Thursday, May 17, 2018

The Stoic Investor


The redwood is a very interesting tree; it is impervious to most diseases, it can withstand fires, and also has extreme drought tolerance. In many ways, the redwood tree physically demonstrates the virtues of a successful investor, the stoic investor.

I'm often asked what stocks I like or where to invest. Good questions, but they are meaningless if an investor doesn't have the stoic fortitude to actually invest like a farmer. Stoicism, an ancient Greek philosophy of enduring pain or hardship without a display of feelings or complaint, valued virtue as the highest good. The wise were considered indifferent to the vicissitudes of fortune and to pleasure and pain equally. I believe successful investing requires a great deal of stoicism, especially if one is hoping to turn a sapling of savings into a redwood fortune.

From a distance, and in a single moment in time, the redwood is seen as still and massive, but over the course of hundreds of years a multiple of growths and starts have occurred that are imperceptible in the here and now. There have been droughts. Fires. Earthquakes. Meteors. And men. But yet the redwood survives. Without a doubt stoic investing involves mental fortitude, but it also involves pruning.

You can lose the small bets in life, and many of them, but you gotta win the big ones. Winning the big bets is the manifestation of a mathematical formula dubbed the Pareto Principle. In short, amongst a handful of redwood seedlings (the recommendation is 20 seeds) perhaps only one will successfully germinate, take root, and rise to the heavens. The rest are failures. So too is the investing landscape littered with the refuse of an absurdly high mortality rate for true start-ups, and only decreasing marginally with ventures that survive the initial lean years. Even then, successful ventures are typically only sustaining ventures.

Consider for a moment that only about 4% of all stocks drive the market's return over time. That's just about the success rate for a single redwood amongst 20 seeds! Coincidence? I think not. The challenge of course is finding these redwood seedlings early and often in your investing career. Which leads me to what I believe is a great fallacy. The thought process of making no mistakes is flawed; I think of investing along the mindset of having a financial destination in mind, a means to secure it, and being able to change course, tac, as necessary.

As investors, theoretically, we should be indifferent to the underlying security, only interested in its potential Alpha...and this is why passive investing survives but by the grace of active investing. By this I mean passive investing owns too much of the forest floor and not enough of the redwoods. Case in point is Warren Buffett's Berkshire Hathaway, which has soundly beaten the S&P 500, no small feat, over the course of 50 plus years. This is due in large measure to Buffett selecting redwoods over time and sticking with them. Technological innovation, branding, and strong leadership matter; buy redwoods!