Tuesday, 15 January 2019

Wild man and markets

I recently finished Daniel Crosby's Behavioral Investor. It was a great read. I especially enjoyed the first half which talked more about us humans and our brains than anything to do with stocks and bonds.

The first chapter is titled Sociology. According to Google, sociology is defined as the study of the development, structure, and functioning of human society. I haven't come across to many investment books that talk about sociology.

Our ability to create social narratives distinguish us from the rest of the animal kingdom. What on earth does that mean? In short, humans like stories. As Crosby puts it, "To put it bluntly, we make up stories about the world and then act as if they are real:" This has enabled us to create many things such as money, laws, country borders, the stock market and so on. None of this stuff is "real". Crosby sums it up well, "our shared belief in them and behaving as though they are real brings about orderly civilizations steeped in mutual trust."

It is this unique ability that causes us to make very poor investing decisions. Because of our "complex" thoughts we are victim to self-deception and irrationality. We follow popular opinion and belief. We want to fit and/or boost our egos. Think about it... You have argument with someone and you are in possession of facts that completely destroy their hypothesis. Often this will not change that someone's mind. We remark in jest that "facts are obviously optional". Your opponent either doesn't want to look bad by conceding the argument or they simply ignore the facts as they contradict a widely held belief (even if that belief is obviously false!).

So to sum it up in easy to understand terms. We suck at investing. Why? Our brains are wired to reason in social rather objective terms (see paragraph above). Therefore, before we even think about investing we need to understand human nature.

In the chapters that follow, Crosby shows us how to go about this but those ideas will be for another blog post. I have also included a link to the book below. It is worth buying. (It is not some silly affiliate link or anything like that).

(As an aside, after reading this book I think I was able to explain how Donald Trump made it to the White House...)

Wednesday, 9 January 2019

Woolworse

Drama. Plenty of it. Woolworths (or "Woolworse") has cribbed someone's product design. Ouch. The evidence is damning and Woolworths have pulled the product from its shelves. They will then wait it out until people get over it. Life will go on.

As a Woolworths shareholder and SME owner, I am pretty disappointed. I expect better. Woolworths lives behind this squeaky clean ethical image. Of course, people make mistakes and in this case, there was no doubt a couple of individuals who decided to rip off a product. I am sure there were some nice corporate bonuses involved too.

There is a point to all this. If we look at the investment universe that is available to us, we have two choices we either invest in companies that we don't always agree with or we invest in nothing and put our money under a mattress. We sacrifice some of our beliefs to ensure we don't end up on the street one day. People who view the world in black and white have a hard time living with this. There are many shades of grey in this world.

So yes, we own companies such as Anheuser-Busch, Imperial Tobacco, British American Tobacco... heck some would even argue Facebook is one of these "evil companies" now.

The way I deal with the "guilt" is by supporting causes that are close to my heart. For example, we have just launched a reusable coffee cup exchange in South Africa. In short, I believe that you should focus on sorting out your retirement etc at a macro level then make a difference in the world at a micro level. I believe that over time as more and more of us make small changes in our lifes, over the long term companies would need to adapt. And since I am an investor, I love the long term.

What about you? Has this ever crossed your mind?


Monday, 7 January 2019

Talking Coffee

I have an interest in a coffee roasting company. Long story short, the team there found out that I blog about investing and have made a writing comeback. They then asked me if I ever wrote about them and I must admit I had never thought about it before. The reality is the business is part of my investment portfolio. Tonight, I thought I could do two things:

  1. Finally acknowledge the coffee team
  2. Relate a few quick lessons about non-listed investments I have learn't
I remember my varsity days. We were all going to have our businesses. We were going to do what we wanted and work on our own terms- conquer the world. We all graduated and reality set in. We got jobs. 

Ironically, having your own business is anything but getting to do what you want or working on your own terms. It is not for everyone but it can still be fun. I am fortunate enough to have exposure to consulting, small private company investments and listed investments. So what's different?

In my experience:
  • Private companies trade on much lower multiples than listed companies (basically, R1 income in a small private company is usually worth less than R1 in a large listed company)
  • I was used to working with degree'ed individuals and a lot of CA/CFA types (who are great too :) ). It has been a breath of fresh air working with people from diverse backgrounds. We have really colourful characters that include a trainee pilot, a musician and an actor to name a few
  • Small private companies are much more management intensive. Even though I have a non-operational role in the business, I find that I spend more time on my private investments than looking at MTN or AVI shares. On the coffee side, I have a passion for coffee so often it doesn't even feel like work.
  • Being involved in running a small business means you need to consider everything. You are the lawyer, the accountant, the strategist and so on. Everything is just on a smaller scale. I feel like I have picked up some great general business skills that are applicable to listed investing.
Should you rush out and start/buy a private company? Only you can answer that. The same rules apply, though. You need to ask:
  • Will a private investment add value to my portfolio?
  • Will it diversity my income stream?
  • Do I have enough time to run/monitor it?
  • Do I have/need good business partners I can trust?
For me, I have been able to get involved in some great businesses and work with some awesome people. It is a welcome challenge. In particular, the coffee roasting business is in an industry that I love.