“We think being a better investor relies on several core concepts. First, keep costs to a minimum. Costs are corrosive and eat at your returns like the most aggressive flesh-eating disease. Second, know what you want to invest in and know what you won’t invest in. The former should be one-tenth the size of the latter. Third, empty your emotions at the door. Getting emotional in down markets can lead to truly catastrophic decisions. Last, invest in quality and for the long term. You don’t see many (any?) billionaires who made their money on betting against things over the long term. Are they occasionally correct? Yeah. But even a broken clock is right two times a day.”
Nintai Partners Annual Report
“NP Internal Investment Fund”
February 2004
I recently discussed investing with senior citizens at an investment conference. Each of these individuals was living a comfortable retirement thanks to their investments. We began defining the most important things in investing. That made me think it might be helpful to create a list of things that have made me (and people I’ve learned from) a better investor. Without further ado, here they are.
It’s less what you invest in and more what you won’t invest in.
At Nintai, we have a detailed set of criteria to identify companies we would like to partner with over a decade or longer. It keeps our investment universe to around 250 US and European companies. While many people are fascinated by who these companies are and how we selected them, we think it’s more important to understand that we don’t feel comfortable investing in roughly 99.8% of all publicly traded companies. Our concise watch list doesn’t say much about the companies on it, but the names not on the list tell us how little we know about so much of the investment world and how focused we are on what we know. It’s essential to keep a list of things you want in an investment and, equally important, what you don’t.
What you can control is extremely small in size and scope.
It’s incredible watching CNBC or Bloomberg how many experts there are on TV or radio predicting recessions, no recession, thoughts on rising (or falling) interest rates, predictions on stock prices, etc. None of them seem to recognize that nearly nothing that happens in the economy or stock market can be controlled or even accurately predicted. Successful investors know that the amount of control or understanding they have in their investment process is minimal. At Nintai, we focus on the areas we know we can control. These include our emotional responses, intellectual biases, and working with objective data that helps us better understand a portfolio holding’s business or estimated intrinsic value.
Most of your knowledge only makes your investment process worse.
Most of the data we obtain on our computers, Bloomberg stations, or televisions adds little to our investment process. How corn futures are being impacted by poor weather in Poland or what Elon Musk is purchasing in the after-hours markets generally helps us not all in managing our investment portfolios. We have found that investment houses that build enormous models based on collecting, collating, and analyzing vast amounts of data don’t perform all that well. We recommend investors stick to data that can help them understand a portfolio holding’s business model, competitors, and ecosystem. This information can help investors better understand the value behind their investments and whether it is best to hold, add, or reduce their position.
The power of doing nothing is nearly always underestimated.
Any mutual fund investor can look at their latest report and be startled to see turnover rates in the triple digits for many actively traded funds. It’s not rare to see an entire fund portfolio turn over completely in a six to twelve-month period. All of this action is generally not worth it because returns still do not outperform a simple index fund. At Nintai, we’ve found it’s best to find a well-managed quality company at a reasonable price and hold on to it for a decade or two. Why not let your holding’s management do the heavy lifting for you? Also, where does an investor locate so many companies to add to the portfolio? We are lucky if we find one or two companies each year that merit our investment partners’ hard-earned investment monies.
Some things require complex thinking. Investing is not one of them.
When investors hear fund companies discuss the need for triple-leveraged synthetic MBS high-yield funds, they should lock their wallets and disconnect their computers. Some of the most egregious investor losses have been produced by very intelligent financial gurus without a lick of common sense. Successful investing does not need to be overly complex or use advanced financial models. In most cases, a portfolio consisting of a handful of index funds will outperform most actively managed money.
The road to financial loss is littered with overly complex systems managed by such luminaries at Long Term Capital Management (two Nobel prize winners!). Most investors do not need such expensive financial services and their associated poor returns. At Nintai, we advise personal investors to keep it simple - either a relatively focused portfolio of 15 - 20 high-quality companies or a portfolio consisting of 3 - 4 broad index funds.
Your greatest ally in investing is time. Your greatest enemy is cost.
For the average personal investor, two areas enormously impact their returns. Coincidentally, both of them are areas where investors have the most control. These are the time horizon of the investment and the associated costs with that investment. The ability to lengthen your time horizon can be the greatest ally in maximizing your investment returns. It helps reduce your tax bill (going from short-term to long-term capital gains and lets your portfolio holdings compound value year after year.
Emotional control beats intellectual gifts nearly every time.
You often hear about how some famous investor has such a high IQ or can do discounted free cash flow or depreciation calculations in her head. Undoubtedly, some extremely smart people manage money in the financial markets. But over time, I have come to believe that those individuals who can keep their emotions in check but aren’t MENSA members are generally better suited than those who are the opposite. We have seen repeatedly that extreme market moments can trigger terrible decision-making for nearly any investor - genius or not. The investors with the best long-term performance records are the ones who keep their heads, continue looking at the data, and purchase shares when at their lowest or sell when at the highest.
Optimistic people make better long-term investors.
I can’t say I’ve seen a lot of empirical data to support this claim. Still, we think optimistic people are better investors than those chronically down on the markets, economy, or political economy. Over the long term, we believe it isn’t in the best interests of investors to bet against the United States or its market-based capitalistic system. Over time, our country’s business leaders have done a reasonable job of allocating capital and creating value for shareholders. Will there be down cycles, and will some economic areas flame out? You bet. But we think a well-tempered optimism is the best emotional attribute for a long-term investor.
Conclusions
Over thirty years in investing and business management, I’ve had tremendous learnings passed on or even beaten into my intellectual frameworks. Are these all of them? Hardly. But they are some of the more powerful. We usually go back at the end of the year and look for data that supports or contradicts these. You are never too old or experienced to learn from your actions or the people/systems you interact with as you invest. Keeping it simple, having your emotions in check, investing for the long term, and watching your costs are four great (and relatively simple) ways to be a better investor.
DISCLOSURE: Mr. Macpherson and Nintai Investments have no positions in any stocks mentioned and have no plans to buy any new positions in the stocks mentioned within the next 72 hours.
Nintai Partners Annual Report
“NP Internal Investment Fund”
February 2004
I recently discussed investing with senior citizens at an investment conference. Each of these individuals was living a comfortable retirement thanks to their investments. We began defining the most important things in investing. That made me think it might be helpful to create a list of things that have made me (and people I’ve learned from) a better investor. Without further ado, here they are.
It’s less what you invest in and more what you won’t invest in.
At Nintai, we have a detailed set of criteria to identify companies we would like to partner with over a decade or longer. It keeps our investment universe to around 250 US and European companies. While many people are fascinated by who these companies are and how we selected them, we think it’s more important to understand that we don’t feel comfortable investing in roughly 99.8% of all publicly traded companies. Our concise watch list doesn’t say much about the companies on it, but the names not on the list tell us how little we know about so much of the investment world and how focused we are on what we know. It’s essential to keep a list of things you want in an investment and, equally important, what you don’t.
What you can control is extremely small in size and scope.
It’s incredible watching CNBC or Bloomberg how many experts there are on TV or radio predicting recessions, no recession, thoughts on rising (or falling) interest rates, predictions on stock prices, etc. None of them seem to recognize that nearly nothing that happens in the economy or stock market can be controlled or even accurately predicted. Successful investors know that the amount of control or understanding they have in their investment process is minimal. At Nintai, we focus on the areas we know we can control. These include our emotional responses, intellectual biases, and working with objective data that helps us better understand a portfolio holding’s business or estimated intrinsic value.
Most of your knowledge only makes your investment process worse.
Most of the data we obtain on our computers, Bloomberg stations, or televisions adds little to our investment process. How corn futures are being impacted by poor weather in Poland or what Elon Musk is purchasing in the after-hours markets generally helps us not all in managing our investment portfolios. We have found that investment houses that build enormous models based on collecting, collating, and analyzing vast amounts of data don’t perform all that well. We recommend investors stick to data that can help them understand a portfolio holding’s business model, competitors, and ecosystem. This information can help investors better understand the value behind their investments and whether it is best to hold, add, or reduce their position.
The power of doing nothing is nearly always underestimated.
Any mutual fund investor can look at their latest report and be startled to see turnover rates in the triple digits for many actively traded funds. It’s not rare to see an entire fund portfolio turn over completely in a six to twelve-month period. All of this action is generally not worth it because returns still do not outperform a simple index fund. At Nintai, we’ve found it’s best to find a well-managed quality company at a reasonable price and hold on to it for a decade or two. Why not let your holding’s management do the heavy lifting for you? Also, where does an investor locate so many companies to add to the portfolio? We are lucky if we find one or two companies each year that merit our investment partners’ hard-earned investment monies.
Some things require complex thinking. Investing is not one of them.
When investors hear fund companies discuss the need for triple-leveraged synthetic MBS high-yield funds, they should lock their wallets and disconnect their computers. Some of the most egregious investor losses have been produced by very intelligent financial gurus without a lick of common sense. Successful investing does not need to be overly complex or use advanced financial models. In most cases, a portfolio consisting of a handful of index funds will outperform most actively managed money.
The road to financial loss is littered with overly complex systems managed by such luminaries at Long Term Capital Management (two Nobel prize winners!). Most investors do not need such expensive financial services and their associated poor returns. At Nintai, we advise personal investors to keep it simple - either a relatively focused portfolio of 15 - 20 high-quality companies or a portfolio consisting of 3 - 4 broad index funds.
Your greatest ally in investing is time. Your greatest enemy is cost.
For the average personal investor, two areas enormously impact their returns. Coincidentally, both of them are areas where investors have the most control. These are the time horizon of the investment and the associated costs with that investment. The ability to lengthen your time horizon can be the greatest ally in maximizing your investment returns. It helps reduce your tax bill (going from short-term to long-term capital gains and lets your portfolio holdings compound value year after year.
Emotional control beats intellectual gifts nearly every time.
You often hear about how some famous investor has such a high IQ or can do discounted free cash flow or depreciation calculations in her head. Undoubtedly, some extremely smart people manage money in the financial markets. But over time, I have come to believe that those individuals who can keep their emotions in check but aren’t MENSA members are generally better suited than those who are the opposite. We have seen repeatedly that extreme market moments can trigger terrible decision-making for nearly any investor - genius or not. The investors with the best long-term performance records are the ones who keep their heads, continue looking at the data, and purchase shares when at their lowest or sell when at the highest.
Optimistic people make better long-term investors.
I can’t say I’ve seen a lot of empirical data to support this claim. Still, we think optimistic people are better investors than those chronically down on the markets, economy, or political economy. Over the long term, we believe it isn’t in the best interests of investors to bet against the United States or its market-based capitalistic system. Over time, our country’s business leaders have done a reasonable job of allocating capital and creating value for shareholders. Will there be down cycles, and will some economic areas flame out? You bet. But we think a well-tempered optimism is the best emotional attribute for a long-term investor.
Conclusions
Over thirty years in investing and business management, I’ve had tremendous learnings passed on or even beaten into my intellectual frameworks. Are these all of them? Hardly. But they are some of the more powerful. We usually go back at the end of the year and look for data that supports or contradicts these. You are never too old or experienced to learn from your actions or the people/systems you interact with as you invest. Keeping it simple, having your emotions in check, investing for the long term, and watching your costs are four great (and relatively simple) ways to be a better investor.
DISCLOSURE: Mr. Macpherson and Nintai Investments have no positions in any stocks mentioned and have no plans to buy any new positions in the stocks mentioned within the next 72 hours.
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