Sunday, 5 June 2016

Further to previous post about Guy Spier...

Re-reading a post from the terrific Base Hit Investing blog the other day I came this quote from Buffet's 2004 Shareholder Letter.

"If only one variable is key to a decision, and the variable has a 90% chance of going your way, the chance for a successful outcome is obviously 90%. But if ten independent variables need to break favorably for a successful result, and each has a 90% probability of success, the likelihood of having a winner is only 35%. In our zinc venture, we solved most of the problems. But one proved intractable, and that was one too many. Since a chain is no stronger than its weakest link, it makes sense to look for – if you’ll excuse an oxymoron – mono-linked chains.”

This quote highlights what I touched on in an earlier post: my belief that dealing in predictions of the future is fertile grounds for disaster. Now obviously investing by its very nature involves predictions, but Buffet's quote above hits the nail on the head. What I don't like to find myself inviting into the equation is over-optimism. Ironic that Buffet ran into trouble with Zinc, like Pabrai and Spier did with Horesehead Holdings. 

Patience is so often the key in investing. We know the "mono-linked chains" will eventually show up, it's keeping the over-optimism at bay and not settling for anything less that is the hard part. 

No more babbling on now, the math alone can do the speaking. I just want to reinforce the need to add a little humble scepticism to our hopes for (and predictions of) the future. As Spier wrote, "many more things can go wrong with an investment than we can possibly imagine".

Now remember, keep restlessness and over-optimism at bay because.....

0.9 x 0.9 x 0.9 x 0.9 x 0.9 x 0.9 x 0.9 0.9 x 0.9 x 0.9 = 0.35%

Here's hoping that I don't end up mesmerised by any 'long chains'.

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