Operationalizing an Investment Philosophy
Former CIA Senior Executive Carmen Mefina: Good Thinking & Avoiding Thinking Traps
With my military background and accounting education, I have found the below similar to my own experiences of what has pragmatically worked from battle to accouting & investing in general. For any investor armchair amateur like myself or the prifessional, you should never forget the analyst perch you came from and Carmen Medina grounds you to that fact and if any investor coducts themselves as if they are immune or the know it all be skeptical. As I continue to traverse the investment landscape along with you, take a full accounting of Carmen's instructive approach in becoming a genius investor (again, I have yet to reach the status of such a bold claim and attempting along with you to catalog and “Stand on the Shoulders of Giants.” like Carmen Medina as she contextualizes her experiences.) It is this word contextualize that Joel Greenblatt states subtly but I have found one of the key factors of his investing success. Contextualizing in terms of how Joel Greenblatt explains is on par to Warren Buffett saying margin of safety was Benjamin Grahams most important work. Go back and listen to what follows whenever you hear Joel Greenblatt stating how he contextualizes an idea.
Returning back to the main theme, Carmen Medina is a CIA analyst but it is the “analyst” part that I have come to learn in my amateur studies that successful investment professionals regardless of experience or seniority have operated and built their wealth. Below are some high level take aways from Carmen's instruction and some contextualizing I have done but I encourage you to watch the video when you have the time.
1) Streetlight affect
Drunkard lost his keys and a police officer
Analysts treat the information in front of them as if it represents reality correctly. They don’t know how accurately it represents reality and the percentage that information reflects reality. In comparison to the analyst being an omniscient god vs what you do know & what percentage of everything you should know that you do know. We can only make decisions on what we do know so be humble in the decisions that one makes. Always realize the information in front of you just represents a slice of reality.
2) Trends should not be relied upon solely as forecasting. What happens a moment ago does not affect what happens next. Be an analyst of small things.
Trends are always about the past composed of data points Basing decisions on trends you stand to make a flawed decision. But you must know that you have to use trends and know what the past is telling you. Probability dictate what happens a moment ago but does not affect what happens next. Look at small indicators of change and to observe the future you MUST observe the present very carefully. Be an analyst of small things and non obvious indicators or indications that travels along or correlates closely (something that is not a direct indication to the phenomenon you are trying to look at and understand.) Through charting I like to look at an hourly 63 period simple moving average and drilling down to individual industries on a weekly monthly and quarterly basis akin to Stan Drunkenmiller’s the best “Economist He knows analogy” as well as looking at the federal reserve report of Weekly Economic Indicator and Commitment of Traders report.
3) Most things don’t happen by chance.
When we use the phrase that something happened by chance we are saying we do not understand the causality chain that led to an event. You are saying there is know way I could have known so therefore I am not responsible for how I could know.. instead replace that with I do not yet understand the causality chain. Exponential causality Thinking Fast and thinking slow will help better understand. We tend to think linearly ie a leads to b leads to c. Trend lines do not take into account exponential causality. Reality a leads to a multiple set of consequences and those lead to their own multiple consequences. Quantum Theory also dictates that something in the future can affect the past. I think of when companies do their own forecasting and make decisions on expected outcomes. Also think of the Buffett transitive dice. Michael Maubossin skill vs luck book.
4) Worst case scenarios happen.
Policy makers conflate the worst case scenarios presented and think to themselves that events are unlikely. Just because you say something is worst case does not mean it is unlikely. Work extremely hard at separating worst case scenarios from unlikely thinking.
5) If you are explaining you are losing.
Particularly when an argument is being had. You need to have competing stories and examples. Analogs and metaphors versus explanation of technicalities
6) You never run out of bullets.
Life happens stuff happens and they find a way to keep on going despite what you are working on analytically via your linear forecasting counted down to the last nail. Step back swallow a dose of humility and realize the enemy will never run out of bullets and things will not happen the way you have laid it out on your spreadsheet. Relates to Ben Graham Warren Buffett preference to being roughly right versus precisely wrong. Also
7) Emotions can KILL
Going back to the individual industry historical returns this gives a good sentiment about the market’s thinking. Sticky prices theory where you compare 10Ls and 10Qs to identify any changes in reporting as part of your analysis. Ken Fisher usage of Price to Sales and his book super stocks. Philip Fisher’s qualitative assessment of individual companies. Steven Crist thoughts about the parimutael sysrtem. And Charlie Munger’s latticework of heuristics and behavioral finance. The world is made of humans and humans are very emotional.
Survival Strategies. Good Thinking
Construct & Constantly Revise an Analytical Landscape.
Helps avoid the streetlight affect. How well do you know the other area? You have a tool most important for shifting attention so that you are not ignoring areas that could be considered important. No matter what tool you use, you will make it a crutch.
Apply a Category System of some kind.
First step in analysis should be categorizations.