Dr. Andrew Wittman on Proactive Thinking & Beating Mr. Market

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.

You’re stuck.

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 brandon@macro-ops.com.

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Brandon Beylo

Value Investor

Brandon has been a professional investor focusing on value for over 13 years, spending his time in small to micro-cap companies, spin-offs, SPACs, and deep value liquidation situations. Over time, he’s developed a deeper understanding for what deep-value investing actually means, and refined his philosophy to include any business trading at a wild discount to what he thinks its worth in 3-5 years.

Brandon has a tenacious passion for investing, broad-based learning, and business. He previously worked for several leading investment firms before joining the team at Macro Ops. He lives by the famous Munger mantra of trying to get a little smarter each day.


Investing & Personal Finance

AK is the founder of Macro Ops and the host of Fallible.

He started out in corporate economics for a Fortune 50 company before moving to a long/short equity investment firm.

With Macro Ops focused primarily on institutional clients, AK moved to servicing new investors just starting their journey. He takes the professional research and education produced at Macro Ops and breaks it down for beginners. The goal is to help clients find the best solution for their investing needs through effective education.

Tyler Kling

Volatility & Options Trader

Former trade desk manager at $100+ million family office where he oversaw multiple traders and helped develop cutting edge quantitative strategies in the derivatives market.

He worked as a consultant to the family office’s in-house fund of funds in the areas of portfolio manager evaluation and capital allocation.

Certified in Quantitative Finance from the Fitch Learning Center in London, England where he studied under famous quants such as Paul Wilmott.

Alex Barrow

Macro Trader

Founder and head macro trader at Macro Ops. Alex joined the US Marine Corps on his 18th birthday just one month after the 9/11 terrorist attacks. He subsequently spent a decade in the military. Serving in various capacities from scout sniper to interrogator and counterintelligence specialist. Following his military service, he worked as a contract intelligence professional for a number of US agencies (from the DIA to FBI) with a focus on counterintelligence and terrorist financing. He also spent time consulting for a tech company that specialized in building analytic software for finance and intelligence analysis.

After leaving the field of intelligence he went to work at a global macro hedge fund. He’s been professionally involved in markets since 2005, has consulted with a number of the leading names in the hedge fund space, and now manages his own family office while running Macro Ops. He’s published over 300 white papers on complex financial and macroeconomic topics, writes regularly about investment/market trends, and frequently speaks at conferences on trading and investing.

Macro Ops is a market research firm geared toward professional and experienced retail traders and investors. Macro Ops’ research has been featured in Forbes, Marketwatch, Business Insider, and Real Vision as well as a number of other leading publications.

You can find out more about Alex on his LinkedIn account here and also find him on Twitter where he frequently shares his market research.