Defining Patience

None of the following is investment advice. Also, if you are in San Diego next month, our firm is hosting an event, details here.

"Waiting helps you as an investor and a lot of people just can't stand to wait. If you didn't get the deferred-gratification gene, you've got to work very hard to overcome that." - Charlie Munger.

This pithy sentiment, as is Munger's modus, contains volumes of wisdom. Patience with all people. Patience when you win and when you lose. Patience with yourself as you internalize lessons learned from mistakes both in work and in life. Patience to wait for the motivation to create something truly great. Patience. Patience. Patience.

In this memo, we consider my empirical views on the value of patience, as they relate to both business and life. The importance of this memo will remain long after I have written it, which is, in itself, a tribute to being a patient person: too often investment advisors consider short term principles. Here forthwith, an attempt is made to extrapolate longer term principles into short term decisions, which I believe is both correct and just. We first look at examples in business, and then move toward personal cultural instances, which are infinitely more subjective, of course. Culture requires patience to define who is involved, what activities are performed, and when to act/not act.

Markets:

Over the past couple of weeks, NFTs have piqued my interest. Bloomberg and most banks have warmed to crypto this year as demand is exponentially growing globally so I developed a bull hypothesis. The hypothesis is that NFTs will function as a revolutionary asset placement mechanism. Some of you will remember that I was bullish enough on cryptocurrencies in 2017 to host a panel discussion with my clients and some industry professionals. To me, the demand was obvious, but at the levels we now see, the future demand for crypto does not necessarily warrant a higher price. Consuming dozens of videos and articles led me to believe that my bull hypothesis actually became a bear one. The NFT situation almost constantly repeats in history, and is quite obviously a case of impatience on the part of crypto bulls that don't have a clear understanding of why they are behaving as they are.

Propy explains here that NFTs are a perfect vehicle for Real Estate. Bloomberg interviews explain here that NFTs are a perfect accessory for video games. While these videos exhibit boundless positivity to the naked eye, to me the opposite was exhibited. Propy found that transferring properties not owned by an LLC was impossible, so the solution became a transfer of a property into an LLC, a transfer of the LLC into an NFT and then the purchase of that NFT using crypto currency. This process both adds another step to the purchase and severely limits the greatest benefit of investing in real estate (use of leverage). In this scenario, the purchaser could just convert the crypto currency to cash, simultaneously selling a mortgage and then buy the property for about 20% as much capital as the NFT.

Similarly, video game creators are optimistic that NFTs will allow secondary trading for in-game purchases, which is probably true, but can't the same be accomplished using LLCs? Anything, even intellectual property, can be owned by LLCs. Two years ago, I discovered how fungible LLCs are in respect to transfers but also how 'non fungible' they are in respect to ownership. It's as though the purveyors of NFTs know exactly what I do, but hype the NFTs anyway, and the users of NFTs just don't understand LLCs well enough to know how they are being suckered.

NFTs are registered on a blockchain, so there can't be instances of an asset being owned by more than one person, but think about the corollary - how often is a piece of property successfully (or even unsuccessfully) claimed by someone without title to it? Is this the only solution NFTs can boast over LLCs? And NFTs can only be bought with crypto, meaning that a significant part of crypto demand is being fueled by this misunderstanding.

Of course, I may be missing something - nothing in the world can be categorically false or true. However, the probability is high that NFTs are ultimately useless and crypto demand is being hyped for solutions that are not as impactful as the demand suggests. All that aside, I encourage the creativity and entrepreneurialism around the NFT space. There will be many innovations in the industry that will make sense.

Ok, moving to the stock market.

How many times this year will we hear that the market will correct, and bad bets will multiply into a cascading avalanche of losses? The portraits painted by even those that I respect have become increasingly dire, and I cling to a very simple fact (yes, fact): That the probability of an up market on any given day is higher than that of a down market. Simplistic, of course, but isn't it true? I could expound upon the bull and bear cases, but ultimately I have resolved that investing based on macroeconomics is unlikely to produce outsized profits, especially in respect to how costly it is to prepare the mountains of data.

I listen to Buffett, Druckenmiller, Tudor Jones, Bruce Kovner, Ken Griffin, Soros, Rieder, and all the others and realize instantly how smart they are. Looking at their returns, you must agree with me. Fact is, those are private investors in America using mostly the US dollar. At the same time, the most powerful person in the entire economic world is the head of US' Federal Reserve. The power of the president of the US is arguable, but the power of the head of the Fed is demonstrable. We note tones of voice from Powell's speeches to indicate his next actions. As I remember, we didn't take Trump as seriously, and we don't take Biden as seriously. So, one must believe that the head of the Fed must be smarter/more powerful than any of those private investors, as that person has more power (and virtually controls the US dollar). A smarter person than Buffett is unimaginable, but if such a person does run the Fed, how can we ever doubt them? How can we bet against them and in favor that the economy will backtrack? The true question is - how can we be so impatient with ourselves, defying logical odds?

Boasting returns YTD of 90%, many onlookers are skeptical that my strategy is risky and I will revert to mediocrity soon enough. I must say that I believe such a reversion is not only possible, but probable. After experiencing such short term success, not doing anything is very hard to do, especially given all the doomsayers as of late - it freaks me out to be patient with our portfolios as many of our positions have doubled in only several months. But the logic is that there's a higher probability for an up market tomorrow than a down market, so I have to let bets ride, and that very decision is what will create or destroy success. If you like what you have, why sell it? The question of patience is a give and take of 'will I die waiting to succeed or should I decide on something different today?' I call this the 'shiny new thing' dilemma in my book - selling something too early to buy something new and exciting.

Warren Buffett is my hero, having read every annual report he wrote over his first 50 years in business. Twice. He never once considered macro predictions while investing. He would look at company financial statements while considering the current prevailing interest rates, and conclude rather quickly on an intrinsic value. When he bought, he also never considered macro. He did so well because he didn't get in his own way. When he was successful with a stock he bought, he didn't sell. When he experienced a drawdown with a stock he bought, he bought more of it. Read the letters closely and you will discover how little he cared about his portfolio - he was much more involved in his insurance operations for at least 7 years from age 35 to 42. And that was exactly the correct decision, because even though he has made 10s of billions of dollars on Geico, he has only bought more over the last 70 years. Was it more difficult for him to wait than to miss out on other investments over that 70 years?

When you determine the correct decision, you must be patient and let it play out. You only need a few of those in life. If you aren't capable of determining a correct decision, you must hire someone that can. This leads me to my next section, patience outside of business, where investment philosophy gains complexity and becomes culture.

Unfortunately, professionals can't be hired to create and maintain a culture in the same way that a wealthy person can hire an investment advisor to create a strategy. The culture of our firm is obsession on logic, which has strengths and weaknesses, but the culture also insists on developing those weaknesses. My discovery is that as we age, we learn more and more how we like to spend our time, and we try to find others that fit their time within the culture we make for our time. Cultures mature over time through hard work and directed efforts.

Not an easy proposition. As noted, you can die trying to figure something out, so time is the ultimate variable. Culture is very steadfast, predictable, and largely unchangeable. Culture must be adapted to and cannot successfully be moderated. Many of us, like Buffett I think, refuse to be distracted by such adaptations. Buffett, for example, has a group of friends and business colleagues that he continues to be fiercely loyal to, 70 years later. He famously doesn't do business with people that aren't smart, ethical and hard-working.

In business, I've met many people that don't want to invest to make money. They invest to feel safe. Similarly, in life, I've met many people that don't want to live a better life, but they too only want safety. Here's the crux of this memo - that you must not only identify your culture's weaknesses, but you must actively want to do everything you can to make them strengths while also discovering why those were weaknesses in the first place. This iterative process requires near infinite patience almost immediately after beginning and for decades after. Buffett commonly claims that the Dale Carnegie course he completed was the most important instruction of his life. He recognized his weaknesses early and sought to develop them.

Continuous learning to satisfy clients is a big part of our culture, and while we have already logged several enormous success stories, those were borne out of logical problem solving... and not sales. In sales, customers can just go to any other salesperson and get the same thing; not a life changing experience. And that is the problem we are trying to solve - to give our clients the opportunity to change their lives using a logical approach. Our culture dies when we become commoditized salespeople. I will quit when I can no longer give people a superlative experience.

Success and failure should be viewed for what they are - data. If you have never experienced either, you may be crippled when they finally knock on your door. History is littered with those people that saw failure as world ending and those people that saw that let success kill them. The 27 club being the most obvious list of examples of the successes, while of course likely 10s of thousands die each year after failing.

None of us can say whether those deaths were justified, but we can define how our culture responds to failure and to success. The best answer - with patience. Harking back to the earlier discussion regarding market probabilities, many investment advisors have had great years, and to take profits off the table 'because of macro risks' might fit their culture, but we think that is both short sighted and self serving. Neither one of those traits are traits of a winning culture, and they aren't traits of ours. In a market that has dropped significantly, our view is exactly the same - we will not sell for any reason other than the position is has less opportunity value than something else.

So when we experience a drawdown or a peak in a 13 year bull market, we won't sell to protect the portfolio unless the position fundamentals have changed. To sell a stake in a company to realize a bonus is common in investment advising, but I see it like divorcing a wonderful partner to get a settlement. Why throw away great partners? Good investments are hard to come by, and the money doesn't ultimately matter to our culture as much as finding others that share our passion for logic.

After interviewing dozens of candidates for open positions, passion has become the only criteria I look for, and it cannot be faked. We want people that don't work for money, but to solve problems. If they work for money, they will act capitalistic and any interaction will be a frustrating tug of war. In almost all dealings, I have avoided these types of interactions and people, because they are not solvable problems. You can't moderate that culture, you must adapt to it. So unless you want that culture to overcome your culture, you can't let those people in. In our business's future, we will have such people (likely in portfolio companies), but they will be far removed from any real decision making.

Sales cultures can definitely work in other businesses, but not ours. French artist Henri Matisse explains culture in his description of colors- "Colors' chief goal is to be in service of expression rather than mimicking reality." And it's the viewer's job to interpret what that expression is. We must create a culture that serves our own expression and is an expression of what is within us and not a reaction to external stimuli. And we must learn each day how better to express ourselves. Free expression allows someone to say, I know you have your reality, but here's mine.

Let's revisit markets:

Inflation worries? Inflation for who? If there weren’t more money in the economy, a rise in prices would be significant. But since there’s more money, higher prices are warranted. So the big question is - do the people/corporations in the economy save or invest the amounts received? For inflation not to kick in, all that money should be invested, especially in new hires. When demand is high, prices rise. The lower levels of wealth really feel the inflation because prices have risen on them greatly but have no new wealth. That divide is insurmountable now - those people will systematically get poorer from here if these trends persist. Stocks included, they don’t have the ability to stay invested, allowing for giant opportunities for the wealthy. It’s only a matter of time before the wealthy stop saving and begin putting the wealth into the businesses. But, a low probability scenario is - lower classes don’t want to work. They could go on strike. That could be the true fate - that they stop working out of frustration that everything they do replenishes wealthy.?If that happens we will sell. Until that happens, there's no threat of a sustained downturn in sight.

Finally, quite obviously, the decision to invest, not invest, or sell is a decision to be patient. If you buy, the patience comes both in developing the strategy of buying - analyzing your investment philosophy, executing the purchase at the lowest price, and then holding it irrespective of other opportunities. If you sell, the patience comes in determine the appropriate time to sell, selling the asset for the highest price, and then finding something that has better opportunity. Above, we considered several examples of doing these things - in purchasing undervalued stocks at all times, and not purchasing NFTs. The best purchases are obvious, and you could own them for over 10 years whether the market is open or not. Such a scenario is not describing a patient mindset, but a mindset of being comfortable with owning something worry free over 10 years.

Patience overwhelmingly influences culture, as the proper culture must be developed through expressing what comes from within, that must be both identified and interpreted. To identify your culture, its strengths and weaknesses is a powerful competitive edge, but to continually develop those strengths and weaknesses is absolutely a choice. That choice requires tremendous learning, struggle, and, if done properly, can enable tremendous reward for all involved. Our goals are to continuously develop a culture that obsesses over providing unparalleled experiences.