How to Update Your Investment Process (w/ Dr. Gio Valiante)
MAX WIETHE: When do you reevaluate your process, or when do you stick to your guns and say, I'm right, and they're being irrational. In the face of what appears to be a rationality, how do you judge your own process? GIO VALIANTE: That's another great question. One of the things I always say is write your process in pencil, not in Sharpie. Because you can't be rigid. Process is something you want to wash, rinse, repeat. It protects us from variability. It protects you from capitulation. It protects you from crises of confidence, but you have to be mentally nimble. If your process hasn't worked, and the question is when do you change your process? Not whether, but when? What does a good process look like? How does one adapt the process while sticking to the principles of it? If you're a value investor, and your strategy hasn't worked, you ask yourself, why hasn't it worked? Am I missing something? Is it just a matter of time? That's the one thing that's interesting about process. This is what I've done with a lot of investors and with conference say, okay, well, I'm going to drop and you're looking around and you're doubling down on your work ethic and you're talking to other people and you're trying to understand the other worldviews and you think you got it. You say, okay, well, I'm going to stick with my process, I trust my process. You want to commit to it, but when the data, whether it's P&L or your performance over the course of time, I always say you don't react to individual events, you react to patterns. If there's a historical pattern, you just keep getting your clock clean and you keep not performing at a high level. That's when you have to ask why. It may be one of two things. Hey, listen, my strategy just doesn't work in this market. I don't recognize this world, okay, then you find a way to put risk around your money. Sit tight, take little risk and wait for things to shift your way. One of the things you don't want to do as a seasoned value investor is try to play a game with what you're not familiar. You don't say, well, everyone's making money this other way, because you're playing someone else's game. We know a lot of sports. In the NFL, for example, if you get in a shootout with the Kansas City Chiefs, you're going to lose. The way to beat certain teams to get them-- how do you get a temporary, you get temporary off of a spot, you make them uncomfortable. You start in the markets trying to play someone else's game just because your strategy's not working, that's a catastrophe. MAX WIETHE: Sometimes, there's force like it could be it's a belly putter scenario. You're forced to relearn a new way to play the game. When do you-- in golf, the rule I'm referring to as you used to be able to anchor your putter to your body, and they said, you can't do that anymore. A whole host of golfers who were high performers, high achievers had to completely relearn something that they've been doing for years, and some of them have gone on to be even more successful after it and some of them not so much. How do you, when it's not that simple, when there's not an actual rule change but you feel like maybe the rules have changed, how do you judge that? GIO VALIANTE: It's really fascinating. There's this old cliché that a shoemaker makes shoes, like you do, you do what you do. In golf, you're a power player, you're a power player. If you're a finesse player, that's in your DNA, we say it's baked in. Then the antimony to that is you always have to evolve. You have to adapt, you have to reinvent yourself. Kobe Bryant as an example. In his youth, he won with sheer athleticism, he evolved because he wasn't a good leader. He was a lone wolf then he became more of a team player than a leader, became a great passer to LeBron James. His DNA remains the same but he's reinvented himself throughout his career. Steve Cohen has reinvented himself throughout his career. Tiger Woods, just won the Masters in his 40s playing really differently than he did in 1997. In '97, it was a power game and now, he's doing with it IQ points. This is what we call an antinomy. The human brain likes to think in binary ways. Do I stay the same, or do I change? Does a shoemaker make shoes, or does a shoemaker evolve? Think of Amazon, Amazon started off selling books. You see, you've got a good platform, and you can innovate and evolve. At the end of the day, it boils down to judgment. That's why in the legal system, the highest form is just judgment, refined judgment, discriminating judgment. How do you know whether to try to play a different game? You have to ask yourself a few fundamental question. Number one, do I have the skill set to play that game? In other words, if I'm going to try to be a power player, can I play that game? If you're a value investor, and you want to start trading in a different style, investing in different style, you better school yourself. If you can't see it clearly, don't do it, but if you can, and you have confidence in it, and when you start swimming in those waters, you're like, oh, I understand the language. This makes sense to me. Then you start investing small amounts of capital, so it's incremental. What I would say is don't go all in. Don't take your portfolio because your strategy's not working, and dump it all into a new strategy and bring in that much risk. I would never, never caution anyone to not innovate, to not change, to not evolve, not reinvent themselves. I would say you have to do with your eyes wide open and in concert with a good coach, or a trusted colleague or talk to your wife or your husband or your best friend, or you better have a dog who likes to hear your stories because if you start making big changes in isolation, playing game with which you are not familiar, the problem is you don't know where the landmines are. You can get good at it early, make money early but if you haven't blown up a couple times with small amounts of money, you're going to blow up eventually, and it'll be a lot of capital. I'll say just when you start to pivot off of your game, if you don't have that second bullet in the holster that second arrow in the quiver as it were, as you learn it, be careful about the amounts of money that you're willing to spend for that education.