A year ago, I launched the Macro Ops investing podcast, Value Hive. I wrestled with starting such a venture. Who would listen to me? How would I snag guests for the show? Am I a good interviewer? Not to mention I hate how I sound and tend to wrestle with a slight stutter.
Yet record I did. I released my first podcast on 12/16/2019. Since then, I’ve published a new podcast each of the last 56+ consecutive weeks.
The lessons I’ve learned from interviewing amazing guests are invaluable. That’s why I started the podcast in the first place. I was selfish and wanted to learn as much as I could from those I admired most while sharing what I learn with others.
In this essay, I share with you the five most valuable lessons I’ve learned from a year of podcasting.
Thank you to those that gave my podcast a shot. Whether you’re a weekly devotee or a one-episode stand, your time is valuable, and you chose to spend a portion of that listening to my attempt to learn.
We’re just getting started. See you in 2021, MO Hive fans!
Investing Lesson 1: Inefficiencies Come From Insights & Obscure Markets
Financial markets are generally efficient most of the time. Advanced computing and machine-learning algorithms have turned traditionally inefficient spaces like spin-offs and microcaps into efficient frontiers.
There are two ways investors can find inefficiencies:
- Differentiated Insights on generally efficient markets
- Willingness to buy obscurity in generally inefficient markets
Two podcasts come to mind when thinking about these two ideas:
Differentiated Insights on Generally Efficient Markets
Cliff Sosin is one of the most differentiated thinkers in the game. He develops insights that others miss in markets that are generally efficient. His fund size prohibits him from finding inefficiencies in obscure, smaller markets. Yet somehow, he smashes the S&P 500.
How does he do it? Put simply, he thinks about companies differently than most investors. Look at his three most prominent positions (as of the latest 13F filing):
- Carvana (CVNA)
- Cardlytics (CDLX)
- At-Home, Inc. (HOME)
These aren’t obscure or overlooked investments. CVNA was one of the most popular momentum investments of 2020. CDLX is a multi-billion dollar enterprise, and HOME is a billion-dollar specialty retailer.
Sosin exploits temporal inefficiencies by thinking about such ideas differently than everyone else. He recognized what the future would look like if the business executed as he thought it could. He bet big on these predictions, seeing something that others couldn’t.
There are three ways to create inefficiencies in generally efficient markets:
- Create a hypothesis for the world or a company that looks vastly different than what we see today
- Determine what a company would be worth if that hypothesis came true
- Bet big when you think you have a decent shot at being right
Willingness To Buy Obscurity
The other way to find inefficient opportunities is to buy where others aren’t willing to enter. This leads us to frontier and emerging markets. Places where you need Google Translate to read annual reports.
Nobody embodies this mentality better than Thomas Bachrach of PFH Capital. Bachrach ventures deep into obscurity. He’ll invest in micro-cap Polish software companies and Egyptian call centers. Most of the time, he’s one of the only US-based investors in the stock.
Then there’s Dave Waters from Alluvial Capital. Alluvial invests in extremely illiquid global companies. It’s not uncommon for Dave to invest in a company trading a few shares a day (if that!).
This form of inefficiency is similar to what Buffett exploited during his partnership days. Companies were trading below net cash. Monopolies were selling for <10x earnings.
You don’t need differentiated insights in these markets. You need a strong stomach.
Investing Lesson 2: Invest In What Excites You, Not Just What’s Cheap
I interviewed over 50 investors last year, and they all had one thing in common: they invested in what excited them. Whether it’s Andrew Walker with media companies, @FoolAllTheTime with semiconductors, Alex Jones with industrials, or Shomik Ghosh with enterprise software. They all shared the same thread of excitement in what they’re researching.
I can’t emphasize enough how important that is for an investor’s longevity. When I started investing, I hunted for net-nets and deep-value situations. This led me to “old economy” businesses like industrials and commodity manufacturers without a differentiated product.
That’s not to say these aren’t good businesses, or investors can’t make money on these ideas (they can!). But I found myself struggling to read a 10-K or an investor presentation.
I know I’ll ruffle some feathers when I say this, but I consider the time I spent laboring through those 10Ks and pitch decks wasted time. Sure, I learned about a business I wouldn’t have otherwise done. But if that business and its product/service don’t excite me, what good is that knowledge?
Instead, that same time should’ve been spent learning about what excited me.
This game’s beauty is that we constantly evolve and refine the answer to what gets us excited.
What excites me today might not excite me in twenty years. And I hope that’s true! It means I’m refining my process and honing my craft.
Like a woodworker learns to love crafting certain pieces of furniture, so investors learn to love analyzing certain businesses and industries.
Investing Lesson 3: Know Your Circle of Competence & Learn To Say “I Don’t Know.”
I’ve read the phrase “know your circle of competence” hundreds of times. Yet, the claim didn’t mean anything to me until I started my podcast.
After interviewing a few investors, I realized they all lived this concept. The circle of competence isn’t a hard-and-fast boundary line. The investors I interviewed couldn’t precisely define where their circle of competence ended. Yet they had the power to say “I don’t know” when they didn’t know. In turn, saying “I don’t know” allowed them to invert and find where that boundary line ended.
Learning to say “I don’t know” frees you from trying to know everything about everything. Spoiler alert, you can’t. Instead, admit you don’t know and then, if you’re interested, take the time to learn. You’ll gain respect for your honesty, and you’ll become more competent in the process. It’s a win-win.
Investing Lesson 4: Create An Investment Process & Always Optimize
A process is vital to an investor’s success. Creating a repeatable process for analyzing new ideas allows an investor to determine the quality of a new idea quickly. In turn, the investor can easily rank a new concept to their watchlist or current portfolio holdings.
No person emphasized this more than Brian Feroldi at The Motley Fool. Brian’s investment checklist gives each company a score out of 100. The higher, the better. This means investors can quantitatively see which companies rank higher than others based on predetermined metrics.
The checklist accomplishes a few things necessary for investment success:
- Allows rapid comparability and hierarchy of ideas and potential portfolio entrants
- Enables investors to invest in their highest-ranked ideas at points of widest intrinsic value discount
- Pinpoints portfolio laggards and replace them with higher-scoring options
Not every investor I interviewed had this exact process. But each investor had a systemized way of thinking about new investments, existing holdings, and their portfolio. They emphasized portfolio optimization because you should continually reinvest in your favorite ideas and continuously reduce/sell your worst bets.
Investing Lesson 5: Have Interests Outside Investing
I ask each guest the same question at the end of each podcast: “If you could have dinner with one person (past or present), who would it be and why?”
It’s not a glib question. I ask this because I want a glimpse into each guest’s life outside investing.
It’s important to have interests and passions outside financial markets. Whether it’s chess, science fiction, psychology, or hiking in nature, you need something to distract you when you feel overwhelmed and burnt out.
Brad Hathaway, for example, loves playing tennis. Connor Haley enjoys poker and watching the Cowboys lose (sorry, Connor!). And Aaron Edelheit wrote a book on taking one full day off away from stocks/investing.
Like investment styles, find what works best for you, whether cooking, knitting, weightlifting, or taking online courses in exciting subjects.
Take dedicated breaks now so you can still play the game later in life.
The podcast feels like an MBA in business and investing. Each guest offers insights on their failures, successes, and best practices. The investing lessons learned from 57 interviews far exceed the five mentioned in this essay.
I can’t thank my guests enough for their appearance on the podcast and their willingness to commit 1+ hours out of their day.
I’m excited for 2021 and another year of podcasting. We’re just getting started at Macro Ops, and we can’t wait to bring our community along for the ride.