Lessons to Become a Better Investor

Welcome to the 91st Pari Passu Newsletter.

Today, I have a lighter writeup for two reasons:

1. I sincerely hope most of you are not in the office; if you are, I would encourage you to skim this email and try to leave early to enjoy a nice summer Friday evening. We have many cold weeks ahead when we will dive into complex topics!

2. Over the past few weeks, we have had some complex write-ups. I would read again and truly master the below writeups in order to get the most out of next writeup (will be one of the most exciting writeups of the year):

   1. Double-Dip Explained Simple

   2. The Untold Story of ESL Investments and the Great Decline of Sears

   3. Special Purpose Entities

Let’s go back to today’s edition. In this year’s Norges Bank Investment Management Investment Conference, the world’s top financial professionals shared their ideas and knowledge about a simple topic: how to become a better investor. Today, we will explore some of the key insights and takeaways from the conference.

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What is a good investor?

Here are some ideas, per members of Norges Bank Investment Management’s portfolio teams:

• A good investor combines passionate curiosity with the relentless pursuit of truth

• A good investor truly understands the market and their portfolio, how to enter and exit positions, and how to effectively manage risk

• A good investor is confident enough in their conviction and is able to make contrarian bets that may disagree with the consensus

Each of these perspectives provide valid, broad-level descriptions of what makes a good investor. Being a good investor means a lot of different things, and developing a perfect definition of a “good investor” is quite difficult. However, a two attributes shared among all high performing investors: adherence to a developed philosophy and mastery of risk management.

Philosophy

Every high performing investor has a thorough and developed investment philosophy for which they base their decisions upon. At Bridgewater Associates, per CIO Greg Jensen, this philosophy consists of three main parts: fundamental, systematic, and diversified. ‘Fundamental’ refers to an understanding of the true drivers of the market; ‘systematic’ refers to the application of the fundamental understanding to develop explicit rules to be debated and tested; ‘diversified’ refers to a strategy to hedge against being wrong – in Bridgewater’s case, portfolio diversification is their method of balancing risk.

Developing a sound investment philosophy ensures that investors make rational, consistent decisions on the market. Furthermore, it allows investors to make unbiased decisions that are unaffected by short-term influences such as emotional and mental states. Howard Marks, founder and CEO of Oaktree Capital Management, calls on investors to develop a unique investment creed. Despite the different terminology, his ideology is very much similar to that of Jensen’s. The first step, Howard Marks states, is to decide whether one wants to be average or to be above average, where striving to be above average forces one to take on the risk of being below average. In other words, Howard Marks believes that all investors should develop their own definition of success and outline the risks that they are willing to take to achieve it. Being above average in investing is very difficult, but those who are able to forge a sound investment philosophy, over years of experience and compounded learning, will be the ones that come out on top.

Risk Management

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