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The Benefits of Investing in Low Hurdle Ideas

We’ve reached the final part in this three part series from my conversation with Dr. Andrew Wittman. If this is your first time reading this series, check out parts one and two. Also, if you haven’t listened to my podcast with Dr. Wittman, check it out here. I promise that’s the last time I’ll bug you about it!

Before we dive in, let’s review the three main lessons:

    • Be Proactive, Not Reactive
    • Knowing Your Mission and Purpose
    • Clear Thinking = Clear Communication

Today we’ll cover the third lesson, Clear Thinking = Clear Communication. As always, here’s the main takeaway:

Clear thinking translates to clear communication. If you’re not thinking clearly, you won’t communicate clearly. Writing down your investment ideas helps you think clearly, which in turn helps you communicate clearly.

Let’s bring this home.

Lesson #3: Clear Thinking = Clear Communication

“The root cause of every real problem is lack of clear thinking” – Dr. Andrew Wittman

Dr. Wittman stressed the correlation between internal thought process and communication ability. If you have a cluttered mind, you’ll have cluttered communication. If you’re not clear in your head, you’ll relay murky messages. These ideas are powerful in the game of investing. As value investors, we need to know why a company’s cheap, its various growth levers and where we might be wrong. If we can’t translate that in a clear and concise manner to others, we shouldn’t invest in the company. Don’t invest in clouded stories. Invest in clear, concise theses.

When it comes to investment writing and thinking, there’s two mantras I like to practice:

    1. Write about simple ideas and simple stories
    2. Write like you’re talking to a fourth grader

Both practices dramatically improved my thinking, writing and communication. It’s one, giant positive feedback loop. Clearer thinking leads to clearer writing. Clearer writing leads to better communication. But like Dr. Wittman said, it all starts in the mind.

Write About Simple Ideas and Simple Stories

The worst performing stock I’ve ever written about was Estre Ambiental (ESTR). The company went public via SPAC merger at the initial price of $10/share. I found ESTR around $6/share. Already 40% below IPO price.

“That’s fine”, I thought to myself. “SPACs always sell-off after IPO.”

What happened next was nothing short of insanity. I spent the next three weeks (multiple hours each day) trying to understand the story and the valuation. Not three weeks writing my thoughts and ideas. Three weeks thinking about how this idea makes sense.

Not good!

I should’ve stopped right there. Why? I wasn’t clear on what the thesis was. I wasn’t clear on how this stock was cheap. I wasn’t clear in my thinking. In the spirit of Mohnish Pabrai, ESTR didn’t, “hit me over the head with a 2-by-4!”

Complex investment ideas can easily clutter your thinking. That’s not to say you can’t make money investing in complex situations. But I prefer Buffett’s “low hurdle” strategy. In doing so, I increase my chances of focusing on clear ideas.

Takeaway: Pick simple ideas and low hurdles. Ideas should hit you in the face. If not, wait for the next pitch.

Write Like You’re Talking to a Fourth Grader

If you can’t explain an investment idea to a fourth grader, rethink your thesis. Investing is an intellectually stimulating endeavor. There’s the thrill of finding an off-the-beaten path idea that nobody’s seen. The shot of dopamine when you work out a special situation. Sometimes that mires the true power of investing: finding simple ideas.

I became a much better investor, thinker and writer when I stopped trying to sound smart. Instead, I focused on simple ideas that could work under conservative assumptions. I don’t want five things to have to go right for my idea to work. Complexity doesn’t show your genius, simplicity does.

Before I dive any further into an investment idea, I ask myself, “could I explain this situation to a fourth grader?” If I can, I will take my research deeper. If I can’t, I pass. Remember, there’s thousands of potential no-brainers out there. Don’t get bogged down by the one, hard-to-understand SPAC reverse merger.

The Consequences of Clearer Thinking

Change brings consequences, emphasizing clear thinking is no different. The first consequence of prioritizing clear thinking is passing on ideas. You’ll pass on a lot more investment ideas. This is a good thing.

Ted Wiliams swung at a handful of pitches in his strike zone. He’s also the only player to hit over .400 for an entire season. But we have an advantage over Ted Williams. There are no looking strikes in markets. Mr. Market can throw us pitch after pitch. We don’t have to swing if we don’t want to.

Like Ted, we can wait until a pitch (i.e., investment opportunity) comes right down our sweet spot. When it does, we’ll be ready. We’ll have a clear mind, clear thinking and clear communication.

That’s all I got for today. Shoot me an email if you come across something interesting this week at brandon@macro-ops.com.

Your Value Operator,

Brandon


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