Markets – Jaison's Blog

Unmasking Myself as a Non-Conformist

[My views are my own]

“When masses of people succumb to an idea, they often run off at a tangent because of their emotions. When people stop to think things through, they are very sane in their decisions.”
Humphrey B. Neill

When I first started on Wall Street, I worked for Peter F. Marcus. He was brutally tough, but also like a father — a real mensch.

In my first weeks on the job, he gave me a book called The Art of Contrary Thinking by Humphrey B. Neill.

He told me that if I wanted to be successful in my career and life, I had to make my own path, and develop my own ideas. And, the first step in doing that is to be a non-conformist when using my mind.

The book changed my mind . . . and my life.

It set me on a path that was uniquely my own.

Let me be clear, I’m not advocating knee-jerk contrarianism. If the train is coming down the tracks, and everyone else is stepping out of the way . . . you don’t remain on the tracks in the name of contrarianism.

However, in emotionally charged and uncertain situations, it is human nature to seek the comfort of the herd — and to look to others for confirmation of our ideas.

The problem is that the crowd does not think, but acts on impulses. For this reason, widely held public opinions are commonly wrong.

To break from the pull of the crowd, requires something that Howard Marks of Oaktree Capital refers to as Second-Level Thinking.

“First-level thinkers look for simple formulas and easy answers. Second-level thinkers know that success in investing is the antithesis of simple.”
Howard Marks – “I Beg to Differ“

Howard Marks provides the following elements for second-level thinking:

What is the range of likely future outcomes?
What outcome do I think will occur?
What’s the probability I’m right?
What does the consensus think?
How does my expectation differ from the consensus?
Is the consensus psychology . . . too [optimistic] or [pessimistic]?
What will happen . . . if the consensus turns out to be right, and what if I’m right?

Over the past nearly 30 years — since Peter Marcus gave me Humphrey B. Neill’s book — I’ve trained myself to be a contrarian thinker.

This doesn’t mean that I go into meetings and habitually take the opposite position.

But it has allowed me to understand that in most situations, there is a sub-conscious (emotionally-charged) force that is influencing the team — and frequently standing in the way of progress.

In my work as a transformation leader, my job is to help the team to see things in an unemotional and more logical way.

To bring them together around a more favorable future state.

In this way, I think of myself as a “Horse Whisperer” in and around emotionally-charged situations.

If you are interested in engaging further in this conversation, I’d love to go on the journey with you. Please subscribe to my free newsletter/blog; and please pass it along to your friends.

Also, please follow me on Twitter, connect with me on LinkedIn, and post a comment below. I’d love to know what you think.

Tail Risks as Margin of Safety

Why I’ve been buying Alibaba (BABA-NYSE; 9988-HK)

[My views are my own]

“The reason that I invested in China is they have much better companies at lower prices. So, I’m willing to take more risk.”
Charlie Munger

One of the investing lessons that I’m teaching my children is that you get paid for your ability to stomach uncertainty, volatility, and risk.

Over 30 years as an investor, hands-down, I’ve made my best investments when I’ve been terrified.

As I wrote here, my approach to investing is to “aggressively deploy capital during recessions,” to invest in “cycles of panic” which happen “like clockwork, every ~18 months,” and to “buy companies . . . that are emerging from nuclear winter.”

My discipline as an investor is to be a liquidity provider when others are panicking and heading for the exits.

During the March and May sell-offs, I started loading up the truck with shares of Alibaba (BABA-NYSE; 9988-HK).

Alibaba is the largest e-commerce company on the planet. It has been called the Amazon.com of China. It’s share of Chinese e-commerce is 55%, and it’s share of cloud computing is 45%. Other assets include $68B of cash and equivalents, $25B of investments in Chinese public companies, and a 33% stake in Ant Financial (which own’s Alipay, the world’s largest mobile payment platform).

With Chinese internet ETF KWEB down 70% since February 2021, the tail risk narrative appears to have become the conventional wisdom.

This doesn’t mean that I won’t be wrong.

The Chinese property crisis could push China into an economic depression. China could invade Taiwan, and I could be forced to sell my shares due to sanctions. Emerging mobile commerce competitor Pinduoduo could disrupt Alibaba. The ADS shares could be de-listed.

However, if I’m right, I think there is a good chance to make 5x or 10x my money over the next 5 to 10 years.

The bet I’m placing is that:

(1) Alibaba is one of the highest quality businesses on the planet today. The company will effectively monetize the emerging Chinese middle class over the next decade-plus given extremely strong network effects.

(2) Despite the political rhetoric, Chinese Communists understand that to stay in power, they require a strong economy, access to capital markets, and powerful global companies.

(3) The company will continue to aggressively repurchase deeply discounted shares with it’s strong free cash flows.

(4) If the U.S. shares are de-listed, I’ll transfer all of my ADS holdings to the Hong Kong-based shares (which I also own).

(5) The current valuation implies that Alibaba will have no growth in the future — which I think is unlikely.

On valuation, my preferred approach is to compare the company’s Enterprise Value to the perpetuity value of it’s trailing cash flows (more on this in a future post).

Enterprise Value / [(EBITA * (1 – tax rate) ) / weighted average cost of capital]

On this measure, companies of this quality normally trade at a ratio 2x to 3x (or more during boom market conditions). Today, Alibaba trades at approximately 1.0x net of cash and minority investments. At the March lows, it traded at a >30% discount (or <0.7x).

Alibaba is very good and cheap — a rare combination!

As a final thought, Alibaba stock could definitely go lower from here. I’m not a trader looking for a quick pop.

In fact, the one common characteristic of almost every single big win I’ve had as an investor is that I was early. Early . . . but right!

In addition, if the we get a deep recession, as I wrote here, all stocks are likely going lower.

“I hope I live long enough to see a couple of recessions in this country. It is the nature of capitalism to periodically have recessions. People overshoot. So, it isn’t the end of the world. I mean, as a matter of fact, for an investor, you know, it turns out to be the times when you make your best buys. I made by far the best buys I’ve ever made in my lifetime in 1974. And that was a time of great pessimism and the oil shock and stagflation and all those sorts of things. But stocks were cheap.”
Warren Buffett

How I prepare to navigate a potential recession scenario is with cash and equivalents. Enough cash to buy more shares at lower prices; and, enough cash/liquidity so that I don’t have to sell my shares if there is a personal adverse consequence in my life.

The name of the game is to buy excellent companies when they are covered in uncertainty (preferably during recessions and market panics), and to hold them through the cycle.

If you are interested in engaging further in this conversation, I’d love to go on the journey with you. Please subscribe to my free newsletter/blog. Also, please follow me on Twitter, connect with me on LinkedIn, and post a comment below. I’d love to know what you think.

Sorry . . . No Mad Money for Me!

“The trick in investing is just to sit there and watch pitch after pitch go by and wait for the one right in your sweet spot.”
Warren Buffett

[My views are my own]

I’m no longer on Wall Street. I largely ignore the stock market machine’s daily noise. It’s dramatically improved my results.

My approach:

Ride the Big Waves. Ignore the Squiggles. Aggressively deploy capital during recessions. Then sit tight. This is how the BIG money is made.
Cycles of Panic. Like clockwork, every ~18 month, investors lose their minds with fear and panic. I ONLY invest when the VIX is over 30.
Nuclear Winter is Your Best Friend. I love to buy companies, industries and assets that are emerging from the nuclear winter.
Reading is my Edge. While I ignore the daily sound and fury of the stock market, I’m always learning. I average at least 100 pages per day.
Insider Investing is the Best. I work for (and get stock grants from) companies that I’d want to own.

When the Tidal Wave Goes Out

[My views are my own]

“As a wave increases in height, its mass increases exponentially, as does the energy released when it breaks.”
Jon Krakauer in “Mark Foo’s Last Ride,” Outside magazine, May 1995 issue

2008 to 2021 was the most significant period of easy money (i.e., Fed Printing) of the Post-War era.

In March of 2022, the Federal Reserve commenced the most aggressive tightening cycle since Paul Volcker was Fed Chair.

As the chart below illustrates, in virtually every tightening cycle something REALLY BIG breaks in the financial system.

So far, crypto and disruptive growth have gotten clobbered. My instinct is that the de-leveraging in the system may just be getting started.

In addition, the backdrop for this Fed tightening cycle is weak real consumer spending, as I wrote here.

For a great recent book on the Federal Reserve, check out The Lords of Easy Money: How the Federal Reserve Broke the American Economy by Christopher Leonard.

If you are interested in engaging further in this conversation, I’d love to go on the journey with you. Please subscribe to my newsletter/blog. The link is at the top of the page on a desktop browser and at the bottom of the page on a mobile browser. Also, please follow me on Twitter, connect with me on LinkedIn, and post a comment below. I’d love to know what you think.

The Pendulum of Ideas (and Recurring Mass Delusions)

[My views are my own].

I bought my first stock at the age of 23.

It was 1995.
We were in the middle of a raging bull market.
Over the next five years, the Nasdaq 100 index rocketed from 480 to 4,800.

Boy . . . that was fun!

During that first bull market, with every passing month, my opinion of myself grew more and more certain.

Going into 2000, I was a 28-year-old Master of the Universe . . . with a fatal blind spot.

In hindsight, I was just surfing the crest of a tidal wave.

I’ve now been investing for more than 25 years. I’ve survived two massive bear markets and innumerable market crashes.

I’ve analyzed at least 1,000 companies; I’ve worked as a senior analyst on Wall Street; and I’ve made every mistake in the book.

One thing I’ve learned along the way is that the “big ideas” of every market cycle are almost always unmasked as mass delusions.

Let me give you an example.

In 2006, I was at a Value Investors Conference at Lincoln Center. The speakers were the rock-stars of our generation. There were over a thousand attendees.

What had once been an obscure corner of the investment world had gone mainstream. It felt like a golden age for value investing!

The fatal blind spot was that the value-style is all about ignoring the crowd. However, by 2006, it had become the mania.

Over the last fifteen years, the value-fever has broken and been unwound. Value investors have been crushed — with many returning outside money or just leaving the business.

This swinging pendulum of ideas (and recurring mass delusions) doesn’t just happen in the crucible of the stock market.

It can happen any time we turn our trust over to the crowd.

It’s QAnon. It’s Gamestop. It’s the Tech Boom. It’s the Tech Wreck. It’s “Housing Prices Never Go Down.” It’s the Global Financial Crisis. It’s Weapons of Mass Destruction in Iraq. It’s Disco and the Macarena. It’s even frickin’ Beanie Babies and Fidget Spinners.

It’s the human condition.

So, next time you feel absolute certainty about something, and everyone around you is reinforcing how you are all geniuses . . .

Don’t be so quick to buy your own bullshit.

And, if you are going to take the time and energy to buy into a specific mental model, you should spend time really understanding the bear case against it.

Not that there is a bear case against the Macarena . . . but . . . you get it.

PS – My wife and I just watched the movie Our Friend. It’s beautiful. We had a good cry. Highly recommended.

PPS – Tom Brady is the GOAT!