Averaging down is a skill. Done well it can be your greatest asset. Done poorly it can mean disaster.
“Investing in stocks is an art, not a science, and people who’ve been trained to rigidly quantify everything have a big disadvantage.” – Peter Lynch What I like about the microcap space is that it is full of people with unique backgrounds. Diversity brings many new perspectives and unique insights,
“Investing in stocks is an art, not a science, and people who’ve been trained to rigidly quantify everything have a big disadvantage.” – Peter Lynch
What I like about the microcap space is that it is full of people with unique backgrounds. Diversity brings many new perspectives and unique insights, and I’ve found many of the successful investors, and greatest business leaders or intelligent fanatics, have been those with no formal investing, business or finance training. They are, or were trained as, engineers, designers, lawyers, doctors and a multitude of different vocations.
I fit right in, my background is unique. My first life was as a musician. I began playing guitar when I was 10 years old. The first few years I’d practice at least five hours a day. I was in the school jazz band and had a few of my own bands. I had dreams of becoming a rock star. My favorite guitarists attended Berklee College of Music so I thought if it was good enough for them, it’s good enough for me. I auditioned and was accepted.
With odds of roughly 1 : 5,000 in making a decent living as a performing musician, I cut my losses as a professional guitarist and settled on studying music therapy. You probably don’t even know what a music therapist even does. I would be surprised if you did. I’ll spare the details (you can read them here).
Fortunately, I found my true passion in investing while at college. I remember toting around Graham & Dodd’s Security Analysis to my music therapy classes where my peers and teachers gave me funny looks. Whenever the teacher was writing something on the board, my face was generally stuffed in that book.
Unlike almost all of my favorite guitarists who attended Berklee, I actually lasted all four years and graduated.
It might seem counter-intuitive, but music has actually helped me tremendously with investing. Music has helped me understand the art part of investing (or any endeavor). There are many parallels between the two that I’d like to share.
Shamelessly Steal From the Best
Pablo Picasso once said, “Good artists copy. Great artists steal.” He also said “art is theft.”
Let me explain.
First, to become an artist of any sort, the shortest path in developing your skills is to stand on the shoulders of giants. To steal isn’t to mindlessly repeat or mimic, although that is a good first step. That cover band you heard at the bar last weekend, they are copying. In other words, they have chauffeur knowledge not Planck knowledge and your ear can tell. There is nothing wrong with copying, it just is not true art.
Stealing is channeling the essence or emotion the artist was trying to convey which includes all of the subtleties. In music if I am trying to steal from Jimi Hendrix, I have to get the rhythms and phrasing just right. Anybody who’s heard Hendrix can tell the phony from the real deal or true artist. You have to understand why he chose which notes and internalize his sound. Then, and only then, can you truly add Jimi Hendrix to your toolbox and “see further.”
I think Mohnish Pabrai gets this, contrary to his simple ideas on cloning (you’ll only be a good investor by mindlessly cloning forever), and other great investors have mastered stealing. Steal from everyone you can, but like Munger recently said, “You really need to do it from some guy that is operating in smaller places and finding places with more advantage.”
— Sean Iddings (@iddings_sean) March 1, 2017
Understand their philosophy, try it and internalize them.
Which brings me to my next point. Art is merely bringing a new perspective to something normal or everyday. People like when familiar things are rearranged in novel new ways. Victor Wooten’s rendition of Amazing Grace is a perfect example.
And you’ve heard Munger talk about a few mental models taking up 90% of the freight in becoming a wise-person. The same is with music. All of the greatest of pop hits in western music for the past forty years are essentially the same song with the same four chords (I-V-vi-IV). Taking it further, 80% of all western music is based on the previous progression and this three chord progression (I-IV-V). Every single jazz tune has these three chords (ii-V-I). Learn those chord progressions and you can play almost any song. This video demonstrates this phenomenon with 25 familiar pop hits:
By stealing you are rearranging the familiar, great ideas in new ways. Stealing far and wide helps you find and develop your inner voice.
There are many ways to skin a cat in investing. As you steal from other great investors you start to develop the philosophy that best suits your personality and eccentricities. Take everyone’s best ideas and throw away their bad habits like a banana peel. Let someone else slip over them.
I thankfully threw away the lifestyle choices of many of my musical heroes. I’ve found stealing the habits and behaviors of successful investors and business operators to be much more fruitful.
Surround Yourself With The Best
In addition to stealing, surround yourself with people that are better than you. I had a lot of trouble with this at Berklee and after. I was intimidated by the musicians who were clearly ahead of me technically and I avoided playing with them. My ego was hurt, I wanted to cry and smash my guitar. What a huge mistake.
Take for instance one of the first people I met at school. He was a monster at keys and guitar; I avoided playing with him and he’s now a successful musician today. I also lived with John Petronzio (Road Man and keyboardist of John Brown’s Body). He is one of the most musically gifted individuals I’ve ever met (see below) and great human being to boot. I taught him guitar but shied from playing with him when he played keys.
Any great musician will tell you that they got better not by playing with marginal musicians but by playing with players well beyond their level.
Thankfully I learned my lesson, and I’ve been able to sidestep my ego with investing and business. I get excited talking with investors and business operators who are clearly operating on a much higher level than me. I make sure to shut up and absorb everything they say. I then immediately emulate and steal every good idea they have. Life is too short to learn any other way. A rising tide lifts all boats.
Don’t Compare Yourself To Others
As a musician, I know there will always be someone faster, more articulate, better looking and more creative than me. Anytime those things haven’t driven me to push harder, they have blocked me.
Great musicians don’t compare themselves to others. They compare themselves to who they were, and their abilities, of the previous day and year.
One of my guitar heroes Steve Vai said:
“I believe it’s a law of nature that every person is different, with a unique capacity for self-expression. As a result, we all have the ability to be unique in the way we express ourselves musically. A lot of people don’t believe this, and find themselves copying others and sounding like someone else. They end up frustrated with themselves because they feel they can’t “slack up” with the competition. But how can you compete with individuality? The only one you’re competing with is yourself. When you can identify with your individuality and accept and respect it, peace of mind comes in. The first falsehood to shoot down is the fear or belief that you lack uniqueness.”
Likewise, there will always be someone making money faster than you as an investor. Compare your performance with your past self, it is much more constructive. I try to take other people making money quicker as more fuel to learn and build up my intuition on intelligent fanatics and great businesses. Then when opportunities arise, I’ll be fully prepared to act aggressively.
It’s All About Focus
I’ve known zero great musicians who were not totally absorbed in their music. Every single one is laser focused to the point that is all they do, talk and think about.
They also have the ability to practice deliberately every single day. I had an ensemble class every Thursday at 8am for a semester. The room was on the same floor as individual practice rooms. I remember seeing one drummer there every week. Anytime I walked by that practice room at any other point in the week, he was there. You could hear his progress.
Great artists aren’t like the gym rat who shows up to the gym and runs through the motions. I’m talking pushing themselves past their limit every single day for up to ten hours straight. Investors can also deliberately practice as pointed out by Chip Maloney here.
I’ve learned to focus with investing. Thankfully it flows a little easier than music. I’ve decided that investing is my main focus and have voluntarily put guitar on the back burner. My guitar abilities have significantly regressed and that is okay.
The Space Between
Claude Debussy once said, “Music is the space between the notes.” Jazz trumpeter Miles Davis added, “It’s not the notes you play; it’s the notes you don’t.”
I grew up trying to play every note as fast as possible. My friends called it noodling. It sounded cool to me, but sure wasn’t music.
My early investments were also focused on doing something. Investing isn’t about the buys and sells. It’s about the space between the transactions. Can you defer gratification long enough, or short enough, to maximize returns for each given investment?
Most importantly, a majority of your investment returns will be determined by which companies you avoid. Are they out of your circle of competence? Is the business model poor in quality? Is management unethical?
Almost all music teachers I’ve ever had have said music is all about contrasts. “All You Need is Love” by the Beatles is a common example used to describe rhythmic contrast. It uses short, choppy phrases as the basic rhythmic element in the verse:
There’s nothing you can do that can’t be done.
Nothing you can sing that can’t be sung.
Nothing you can say but you can learn how to play the game…
The chorus switches to longer note values:
All you need is love,
All you need is love,
All you need is love, love,
Investing is about contrasts, too. You have to balance between the times of in-action with aggressive action. It often takes only a few ideas to compound wealth over a lifetime, and when they come, you have to act aggressively.
I like the story Charlie Munger recently gave about his grandfather:
“What Grandpa Ingham use to tell her is, ‘there’s just a few opportunities you get in a whole life’. This guy took over Iowa when the black topsoil in Iowa was cheap. But he didn’t get that many opportunities. It was just a few that enabled him to become prosperous. He bought a few farms every time there was a panic you know. And leased them to thrifty Germans, you couldn’t lose money with leasing a farm to a German in Iowa. But he only did a few things. And I’m afraid that’s the case…you’re not going to find a million wonderful ideas.”
It’s not about the destination, it’s about the journey
To be an artist, athlete or craftsman is a lifelong journey. I’ve studied music for nearly two decades, went to school for music and I can tell you I’ve scratched only the surface. If it weren’t for investing, I’d probably would have dug much deeper. I’ve been investing for fewer years and still have so much to learn.
For investing, it’s not about getting multi-baggers, it is about the journey. The process is the most challenging, yet rewarding part about investing.
If you want to be successful at anything, you have to be open to continuously learning the rest of your life. I’ve found the more efficient I become at learning new things, the more enjoyable my guitar playing and investing journeys become.
You also have to surrender to the fact that you’ll never fully master your trade. But, I’ll die trying.
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Averaging down is a skill. Done well it can be your greatest asset. Done poorly it can mean disaster.
Nicolai Tangen is the CEO of Norges Bank Investment Management, Norway's $1.4 trillion sovereign wealth fund.
Dilution is the subtle erosion of ownership. This hidden, persistent addition of new supply of shares leaves shareholders with less and less of the company’s value. Dilution, like inflation, is a silent killer of returns.