as a result of the free content available on the web. The move of people to index funds has also been accelerated by people who write essays on that topic as form of content marketing.
- “I was following Josh Brown’s work, both on Twitter and the blog, and what he was talking about really resonated with me. …I was lucky enough to meet him at a train station…” “I stepped onto the platform and as luck would have it, Josh Brown walks right past me. My heart stopped, and my body froze. I hadto turn around and introduce myself.” “Josh gave me his business card and four months later I was in his office for an interview.”
I am repeating this story here because it illustrates a number of important lessons about luck and seizing opportunities when they become available. Charlie Munger likes to say that great opportunities in life aren’t made available to a person that often and when they do you need to quickly and aggressively seize them. If Batnick had not been a person who reads a lot he never would have found his way to a job that he seems to love working for people who he respects. If he had not been brave enough to introduce himself to Brown, the opportunity would have been lost. I mentor a few people right now and I am trying to teach them the importance of being as brave as Batnick was at that train station. Even a small increase in bravery can help some people better establish a reputation and create a network of people who know of that reputation, which are two elements in a career that are often overlooked. There are very specific skills that can help people be braver. As an example, Warren Buffett has said about himself: “I was terrified of public speaking when I was young. I couldn’t do it.” The Financial Times describes how Buffett got over his fear of public speaking:
In his office in downtown Omaha, Nebraska, Warren Buffett displays only one certificate of his education. It is for completing the “Dale Carnegie Course in Effective Speaking, Leadership Training, and the Art of Winning Friends and Influencing people”, dated January 23 1952. The instructors on the course “made you do all these crazy things to get out of ourselves”, Mr Buffett says in the new HBO documentary Becoming Warren Buffett. But “if I hadn’t had done that, my whole life would have been different”.
Writing for public consumption and participating on Twitter like Batnick does requires a certain type of bravery. When you create sentences and publish them you are creating the potential for people to attack your ideas. To get over the fear of sharing your thoughts publicly some people will need to do something like join Toastmasters. Maybe there should be Blogmasters or Twittermasters groups that help people express themselves in public. Learning how to sell ideas is an underappreciated skill in life. Some people naturally have storytelling skills and other people need to learn how to do it. Telling stories well and learning how to sell are highly underrated skills in life.
- “This is not a ‘how not to’ book. We grow by making our own mistakes and taking them in stride.”
I have written my own blog post on mistakes which uses the ideas, experiences and stories told by Charlie Munger as a framework. Using Munger as an example to make points is an approach that people seem to like since humans enjoy reading about other interesting humans and hearing stories. Batnick’s book Big Mistakes: The Best Investors and Their Worst Investments is using the same storytelling approach in educating readers about a fundamentally important approach to learning. Batnick made a great choice since “how to” books tend to have fewer readers. “How to” books are far less useful since recipe approaches to investing are problematic anyway. One of the biggest selling books ever written on investing is The Warren Buffett Way by Robert Hagstrom. That book teaches lessons about investing while telling a story. A famous investor once said that far more people talk about Ben Graham’s books than have actually read them. More people would actually read Graham if he had told better stories
- “I never made any big mistakes, but I did make the same mistakes over and over again.” “The difference between normal people and the best investors is that the great ones learn and grow from their mistakes, while normal people are set back by them.” “We can never say to ourselves, ‘I’ll never let that happen again!’ Sure, there are very specific mistakes that you won’t repeat, like buying a triple-levered inverse ETF and holding it for three months. That’s something you do one time and never repeat. But like Livermore said, the mistake family is too large to avoid all of them.”
The sentence first sentence above about repeating mistakes is a core message of Batnick’s book. No one can avoid making new mistakes and sometimes we will repeat old mistakes. But the best investors repeat old mistakes less often. Munger believes that it is important to rub your nose in your mistakes and then move on without dwelling in them. This is important since as Batnick said once in a blog post: “Bad news smashes your face against an amplifier, while good news just plays quietly in the background.” Making your own mistakes is both memorable and inevitable. These personal mistakes give you points of reference for the many other mistakes you read and hear about. One way to learn a lot quickly is to read about mistakes made by others since making all the possible types of mistakes yourself scales poorly.
- “Professional win points. Amateurs lose points. Professionals should play to win and amateurs should play not to lose (try to make fewer mistakes).”
Charlie Munger makes the point being made by Batnick in this way: “It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.” If I was going to write a story about an investor who is a professional, citing the example of the billionaire reals estate investor John Arrillaga Sr. would be a good idea. Arrillaga decided to focus on developing and owning commercial buildings located very close to Stanford. By not straying into other markets and instead focusing in a specific market where he had more information than amateurs and less focused professional investors he was able to generate huge financial returns. What learning about different types of mistakes and their consequences should help teach you is the value of staying within your circle of competence. Munger believes:
“Warren and I have skills that could easily be taught to other people. One skill is knowing the edge of your own competency. It’s not a competency if you don’t know the edge of it. And Warren and I are better at tuning out the standard stupidities. We’ve left a lot of more talented and diligent people in the dust, just by working hard at eliminating standard error….“Warren and I only look at industries and companies which we have a core competency in. Every person has to do the same thing. You have a limited amount of time and talent and you have to allocate it smartly. …“You have to figure out what your own aptitudes are. If you play games where other people have the aptitudes and you don’t, you’re going to lose. And that’s as close to certain as any prediction that you can make. You have to figure out where you’ve got an edge. And you’ve got to play within your own Circle of Competence.”
Too many investors confuse familiarity with competence. For example, that a given person may fly on airlines a lot does not mean that they understand the airline industry well enough to be competent as an investor in that industry. Using Facebook, does not make you qualified to invested in a social media start up. If you have not taken a deep dive into the business of a company and its value chain/industry, and you nevertheless decide to invest in that company because you got a stock tip from someone, you are asking for trouble. There is no substitute for doing the work yourself, but you actually need to do the work.
- “Mark Twain was an obsessive investor but a terrible one. He couldn’t stay within his circle of confidence, which was being an incredible storyteller and humorist. The first rule when you’re in a hole is to stop digging. He didn’t know when to stop digging. That’s really dangerous. He put good money after bad constantly — in his typesetter, for example. That forced him to do humorous lectures around the world to raise money to repay his debts. When you find yourself in a bad situation, putting more money into a losing investment won’t fix the problem.” “Putting too much money into something you don’t fully understand is a good way to lose a lot of money.”
Twain is an excellent contrast to the example set by an investor and business person like Arrillaga. The famous writer invested in numerous businesses he did not understand and paid the price for straying outside of his circle of competence. My blog post on Twain is here. One of the best reasons to read the kids of stores in Batnick’s book is described by Buffett: “I suggest that you look at the behavior that you admire in others and make those your own habits, and look at what you really find reprehensible in others and decide that those are things you are not going to do.”
I wish I had written this sentence: “The best way for investors to learn from mistakes is to let others make them, then read about it.” That sentence was written by Scott Barlow in The Globe and Mail and is most certainly true. There are both role models and anti-role models that you can learn from in life. Everyone has things about them that are not perfect. That you like X quality or behavior in a person does not necessarily mean you like Y about that same person. Life is like a shopping cart at a grocery store: you can pick out what you want as you go through life and change out what you once selected for things that are better or more suited for you as you go along. One way to accelerate that process is to read a lot of biographies.
- “Intelligence in investing is not absolute; it’s relative. In other words, it doesn’t just matter how smart you are, it matters how smart your competition is.” “While Harvard is planting almonds and Renaissance Technologies is doing god knows what, the rest of us can do just fine by chasing patience, an edge that can never be arbed away.” “Imagine that you were physically exchanging stock certificates with Jim Simons of Renaissance Technologies every time you went to buy or sell a stock.”
You are not Jim Simons and neither am I. That he can do X does not mean that you can do X. Pretending that you are Jim Simons is not good for your financial health. It is fun and helpful to your performance as an investor to learn about what someone like Jim Simons does, but don’t get confused about your ability to do that too. Munger says: “For a security to be mispriced, someone else must be a damn fool. It may be bad for the world, but not bad for Berkshire.” To paraphrase a famous line spoken on screen by Dirty Harry Callahan: “A person’s got to know their limitations as an investor.”
- “The important thing is to just do less, make less decisions. Never change a portfolio because of what happened yesterday.” “The best and most important thing we should concern ourselves with is getting the big things right.”
Munger is famous for saying that he spends most of his time sitting on his ass and reading. He believes the key to investing is being patient and yet very aggressive when the time is right. There are no called strikes when you invest. You do not have to swing at every pitch. The only time you should swing is when the expected value of doing so is significantly positive. The process of calculating expected value is easy to describe, but hard to implement:
“Take the probability of loss times the amount of possible loss from the probability of gain times the amount of possible gain. That is what we’re trying to do. It’s imperfect but that’s what it’s all about.”
If calculating expected value while eliminating the impact of emotions and others psychological dysfunction was easy, everyone would be rich.
- “Too many people invest as if their success in one area of life will translate to market beating returns, without understanding that there is little correlation between brains and alpha.”
Doctors, lawyers and dentists are well known marks for promoters of frauds and scams since they are smart, but are more likely to not know the limits of their circle of competence than less educated marks and they have more money. An IQ is not necessarily a negative factor when it comes to investing, but believing your IQ is higher than it actually is inversely correlated with positive investing outcomes. That someone is rich or famous as a media personality does not mean they have anything valuable to say about investing. Just because you are a fantastic surgeon or lawyer doesn’t mean you will be an investor who can outperform market benchmarks after fees. Buffett said once: “I always look at IQ and talent as representing the horsepower of the motor, but that the output―the efficiency with which that motor works―depends on rationality.”
- “Emotional intelligence will have a much bigger impact on your returns than your ability to out-think the market.” “Few people are spared from unforced errors, and the way they usually manifest themselves is because we can’t handle people making money while we aren’t.” “Once something belongs to us, objective thinking flies out the window.”
Most investing errors are emotional or psychological. You will never stop making errors and mistakes completely. I have written often about these issues that some people refer to as behavioral economics now since this post is already running long. Batnick identifies just a few of the major causes of emotional and psychological mistakes. The concept of a “margin of safety” was created by Ben Graham precisely because these mistakes are inevitable. Graham believed “the function of the margin of safety is, in essence, that of rendering unnecessary an accurate estimate of the future.” The key word in this Graham quote is “accurate.” With a margin of safety you can still make a few mistakes and still have a satisfactory result. Seth Klarman put it this way: “A margin of safety is achieved when securities are purchased at prices sufficiently below underlying value to allow for human error, bad luck, or extreme volatility in a complex, unpredictable and rapidly changing world.”
- “We cannot chart the future with precision.” “Humans are very, very bad at forecasting.” “The greatest lesson we can learn from history is that those who learn too much from it are doomed to draw parallels where none exist.”
Everyone must find their own way to arrive at a place where they can acquire a behavioral, analytical or informational edge if they are going to outperform a market benchmark after fees and expenses. Most people never do. We are all dealing with a world that is a nest of complex adaptive systems where we face risk, uncertainty and ignorance. Bill Miller wrote in his recent quarterly letter:
“It is worth reminding oneself from time to time that almost any description and every prediction about the U.S. stock market involves a gross oversimplification of an extraordinarily complex system, a system that adaptively incorporates the collective expectations of all its participants into the price of its securities.”
Some people find their comfort zone as investors by moving to a portfolio that consists of a low cost diversified portfolio index funds. Some people do some of that but also find an investing edge by acquiring a microeconomic understanding of specific businesses within their circle of competence.
One process an investor can use to achieve a superior overall outcome in life that is more than just financial is to think about what matters to them and calibrate the exposure they want to incur in a world that is dominated by risk, uncertainty and ignorance. As Buffett says: “It’s insane to risk what you have and need for something you don’t really need.”
p.s., Batnick has said he devoted 60 weekends to writing his book. I like supporting people who have worked hard to write a book. I like it when when experienced and well-known book authors give some help to people like Batnick when their first book is published. For example, when accomplished authors like Jason Zweig reached out to help Batnick get a good start on book sales, I thought: “bravo for them!”
I have written blog posts on Batnick’s colleagues at Barry Ritholtz, Josh Brown and Ben Carlson. They do a lot of work to make people into better investors. That their writing is also content marketing for their business does not change the good things they accomplish when people read what they write. Bravo for them and other people like them. I often quote Charlie Munger on this point: “The best thing a human being can do is to help another human being know more.” That will continue.
End Notes:
Batnick, Michael. Big Mistakes: The Best Investors and Their Worst Investments https://www.amazon.com/dp/B07D8GSXJC/ref=dp-kindle-redirect?_encoding=UTF8&btkr=1
Batnick’s blog: http://theirrelevantinvestor.com/
http://ivanhoff.com/2018/06/08/ten-lessons-from-michael-batnicks-book-big-mistakes/
http://awealthofcommonsense.com/2018/06/6-things-i-learned-from-big-mistakes/
Financial Times: https://www.ft.com/content/d02c002a-e934-11e6-967b-c88452263daf
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