One of the things that really hurt Apple was, after I left, John Sculley got a very serious disease…It’s the disease of thinking that a really great idea is 90% of the work. And if you just tell all these other people here’s this great idea, then of course they can go off and make it happen. And the problem with that is that there’s just a tremendous amount of craftsmanship in between a great idea and a great product. – Steve Jobs
What does Steve Jobs have to do with our investment process and Value Ideas in Action? We believe that Steve Jobs’ concept of the idea disease, as expressed in the above quote, is quite relevant to investors.
Just like the craftsmanship that is required to turn great engineering ideas into successful products, investment success is built on more than great investment ideas. Yet, in many parts of the investment world – and the media that cover it – there is little incentive, time, or competence to devote to the intricacies of the entire investment process, including not only idea generation but also position-sizing and other vital portfolio management decisions.
To make matters worse, even the presentation and discussion of investment ideas is too often superficial and lacking in second-level thinking – to borrow Howard Marks’ important concept. The end result is a proliferation of and obsession with investment ideas that are rarely great and where other vital elements of the investment process are left out. Over time, these developments distort the nature of investing and can lead to inferior capital allocation decisions within a society.
In our view, successful investing is not about hundreds of superficially researched ideas, with little follow-up and no accountability. It is about focusing on the most compelling ideas on the basis of value versus price, making judgments on probabilities and payoffs, deciding on appropriate position-sizing within a portfolio, and then constantly evaluating and adjusting positions according to changes in price, fundamentals and portfolio considerations. In short, investing is a process.
Value investing is simple to understand, but difficult to implement.The hard part is discipline, patience, and judgment. – Seth Klarman
So, in our view, successful investing starts with great investment ideas (great on the basis of value versus price, not popularity). But, give two investors the same great ideas and they are likely to experience vastly different investment outcomes. We therefore believe that great investment ideas are a necessary but insufficient element of a successful investment process.
Vital additional elements include the initial position-sizing of an idea, deciding when to sell or buy more, how to manage cash, and other portfolio decisions. In order to be successful, an investor therefore needs to not only have great investment ideas, but has to turn these ideas into action within a portfolio. Over time, the performance of this portfolio will ultimately determine the investor’s reality.
These vital elements are what we call the investor’s craftsmanship. We believe the above words of Seth Klarman illuminate the intangible attributes behind tangible actions such as selling a security or buying more of it. In that sense, differences in discipline, patience, and judgment among investors will invariably lead them to have different investment outcomes – even if they start off with the same investment ideas.
Value Ideas in Action is our attempt at this craftsmanship. It represents a framework for turning individual investment ideas into reality in a live model portfolio. The end result, we hope, is not only a better reflection of the nature of investing, but also accountability for performance, an attribute which is too often an afterthought in the investment industry.
If you are an investor seeking not only compelling global equity ideas, but also a framework for turning these ideas into reality, our team at Value Ideas in Action looks forward to sharing our craftsmanship with you and serving you throughout the investment process.