Owner's Manual
If it's not a no-brainer, it's a no.
When I started this Substack, I wasn’t sure what it would become. Now it’s starting to become clearer. This Substack is my way of documenting my path to a concentrated portfolio of durable businesses with healthy reinvestment engines that I can own for a long time.
If that’s something you’re interested in, let me tell you more about what to expect.
The Goal:
The goal is to outperform VTSAX in the long term - 5 years at least.
“one year is far too short a period to form any kind of an opinion as to investment performance, and measurements based upon six months become even more unreliable. One factor that has caused some reluctance on my part to write semi-annual letters is the fear that partners may begin to think in terms of short-term performance which can be most misleading. My own thinking is much more geared to five year performance, preferably with tests of relative results in both strong and weak markets.”
-Warren Buffett
For more on my thoughts on measuring performance, you can read this post:
Expectations
Let’s set expectations up front. You should not expect Brainless Investing to help you:
Get rich quick
Eliminate the need to do your own research
Outperform the market every year
It will help you:
Learn and become a better investor
Generate new ideas to research
Outperform the market in the long run
I strongly believe in François Rochon’s rule of 3:
One year out of three, the stock market will go down at least 10%
One stock out of three will be a disappointment
One year out of three, the portfolio will underperform the index
If you’re not OK with the above, a concentrated portfolio isn’t the right strategy for you. Indexing might be a better choice.
My Investment Philosophy:
I want to invest in companies that I can understand, which have sustainable competitive advantages, run by trustworthy management, and available at a discount to intrinsic value. There won’t be many of these opportunities available, so when I find them, I expect to bet big, and aim to hold them for a long time.
Exceptional performance is the result of a few great investments held over a long time.
“In 58 years of Berkshire management, most of my capital-allocation decisions have been no better than so-so…Our satisfactory results have been the product of about a dozen truly good decisions - that would be about one every five years.”
-Warren Buffett, 2022 letter to Berkshire shareholders
Mohnish Pabrai has guessed at what those decisions might be:
What they all have in common is that they were held for a long time.
To have long-term compounding in our favor, we need the right kind of business.
We need companies with sustainable advantages and long runways.
Chuck Akre sums up what I’m looking for with his idea of a 3-legged stool:
Price still matters.
At the moment, there’s a lot of willingness to pay high multiples for the types of businesses I’m looking for.
I see people using Warren Buffett’s transition from a ‘value’ investor to a ‘quality’ investor being used as justification to pay up for good companies.
Paying too high of a price, even for a great business will hurt your results. For more, read this article:
Opportunities will be rare.
The market will occasionally offer up a great business at a significant discount, but it’s not going to happen very often. Because of that, when the market presents the right business at the right price, I’m going to bet heavily.
The portfolio will likely have between 10 and 20 positions.
Investing is hard. You have to believe you’re right and everyone else is wrong.
‘We have no system for having automatic good judgment on all investment decisions that can be made. Ours is a totally different system. We just look for no-brainer decisions. As Buffett and I say over and over again, we don’t leap seven-foot fences. Instead, we look for one-foot fences with big rewards on the other side. So, we’ve succeeded by making the world easy for ourselves, not by solving hard problems.’
-Charlie Munger
Where do we find these no-brainers and one-foot fences? Here are a few examples:
During times of market panic - the good companies sell off with the not-so-good ones
During company-specific events - don’t you wish you bought Chipotle during the E.coli scare? These can create unpopular large cap opportunities.
In unloved and misunderstood industries. Like coal, or auto dealers.
The goal is not to outsmart the market. It’s to make large, asymmetric bets when given the opportunity.
“It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent,”
-Charlie Munger
What’s up with the name?
The idea of “brainless investing” comes from the Charlie Munger quotes above, mixed with David Einhorn’s thesis that passive investing has broken the markets:
‘I view the markets as fundamentally broken…Passive investors have no opinion about value. They’re going to assume everybody else has done the work.’
— David Einhorn, president of Greenlight Capital
Combining the ideas of the markets being driven by momentum, passive flows, and algorithmic trading, with the need to find ideas that are obvious led to the name.
It is not meant to imply that investing is easy or should be done in a mindless manner.
It’s a reminder to myself that I should not try to outsmart the market, to be a harsh grader, and to pass on anything that isn’t obvious.
Follow along!
Now that you know what to expect, if it sounds interesting to you follow along. Just click the subscribe button below: