Jim O’Shaughnessy and Adam Townsend

Adam Townsend and Jim O’Shaughnessy on Investing, the Markets, Past, Present, and Future

Watch their full chat on Periscope

Key Takeaways

  • Find an investing process you can commit to and let it work
    • Test strategies against as much market data available and look for how often does it beat the benchmark and by what magnitude?
      • And keep in mind, nothing ‘always’ works
  • Train your mind to think in probabilities
    • Deterministic thinking leads to premature certainty, your brain stops seeking and thinking and instead starts proving your beliefs
  • The narrative comes after a stock price moves, not before
    • The best momentum is the one that has no narrative yet
  • Keep a journal to master your emotions and counter mind games
  • If you aren’t interested in analyzing stocks, low-cost index funds are the way to go
  • The best investors are dispassionate, persistent, view failure as learning opportunities, and are unbelievably curious

Intro

Books, People, and Resources Mentioned

Picking Strategies

  • Find an investing process you can commit to and let it work
    • Test strategies against as much market data available
      • How often does it beat the benchmark and by what magnitude?
    • And keep in mind, nothing ‘always’ works
      • “Anybody who tells you that he or she isn’t gonna lose money with a fairly reasonable degree of frequency is lying to you” – Jim O’Shaughnessy
  • Many decisions in life are made by algorithms and actuarial tables
    • That said, humans feel the need to have that final input they think ‘makes the difference’
  • Bear in mind, a lot of people know how to buy stocks, few know how to sell stocks
  • Finally, if you aren’t interested in analyzing stocks, low-cost index funds are the way to go

Think Probabilistically

  • “We are deterministic thinkers living in a probabilistic world and sometimes mayhem can ensue” – Jim O’Shaughnessy
    • A common trap is to ask for specific predictions and demand certain answers, especially that people equate uncertainty with weakness
    • Deterministic thinking leads to premature certainty, your brain stops seeking and thinking and instead starts proving your beliefs
  •  “The greatest deception men suffer is from their own opinions” – Leonardo da Vinci
    • Avoid letting your ego override things

Watch Out for Narratives

  • The narrative comes after a stock price moves, not before
    • A stock may behave favorably, but the reason won’t be clear till after the move
    • The best momentum is the one that has no narrative yet
  • Normally, market participants have heterogeneous views on a stock so its price remains stable
    • Then a narrative takes over and peoples’ opinions become homogeneous, this is what bubbles and crashes look like
      • That said, narrative and analyst coverage is what drives in retail activity and  pushes prices up (or down)

Master Your Emotions

  • “One doesn’t emotionally override anything” – Jim O’Shaughnessy
  • Your current beliefs and emotions can alter your memories without you realizing it
    • In investing or in life, people should journal to counter mind games
  • Don’t attribute human qualities to stocks (e.g., loving a stock)
  • Looking at a stock price 10 times per day is akin to gambling and is no way to create wealth
    • “What a market does on day to day basis is 100% noise” – Jim O’Shaughnessy

Machine Learning

  • Machine learning is a lot less complicated than people think
  • One can be acutely aware of what they don’t know, but it’s the unknown unknowns that get you
    • Testing historically and continuous research reveals some unknown unknowns
  • We live in a society where information consumption challenges the Shannon limit
    • Pattern recognition helps differentiate real trends from biases
      • “My biggest behavioral bias is being a human being. I corrected it by becoming a quant” – Jim O’Shaughnessy

On Stock prices and Buy backs

  • Though a controversial and politicized topic, buybacks are just a form of returning cash to shareholders
    • That said, a company should have good financial strength, as opposed to borrowing money, in order to do buybacks
  • Consistently expanding and overtaking shouldn’t be the goal
    • If you don’t have anything to buy with that money, your best return is buying yourself” – Adam Townsend

Elections and the Economy

  • The USA is a republic, not a democracy. Thus, the bet isn’t on a particular political party or ideology
    • In a republic, you elect people you think will use their best thinking on an idea
    • In a democracy, you elect people that reflect what you want to happen
  • As long as America remains relatively free, the rule of law is enforced, and people can freely start companies and pursue occupations, then it remains a great place regardless of a republican or democratic president
    • Additionally, it’s still a country that attracts smart talents from around the world, an advantage we should maximize

On Gold and Scarce Assets

  •  “I have always looked at gold as the barbaric relic” – Jim O’Shaughnessy
    • There are other good scarce assets to protect against inflation (e.g., Land, Timber, etc.)
      • Additionally, real estate developers are willing to extend credit at low rates, and you can extract value from renting and Airbnb
  • Jim is still exploring Bitcoin and doesn’t yet have a concrete view

Advice for Investors

  • Read everything you can get your hands on (Start with the books mentioned above)
  • Keep in mind, markets and people change, but human nature barely changes at all over millennia
    • “Arbitraging human nature is the last sustainable edge” – Jim O’Shaughnessy
  • The best investors are dispassionate, persistent, view failure as learning opportunities, and are unbelievably curious
  • As an asset manager, be comfortable with investors hating you for losing money
    • You don’t always have to talk to clients when you are doing well, but you must be continually be talking to clients when a portfolio isn’t performing well

Miscellaneous

  • Jim doesn’t read Zero Hedge
    • We don’t make decisions based on people’s forecasts
  • Patent searches are a good way to discover inventions to be commercialized
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Notes By Mostafa Khaled

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