A few weeks ago I sat down with former Marine veteran, Dr. Andrew Wittman for Episode 7 of the Value Hive Podcast. Dr. Wittman’s resume is impressive. He’s the founder of the Mental Toughness Training Center, and author of the book, “Ground Zero Leadership: CEO of You”.
A Marine Corps infantry combat veteran and former federal agent, Andrew holds a Doctorate of Philosophy in Theology. He’s a guest lecturer at Clemson University, and co-hosts the radio call-in show, “Get Warrior Tough.”
You can check out the podcast here.
There’s three main lessons I took from my conversation with Dr. Wittman:
- Be Proactive, Not Reactive
- Know Your Mission and Purpose
- Clear Thinking = Clear Communication
We’ll break down each lesson in this three-part series. If you don’t read any further, here’s the main point:
Proactive thinking enables you to take advantage of Mr. Market’s radical mood swings. Reactive thinking victimizes you to the swaying emotions of short-term oriented crowds.
Let’s dive in.
Lesson #1: Be Proactive, Not Reactive
“A large part of reducing stress and inoculating yourself against the kind of pressure that stymies performance is being able to see ahead and execute. In order to anticipate problems or mere course changes, one must raise their perspective to the 50,000 feet level.”
Dr. Wittman explains in his article, From Reactive to Proactive, that the key difference between proactive and reactive thinking is preparation. This has myriad investing applications. Where does proactive vs. reactive show most?
Sudden share price movements.
Example of Reactionary Thinking
Imagine you’ve invested in Company XYZ at $10/share. You thought the company was cheap because an analyst slapped a high P/E ratio on a Year 10 earnings figure. They then spat out $25/share in valuation. This doesn’t sound like proper due diligence, but it’s what you did.
Two weeks later the stock plummets 25% on a single trading day. What do you do?
At this point you’re lost.
Your anchor? Some random analyst’s price target based on a flimsy, haphazard price-to-earnings figure.
In other words, you have nothing to fall back on. No due diligence. No understanding of the business fundamentals. You have zero idea how to interpret the recent price action. If it was an earnings miss, you wouldn’t know if it was long-term issues or short-term hiccups.
The only thing you’re left to do is wait for that analyst’s interpretation of the share price drop. That’s a position of weakness — of relinquished control over your investment process.
This is reactive thinking. Reacting — not responding — to price actions movements. Letting Mr. Market dictate your next moves instead of the other way around. It’s a losers game. What happens if you own your investment process? What happens if you shift from reactive to proactive thinking?
Example of Proactive Thinking
Let’s use the same Company XYZ and the same price of $10/share. But there’s one major difference. Before you bought XYZ, you did your due diligence. You learned about the business, it’s drivers and its historical financials. You know what levers they can pull to speed up growth, cut costs and return capital to shareholders.
In fact, you’ve mapped a simple, five year discounted cash-flow model and estimate that the company’s worth $25/share. Assuming the company meets conservative growth estimates.
You accumulate a position, confident that Mr. Market is mispricing Company XYZ by $15/share.
Two weeks later you wake up and find XYZ down 25%. Shares are trading hands for $7.50. Your initial cost-basis is $10. What do you do? Do you react or do you respond?
You check the news. It’s an earnings miss.
“These things happen”, you mumble to yourself as you read the earnings call transcript.
One sentence catches your eye halfway down the page. Management says the earnings miss was due to a delay in a purchase order from one of their customers. The relationship with that customer remains strong. Management also expects business to resume as normal in the coming quarters.
Not only have you done your due diligence on the company, but now you know that the earnings miss was a temporary headwind. In other words, one quarter doesn’t affect the long-term cash flow power of the business. After all, you modeled out the next five years. You have some reasonable estimation of what those cash flows look like.
After finishing the earnings call, you don’t see any reason why the stock should be down 25%.
So you buy more. Confident that your 60% discount is now closer to 70%. Future returns look even better.
The Power of Proactive Thinking
There’s tremendous power in proactive thinking. Proactive thinking turns Mr. Market from maniacal to generous. From unruly to opportunistic. It’s all in how you frame your mind. But before you do that, you have to earn the right to use proactive thinking.
It isn’t something you “decide” to do. You earn it through deep work on individual businesses. Understanding what makes them work. Understanding the valuation and embedded expectations within the current stock price. Then, only then, can you have a proactive mindset and use Mr. Market to your advantage.
If you haven’t already, listen to the interview here.
We’ll touch on the other two lessons later this week.
That’s all I got for today. Shoot me an email if you come across something interesting this week at firstname.lastname@example.org.
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Student of value investing for over 13 years spending his time in small to micro-cap companies, spin-offs, SPACs and deep value liquidation situations.