Two recent releases on the Disney+ streaming service, both relating to The Beatles, have prompted a few thoughts about idea generation in investing.
Rushing investment ideas does not tend to end well. In other words, hitting the buy button before you believe enough boxes on the checklist have been checked off is not ideal. That is not to say the due diligence process should require a defined amount of time. The reality is that some ideas will ‘click’ easier than others based on one’s circle of competence.
In music, the contrary is possible. In the docuseries The Beatles: Get Back, there is footage that captures the moment that Paul McCartney ‘doodles around’ and created the beginnings of a classic song under the pressure of a tight deadline. That song was Get Back. What is so striking about that scene is witnessing McCartney strumming on his guitar and searching for the riff, while creating the main melody of the verse. He would struggle over the next few weeks to backfill the tune with lyrics and arrive at an incredible final product. The main takeaway here for a long-term value investor is that cramming the due diligence within a confined, quick timeline should be avoided. This approach may work in music but rushing investment decisions tends to mean missing critical risk factors. The problem is particularly acute in a situation where a windfall of cash is received and the investor has an inadequate watchlist of ‘ready’ candidates – pressure is felt to make decisions within a reasonable time, especially in a rising market with inflation humming in the background.
The second point is related to the first, and that is the understanding that an investor in stocks does not create anything. The Beatles created amazing content; investors on the other hand are relegated to identifying things already in existence and moving capital between them. There is perhaps labor involved in searching for investment candidates and the due diligence process for each selection, but ultimately investors react. Is there a discrepancy that can be capitalized on by buying and then waiting for the gap between price and value to close? If there isn’t a price-value disconnect, or if it has closed, is the investment still compelling from the standpoint of intrinsic value being likely to compound at a rapid clip going forward? Investors should try to stay humble by realizing their limitations and giving due credit to blind luck.
Simplicity can be powerful in forming cogent decisions. In the docuseries McCartney 3 2 1, Paul McCartney stated that a key reason many of their songs were memorable was the need to remember them due to the lack of portable recording devices in the 1960s. That got me thinking about technology and how its use can help or hinder the investment decision making process. Could it be that The Beatles’ tunes would have turned out to be less catchy had smartphones been around? Warren Buffett did not grow up with Microsoft Excel to build valuation models for his stock picks. Perhaps that made him a better thinker and investor than if he could rely on technology since childhood. I use financial models to value companies and it’s possible they weakened my capabilities in some ways. Being able to save a spreadsheet substitutes the need for memory and the need for making mental calculations. Mental math is like a muscle that needs to be trained. For most, it will be slower and less precise than being able to perform sensitivities on an intricate model. And yet it can be argued that having to think through a valuation in your head or on the back of an envelope leads to a firmer grasp of the numbers.
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