Monday, November 10, 2014

East Coast Asset Management's Q3 2014 Investment Letter: Grove of Titans

Link to: Grove of Titans
In our third quarter letter you will find our portfolio update and general market observations. Each quarter we highlight one component of our investment process. This quarter, in the section titled Grove of Titans, I will discuss the attributes of what we think constitutes an enduring business.
I recently invited Peter D. Kaufman, CEO of Glenair, Board Member of the Daily Journal, and Editor of Poor Charlie’s Almanac, to come speak to the Security Analysis class I teach at Columbia Business School. Peter Kaufman is an exceptional business operator and is also one of the great multidisciplinary thinkers of our time. On the topic of multidisciplinary learning and rational decision-making, Peter shared the approach he uses, which he refers to as his “three-bucket” framework, to arrive at universal principles that have high utility. Peter shared:
Every statistician knows that a large, relevant sample size is their best friend. What are the three largest, most relevant sample sizes for identifying universal principals? Bucket number one is inorganic systems, which are 13.7 billion years in size. It's all the laws of math and physics, the entire physical universe. Bucket number two is organic systems, 3.5 billion years of biology on Earth. And bucket number three is human history, you can pick your own number, I picked 20,000 years of recorded human behavior. Those are the three largest sample sizes we can access and the most relevant.
Peter then walked the class through how compounding and the law of reciprocity can be applied to these data sets and therefore applied to reason. A light immediately went on. Applying questions to these three large data sets simplified and strengthened how I was organizing and applying mental models. Kaufman’s approach provides a framework of general laws that have stood the test of time – invariant, unchanging lenses that we can use to focus and arrive at workable answers. A multidisciplinary framework helps shift the human paradigm to one of an empathetic perspective, as if we were looking from the outside in. Just as I began this letter with the three foundational insights of Dialectical Materialism, we want to be constantly searching for these types of invariant strategies that can serve us in rational decision-making.
Seeing the Forest and the Trees:

One of the most limiting biases for individuals attempting to make sense of complex systems is that they are a part of the systems. When you are part of the system it becomes increasingly difficult to see the forest for the trees. Each individual tree’s uniqueness and complexity can lead to confusion and ambiguity. The key is to attempt to step outside of the system and see the forest and trees for the essence of what they are. How can we find these groves or islands of simplicity in an infinitely complex world?

Jason Zweig of the Wall Street Journal asked Charlie Munger to describe a key attribute of Berkshire Hathaway’s evolution over the years. His response: “There isn’t one novel thought in all of how Berkshire is run. It’s all about what [Mr. Munger’s friend] Peter [Kaufman] calls ‘exploiting unrecognized simplicities.” Peter Kaufman was sitting with Charlie during this interview after the recent Daily Journal annual meeting. The entire quote that Charlie was referencing was one that Peter attributes to a 28 year old writer for Sports Illustrated named Andy Benoit, who wrote these words to describe the essence of a particular quarterback’s genius: “Most geniuses—especially those who lead others—prosper not by deconstructing intricate complexities but by exploiting unrecognized simplicities.” This quote captures the essence of genius and can serve as a roadmap to the Grove of Titans.

Finding unrecognized simplicities requires one to step outside the forest, outside of the human system to see and measure holistically without biases