Evolve or Die

Ian Cassel Blog, Educational 5 Comments

Every successful investor has gone through situations that have rattled them to their core – that made them question their strategy, their abilities, everything. It happens after something you really believe in lets you down. Don’t worry, you aren’t alone. It happens to EVERYONE.

In 2007, fund manager Mark Sellers, gave a speech to a group of Harvard MBA students titled: So You Want To Be The Next Warren Buffett? How is Your Writing?

In his speech, he lead with, “I’m not here to teach you how to be a great investor. On the contrary, I’m here to tell you why very few of you can ever hope to achieve this status.” 

If you read past the sentence above you would eventually make your way to a list of seven traits which Sellers believed were imperative to becoming a great investor. But before he gave the list he had another clenched fist gut shot to the aspiring investor: 

“The way I see it, there are at least seven traits great investors share that are true sources of advantage because they can’t be learned once a person reaches adulthood. In fact, some of them can’t be learned at all; you’re either born with them or you aren’t.” 

Here is an abbreviated list of the seven traits: 

  1. Ability to buy stocks while others are panicking and sell stocks while others are euphoric. 
  2. Obsessed about playing the game and wanting to win. 
  3. The willingness to learn from past mistakes.
  4. An inherent sense of risk, based on common sense. 
  5. Confidence in their own convictions and ability to stick with them, even when facing criticism. 
  6. Keep both sides of their brains working, details and big picture.  
  7. The ability to live through volatility without changing your investment thought process.

16 months after giving this speech Sellers closed down his fund. 

“I truly love the art of investing, but managing people’s money has taken a large toll on my demeanor and psyche,” Sellers said in a letter obtained by The New York Post. “I feel downright miserable.”

“I have found myself neglecting my personal life (friends, family) in order to put 100% of my energy into managing the fund. I can’t continue to do that; it isn’t healthy.”

Sellers and his wife would move to Grand Rapids, Michigan and open several bars and restaurants and live a much happier life. 

“The restaurant-bar business is a lot more fun. It’s not the day-to-day volatility and stress of managing other peoples’ money. This seems like a walk in the park to me after doing that.”

We all have our breaking points. 

On a rainy day in 2016, I had planned to tell my wife I was burnt out. I was done. 

I had been a full-time private investor for seven years, and before that it might as well been full-time. Sitting at a computer staring at stocks was all I’ve done since I was a teenager. I had carved out a nice little niche in microcap stocks. But I felt unfulfilled. I was becoming the person I didn’t want to be. A miserable lonely person. 

It had been a few years since I had a winner, and the longer it went the shorter my time frames became. The hardest part about owning a concentrated portfolio isn’t financial risk but thinking about your positions too much. The shorter your time horizon the more you need your positions to perform to your expectations. The market doesn’t work this way. 

Whether it’s relationships or stock positions, when you hold anything too tight you are going to lose them. You grip them tight because you want them to be who you want them to be instead of who they are. In reality you should be doing the opposite. Give them some room to breathe. Some room to disappoint you but still hold on. Some room to exceed your expectations but not sell. 

An hour before my wife was supposed to come home that day I snapped out of my mental rut. I wrote down a list of things that I needed to do to keep me in the game. 

I sold my biggest loser in the portfolio. Your biggest loser is always the position you think about most. It has the most mindshare. I had to free up my mind and some capital to focus on new things.  

For 15 years I had always been a very concentrated investor – holding 3-4-5 companies. This is a great way to start investing but it’s an easy way to end your career in investing. Sellers himself was primarily in three companies when he shut down his fund. The fewer positions you hold the more you think you are in control when in reality you have less control. You have no room for error. 

Investing is a mind game. You need to have a win, even a small win, in the portfolio every so often to keep you positive and sharp. If you are in a rut as a concentrated investor, increase your chances of winning and add a couple positions. It also lets you breathe and your positions breathe a bit. You aren’t staring at them “needing a win”. You can just let it happen. I added three more positions.

The third area that I changed was I stopped thinking like a scientist and started thinking like an artist. In the first few years of my career I was mainly a story stock investor. I paid very little attention to fundamentals. I then pivoted to mining for a few years and then life sciences, and then to quality businesses. 

In 2013-2016 my portfolio was very bland and one dimensional. All different shades of the same color. There was no evidence in my portfolio of my earlier years, where quite frankly I did very well. So I repainted my portfolio and used all the colors I had at my disposal. Today my portfolio looks like a hot mess. There are mining companies beside life science companies beside story stocks beside deep value companies and quality businesses.  But this is my painting and it’s who I am. 

After I made these changes I started winning again. I got my confidence back.  Great investors evolve or go extinct. Don’t spend the next 10 years bragging about the returns you had 20 years ago. Stay in the game. Challenge your convictions. Make your own painting. 

“Why do I come in at 7 every morning, can’t wait to get to work. It’s because I get to paint my own painting and I like applause.”

– Warren Buffett

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Comments 5

  1. A lot of wisdom in your post Ian, and your experience closely parallels mine.

    My one difference:

    7. The ability to live through volatility without changing your investment thought process.

    I’d say instead develop a strategy that has as a major element the ability to profit from, rather than suffer from or cope with, volatility. Some very high percentage, perhaps 90%, of major daily price moves, are emotion driven because humans are emotion driven. Emotion driven rationalized by one-sided facts.

    And a month later, most major daily moves have been erased by subsequent moves. So an investor either benefits from that volatility or suffers from it. Volatility is an expression of human emotion.

    The tool I use — daily chart, Keltner channel. I just buy in an uptrend but under the Keltner channel, and just sell in a downtrend above the Keltner channel. But there are lots of ways to accomplish a similar objective — 9 EMA crossing 110 EMA. But lots and lots others. And like everything, these are not 100% reliable. They just increase the probabilities.

    The key similarity — not making decisions based on impulse, and rather having some objective standard to trigger decisions. Otherwise my tendency is to take losses fast, and in my case, because of the amount of fundamental research I do, I’ve lost a lot more money by taking losses and thus missing out on big profits than I have being wrong. This applies, in my case, just to the one month to two year time frame. At least hundreds of thousands of dollars more. At very least.

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  2. A very sincere and honest article, Ian.

    There is a popular value investing parable in which an investor sticks to his style despite an extended period of underperformance but is rewarded handsomely in the end. Variations of this story include the determined investor who keeps buying more with every 52 weeks low.

    Since there is a large degree of hubris in stock picking – “I’m right and Mr. Market is wrong” – the Vindicated Stubborn Bastard story is always well received.

    I bet for every vindicated investor there are multiples who stick with a strategy which is way beyond the expiration date (for them, not necessarily for everyone).

    Very happy your strategy evolved Ian but part of me liked it better when you stuck with your concentrated names … which weren’t the same ones as mine. 😉

    Leave some shares for the rest of us!

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  3. Solid article and it’s my first time on your blog. Those are important traits for investors to succeed. I think I can check most of them off for myself and for the ones I can’t, I hope I can learn/improve. I like to have a healthy level of skepticism in all of my investment decisions to avoid confirmation bias and other psychological pitfalls.

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