Seth Klarman Year Ended Letter 2015

When somebody criticizes the stock I hold should I don the lawyer hat and defend it?. Lots of questions arise within me. Are they willing to learn from facts or am I just defending my ego ?. Are they trying to be genuinely friendly to me and trying to protect me ? Are all their stocks doing so well and only mine doing poorly ? Are their stocks in the ruins and they are trying to massage their egos by finding out there is a bigger fool out there ?

Ah whatever the reasons are , I feel that my energy is misdirected. I should not be spending energy on the defence of the stock or to refute the know-it-alls by being another know-it-all. I should rather spend my energy on researching the stock more, If I made a mistake, should sell it and look to live another day. If my process is right I should sit tight. I think Seth Klarman letter of 2015 is like a bible in the above scenario

Src : http://consensus-inc.com/002001i/knay1537/fin-com/0217fm-03.pdf

BAUPOST LIMITED PARTNERSHIPS 

2015 YEAR-END LETTER

“The whole problem with the world is that fools and fanatics are always so certain of themselves, and wiser people so full of doubts.” -- Bertrand Russell

Did we ever mention that investing is hard work – painstaking, relentless, and at times confounding? Separating relevant signal from noise can be especially difficult. Endless patience, great discipline, and steely resolve are required. Nothing you do will guarantee success, though you can tilt the odds significantly in your favor by having the right philosophy, mindset, process, team, clients, and culture. Getting those six things right is just about everything. 

Complicating matters further, a successful investor must possess a number of seemingly contradictory qualities. These include the arrogance to act, and act decisively, and the humility to know that you could be wrong. The acuity, flexibility, and willingness to change your mind when you realize you are wrong, and the stubbornness to refuse to do so when you remain justifiably confident in your thesis. The conviction to concentrate your portfolio in your very best ideas, and the common sense to nevertheless diversify your holdings. A healthy skepticism, but not blind contrarianism. A deep respect for the lessons of history balanced by the knowledge that things regularly happen that have never before occurred. And, finally, the integrity to admit mistakes, the fortitude to risk making more of them, and the intellectual honesty not to confuse luck with skill.

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Value investors must be strong and resilient, as well as independent-minded and sometimes contrary. You don’t become a value investor for the group hugs. Indeed, one can go long stretches of time with no positive reinforcement whatsoever. Unlike some other fields of endeavor, in investing you can do the same thing as yesterday but achieve completely different reported results. In the long run, the research and analysis you perform should overcome market forces; the fundamentals ultimately matter. But in the short run, markets can trump effort and insight. They move in unpredictable cycles, with investors stampeding this way and that. Businesses quickly come in and out of favor, and the same business can be valued by the market very differently in a matter of days, sometimes on the basis of new facts, but often because of mercurial investor perceptions or simply money flows

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It is critical for any investment firm to be built to take a pounding – structurally, financially, and psychologically. Investors must have a patient client base that allows for persistence during a bad year (or years), and an approach that limits risk while maintaining an appropriate balance between greed and fear. Greedily throwing caution to the wind is eventually disastrous, but fear-induced paralysis is not a recipe for success either. Investors must employ an investment philosophy and process that serve as a bulwark against a turbulent sea of uncertainty and then navigate through confusing and often conflicting economic signals and market head fakes. Amidst the onslaught of gyrating securities prices, fast and furious corporate developments, and an unprecedented volume of data, it is more important than ever to maintain your bearings. Value investing continues to be the best (and perhaps only) reliable North Star for those who are able to remain patient, long-term oriented, and risk averse.

While value investing is a demonstrated strategy for long-term investment success, it isn’t like being handed a treasure map. Rather, the value approach teaches you how to make your own map. And even then, the map doesn’t tell you precisely where to dig for treasure: it just points you in the proper direction.

Several years ago, a friend outside the industry asked me to mentor him in Graham and Dodd, and I provided voluminous reading material and coaching. He was intrigued and energized, he said, and declared himself a value investor. Three months later, he informed me that he was giving up. It didn’t work, he had determined. It turns out that not everyone has the patience and discipline to follow the one approach that has been demonstrated to deliver excess returns with limited risk over the long run.

Value investors gain clarity by thinking about their investments not as quoted stocks whose prices whip around on a daily basis, but rather as fractional ownership of the underlying businesses. In Benjamin Graham’s construct, Mr. Market sometimes becomes greedy, overpaying for your shares, and other times fearful, selling you his shares at bargain levels. Successful investors must possess the mindset to take advantage of Mr. Market’s bipolarity, and even come to appreciate it.

Two extremes of human nature, greed and fear, perpetually drive market inefficiency. Fear is primal, the effect of confronting the apparent loss of what you have. While your shares today still represent fractional ownership of exactly the same business as when they traded higher yesterday, people en masse are delivering the verdict that your shares are worth less. It is natural to panic at the possibility of further markdowns. But crucially, you have to find a way not to care or even to relish this eventuality. Warren Buffett has written that one should not invest in stocks at all if uncomfortable with the possibility of a 50% drawdown. The mistake some investors make is to accept the market’s immediate verdict as fact and not opinion, and become disappointed, even frustrated. For investment professionals, trepidation over poor performance can morph into fear of job loss. Career risk thus plays a role in their ultimate, and usually untimely, capitulation; even those who wish to be patient may worry that their employer or client will not share their resolve.

Paper losses can cause people to lose their bearings. When your portfolio is marked down sharply, it’s natural to fear losing the rest. Thinking about your net worth based on the latest stock quotes may superficially seem appropriate, because if you sold your shares today that’s all you would get. But investors must adopt more complex thinking. What you’re really worth is not what the market will pay today (that’s the erroneous assumption behind the efficient market hypothesis), but rather the true value of the securities you own based on such attributes of the underlying businesses as free cash flows, private market values, liquidation values, downside protection, and growth prospects. This is what Graham and Dodd taught and what we believe at Baupost.

When the market, in the absence of adverse corporate developments, drives an undervalued security down in price to become an even better bargain, that’s not reason for panic or even for mild concern but rather for excitement at the prospect of adding to an already great buy. When tempted to sell into a decline, investors must think not only about what they would be getting (the end of pain that accompanies the certainty of cash), but also what they’re giving up (a significantly undervalued security which, emotion aside, may be a far better buy than a sell at today’s market price). This is why relentless and thorough due diligence and deep fundamental analysis are so important. They give you the justifiable confidence to maintain your bearings – to hold on and consider buying more – even on the worst days in the market.

Greed, too, is deeply rooted within people. It is expressed through the drive to acquire more and more and the related angst felt when others are succeeding while you are not. This is what J.P. Morgan meant when he said “Nothing so undermines your financial judgment as the sight of your neighbor getting rich.” Or as Gore Vidal dryly noted, “Whenever a friend succeeds, I die a little.” The positive reinforcement from repeated stock market success can be a kill switch for risk aversion in that it tempts people into paying up and then holding on too long. A recent article in Vanity Fair about a looming bubble in Silicon Valley noted, “Collectively these start-ups have helped promote a culture of FOMO – or ‘fear of missing out,’ in Valley parlance – in which few [venture capitalists], who have their own investors to answer to, can afford to ignore the next big thing.”

Fear of missing out, of course, is not fear at all but unbridled greed. The key is to hold your emotions in check with reason, something few are able to do. The markets are often a tease, falsely reinforcing one’s confidence as prices rise, and undermining it as they fall. Pundits often speak of the psychology of markets, but in investing it is one’s own psychology that can be most dangerous and tenuous.

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Discipline isn’t something an investor should be turning on and off. There’s no point in being disciplined most of the time, only to toss the fruits away in a weak, distracted, or greedy moment. And there’s no such thing as being almost disciplined – even one moment of weakness can invite the wolves in, and it can also send a message. If you expect the members of a team to be disciplined, then letting down one’s guard on occasion is at first confusing, and then demoralizing, as the benefits from prior discipline are squandered. If excessive risk-taking is rewarded even once, there will quickly be no discipline at all

In the moment, public market investors have no ability to control investment outcomes, but they can control and improve their own processes. We never shoot for high near-term investment returns. Trying too hard to earn positive results, or assessing performance too frequently, can drive anyone into short-term thinking, herd-like behavior, and incurring higher risk. We do our utmost not to allow this to happen. We believe that by remaining focused on following a well-conceived process, we will make good risk-adjusted, long-term investments. And we know that if we do that, we will indeed earn good returns over time.

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While operating within the constraints of value investing principles, we are determined to look far and wide for opportunity, building our competencies over time based on learning and experience. We must neither be confined by a narrow mindset of what may or may not be undervalued, nor become so aggressive in pursuing opportunity that we deviate far beyond our circles of competence. I tell our team that we wouldn’t be doing our jobs if we remained locked in the past, buying only the melting ice cubes of previously good businesses now in decline as though technological change weren’t accelerating the obsolescence of entire industries. We would also be remiss if we failed to take advantage of new analytical tools and resources. We must consider new ways of thinking. We must continuously ask ourselves whether any investment under consideration is just too hard to properly assess: Is the fruit too high-hanging? In investing, there are no style points awarded for degree of difficulty. However, the complexity and opacity that may cause others to discard potential opportunities as “too hard” can drive market inefficiencies that result in opportunity for us. In 2015, we took a close look at “big data” technology as a research tool and potential “edge” for Baupost. While there are a number of applications that may be interesting over time, we continue to strongly believe that our investment success will ultimately depend not so much on big data as on big judgment.

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As with Pavlov’s dogs, in a bull market investors find certain actions repeatedly rewarded; their behavior thus becomes deeply ingrained. Amidst a relentless rally, almost anything you come close to buying but ultimately pass on goes higher, inducing you to be more aggressive. Similarly, anything you sold you probably sold too soon, even if it had met your price objective. In a bull market, focus on downside risk ceases to be shrewd discipline and instead becomes an albatross. Many are seduced into raising their appraisals, because doing so is rewarded. As if missing out on returns weren’t itself painful enough for “Type-A” money managers, it also causes underperformance that can frustrate clients and raise career risk. Bull markets don’t typically end until most have capitulated, at which point there is almost no one new left to buy.

Bear markets, of course, offer their own false “lessons,” but in the opposite direction. As prices fall, anything you previously sold turns out to have been a good sale; anything you bought was premature accumulation. When securities become “value-ish,” they at once become too tempting for the value-starved to avoid, yet still potentially toxic to one’s financial health. It takes a great deal of fortitude to set the bar at the consistently right place in all market environments. A bar that fluctuates with the tide is, in effect, no bar at all. Trading losses in a down market can turn investors into Mark Twain’s proverbial cat who once jumped on a hot stove: to this feline, all future stoves are also assumed to be worth avoiding. We haven’t been in a broad-based bear market since early 2009, although numerous sectors now seem to have entered one. We believe that value investing principles, great patience and discipline, a flexible mandate, a time-tested process, and the ability to hold cash, as well as decades of experience in a multitude of market environments, should serve us well in navigating through.

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It’s obviously far better to be alive today than 50 or 100 years ago. But optimism isn’t an investment strategy. Growth isn’t always profitable growth, and the returns from investments are typically determined more by the price paid than the growth rate. Whether any of these favorable trends are fruitfully investable is unclear. While we may all be better off decades from now, it’s reasonable, in light of the numerous concerns discussed earlier, to expect a bumpy ride.

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A fiduciary should think more about the safety of an entire portfolio than about any individual holding. Is Baupost willing to make an investment that has a meaningful, even significant probability of loss, if the expected value – the weighted amount and probability of gain and loss – is hugely positive? The answer is yes. All positions involve a degree of risk; any investment can go sour, and any probability assessment can be wrong. We manage the risk of loss in any single position by sizing appropriately based on historical experience as well as by striving for prudent diversification. Every day, businesses we own are making countless decisions they believe will offer positive expected value to shareholders in excess of their firms’ cost of capital. It doesn’t make sense to own businesses which do that, yet be unwilling to do it ourselves.

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A Short Framework For Investing Your Own Money by Kerr Neilson

https://www.platinum.com.au/journal/fundamentals-of-investing/a-short-framework-for-investing/

A Short Framework For Investing Your Own Money

by Kerr Neilson, 30 November 2012

Firstly, crises are not as rare as you may think. Secondly, you need to have realistic expectations from your share investments.  Thirdly, there are always opportunities - a brief case study.

This is a speech given to audience titled:

‘A short framework for investing your own money’

In the next 10 minutes or so, I shall try to provide you with a framework for investing your own money.

I will cover three topics ever so briefly:

• Firstly, crises are not as rare as you may think.
• Secondly, you need to have realistic expectations from your share investments.
• Thirdly, there are always opportunities - a brief case study.

With all the noise we get from the media, it is very easy to believe that we're facing one of the worst crises ever.  It certainly won't be a walk in the park with government’s overspending and creating money, but it is important to go back in history to realise that the system eventually sorts itself out and after five or 10 years, the game will be ‘on’ again.

In fact, the US economy is littered with a large number of financial crises starting with the railway building manias in the early 1800s as the country expanded West, to the well-known contraction of the great depression of 1929-1933.  In those 3.5 years, the economy contracted by close to 30% and prices fell by about a quarter.  The same sort of pattern has been evident elsewhere and the workout tends to follow a saw-tooth type of recovery with lots of concern throughout!

Time doesn't permit me to elaborate but it is highly likely that these damaged economies will gradually be brought back onto an even keel principally achieved by the debasement of money.  This process of sharing the burden is not attractive and if it is poorly executed, it will result in social dislocation, but this is too early to call.

A more interesting observation is that for all the turmoil, the trend in the last 110 years has been for real earnings to grow by 2% per annum.  This single figure hides huge swings and even includes periods when earnings did not grow!  More interesting still, is that even in periods were earnings have oscillated in a wide band but with no upward tendency, real returns from shares have been quite positive.  Over this 110 year period, real returns from shares have been considerably higher than real earnings growth and have averaged 6% a year; in money terms, this was 9.2% a year in the case of the US stock market.  In the first half of that period, returns were quite modest at around 3.5% real return but a full 9% real return in the second half because earnings were treated as more certain and shares were re-valued upwards.  By contrast, over this long period bonds gave one a 2.1% real return and cash about a 1% real return.

Now this is important; of the 9.2% total return from shares over this 110 year period, nearly half came from the receipt of dividends.

The message from this section is that real earnings growth is much lower than many people believe and secondly, that the dividends play a very important part in rewarding shareholders for the risks they take.

I have sped through these first two points because the most important message I wish to convey is that the market always provides us with opportunities; come inflation, deflation, economic expansion or contraction, the behaviour of the crowds invariably results in imperfect pricing.  At Platinum we try to exploit these by following two simple ideas.

Firstly, that the crowds tend to overemphasise the recent event, and

Secondly; there is a natural predisposition towards extrapolating the present situation far into the future.

Before giving examples of this, I would like to deliver a couple of key bullet points.

1.     The valuation of shares you propose to buy is critical; if you pay too much for a share you’re unlikely to make much money.

 2.    When assessing the price, it is essential to think about the sustainability of earnings and whether the earnings are being driven by temporary factors, which for example, are resulting in growth being above trend.  Ask yourself whether margins are high or low and what allows them to stay where they are.

3.     Be clear about the risks you are exposing your money to.  This can be broken down into many categories; economic, financial, political, business type etc.  For example, has your success herded you into an increasing exposure to Chinese dependent growth stories i.e. resource stocks.  We saw at the turn of this century how excess exposure to tech stocks and the Internet damaged one’s wealth.  Ask yourself about your currency sensitivities and the like.

Think carefully about the business you are buying.  We have a preference for companies that can control their destiny, set their prices independently of their competitors because of their market position and so on.  In a low growth environment this is particularly important.  One useful way of assessing management is to compare what they say, to what they do and to look for shifts in the narrative where excuses or external factors are blamed.

4.     Be patient and give your investment thesis time to work out but be decisive when the facts change.  It is essential that you change your position if the facts have changed.

5.     It is important to realise that the stock market owes you nothing.  It is simply offering you a smorgasbord of opportunities; some are cheap and some are expensive.  The cheap ones in our experience give you the best opportunities to make money so long as you can understand and see through what appear to be blemishes.  Lastly, it is not enough simply to be contrary and if the stock is cheap you must presume generally the market gets it right and an intelligent investor will start by trying to assess where he or she has got the wrong end of the stick.

Example

We have made some good money on individual stocks during this crisis period by ignoring the noise.  Into the teeth of the European crisis in the middle of last year, we bought a company that was highly sensitive to economic activity.  We were driven principally by considerations of value and the fact that this business was almost impossible to replicate without spending a great deal of money.  When DHL tried to break into the express delivery service in the US, it spent several years and a total outlay of about $8 billion and had to retreat ignominiously.  The company we bought was of this nature by the name of TNT Express.  It had around a fifth of the European market in fast delivery of parcels, was making around €400 million per year and became available in the market sell-off at under €2.5 billion.  We figured that one of the American giants, FedEx or UPS, would be unable to resist acquiring TNT as the one part of their global network that was weak, was Europe.  Within six months of buying a big position in TNT, we received a bid from UPS at over €8 per share; our entry price was around €5.  Sure we were lucky that they made a bid at that time; we could have experienced a much longer holding period but the logic of our case was strong.

There have been several other opportunities coming out of this crisis in Europe which have been very profitable for us including a company by the name of Amadeus which is listed on the Spanish exchange and again, as the country faced miserable conditions, the opportunity arose to build a large position in a company that is arguably almost a monopoly in the global air travel booking system; subsequently the shares have risen by about 60%.

These war stories are not meant to convey our proficiency but to highlight the fact that in the teeth of a gale, opportunities arise.  Hold your poise, do your work, remain independent in thoughts and action, and wealth will accrue.

How Charlie Munger Transformed the Daily Journal

http://www.fool.com/investing/general/2016/02/17/how-charlie-munger-transformed-the-daily-journal-i.aspx

With a handful of well-timed stock purchases in 2009, the chairman of the Daily Journal breathed new life into the newspaper company.

One of the most interesting financial stories from the last decade involves the incredible returns earned by the Daily Journal (NASDAQ:DJCO) on its portfolio of common stocks.

The Daily Journal isn't an investment company. It generates most of its revenue from publishing newspapers throughout California -- ones like the San Francisco Daily Journal and the San Jose Post-Record.

What makes the Daily Journal so unique is the fact that Charlie Munger, Warren Buffett's longtime confidant, is its chairman. And Munger, like Buffett, personifies the power of capital allocation.

At the beginning of 2009, the low point in the financial crisis for the stock market, Munger invested $20 million worth of the Daily Journal's cash largely into the shares of four companies: Wells Fargo (NYSE:WFC), Bank of America (NYSE:BAC), U.S. Bancorp (NYSE:USB), and Posco, a company that manufactures and sells steel rolled products and plates in South Korea.

The recovery of their stock prices has since more than quadrupled the size of the Daily Journal's balance sheet.

By the end of last year, shares of Wells Fargo were 570% higher than when the Daily Journal bought them in the first quarter of 2009. Bank of America's stock finished last year 431% higher than the Daily Journal's basis. And U.S. Bancorp was up 374%. Only Posco has seen its stock price fall, losing 31% of its value over this stretch, leading the Daily Journal to pare its position.

It would be an understatement to say that this has transformed the Daily Journal. Eight years ago, it didn't own any stocks. Today, three-quarters of its assets consist of marketable securities. Its investments in Wells Fargo, Bank of America, and U.S. Bancorp alone made up 55% of its assets at the end of last year.

You can see the impact of this on the Daily Journal's income statement as well. It earned $3.8 million in dividend and interest income in 2015. That's up from $704,000 in 2009. As a percent of revenue, its dividend and interest income went from 1.7% all the way up to 8.7% over this stretch.

This income stream is only bound to increase. Bank of America in particular has substantial room to boost its quarterly dividend, which sits at $0.05 per share after it all but eliminated distributions during the financial crisis. And even though Wells Fargo and U.S. Bancorp's dividends have recovered since then, they can both be expected to ratchet up their payments on an annual basis for the foreseeable future.

In short, the Daily Journal's transformation speaks to the impact that a single individual can have at a company. This is especially true if that person has the knowledge and ability to profitably allocate capital. Indeed, if Munger and Buffett have taught us anything, it's that capital allocation should never be an afterthought for investors or executives.

Adam Blum notes from Charlie Munger DJC 2016 Annual Meeting

http://www.valuewalk.com/2016/02/2016-daily-journal-corporation-meeting-munger-notes/3/

Investment story from younger days: In 1962, Al Marshall [his partner at Wheeler, Munger] asked him to help bid on oil royalties, “and under peculiar rules of stupid civilization, the only bidders were cheap and shady bastards who were insiders to the space who low bid everything, and so we bid a little high to win, and are getting thousands of dollars a year off of a single $1,000. The trouble with that story is it only happened once. The trick in life is when you get to one, two or three great deals, which is your fair allotment, you gotta do something about it.”

“Blue Chip Stamps and Wesco were some of the most screamingly successful investments in the history of mankind, and only five or six transactions carried all the freight - just doing a few things over a long period of time - those nothing companies worked out fairly well out of a few good decisions. You make your money by the waiting, not til next depression, but a fair amount of patience is required followed by pretty aggressive discipline when the time comes. Imagine putting all the foreclosure boom money to work in 1 day on the bottom tick of the market (Wells Fargo stock bought at $8). Sure it was luck, but it wasn’t luck that we had the money ready to deploy and were willing to do so when others were fearful.”

Mental models used to make investing easier: “There’s no way to make investing easy. Anyone who finds it easy, you’re living in an illusion. This is an intelligent group of people [at the meeting]. We collect them. It is hard for all of us. The constant quest for wisdom and a temperamental reaction to opportunity will never be obsolete.”

How to reduce errors in life: “Warren and I and [DJCO director J.P.] Guerin do two things. One, we spend a lot of time thinking. Our schedules are not crowded, and we look like academics more than businessmen. It is a soft life waiting for a few opportunities, and we seize them and are ok with waiting for a while and nothing happens. Warren is sitting on an empire, and all he has on his schedule is a haircut this week. He has plenty of time to think. Luckily so many of you groupies [attendees] are so obscure, you’ll have plenty of time to think. Second, multitasking is not the highest quality thought man is capable of doing unless you’re chief nurse of hospital. If not, be satisfied with life in shallows. I didn’t have #2 plan; I wasn’t going to dance lead in Bolshoi Ballet or stand on the mound in Yankee Stadium. The constant search for wisdom or opportunity is important.

On synthesis of disciplines: “Saying one is in favor of synthesis is like saying one is in favor of reality. It is easy to say we want to be good at it, but the rewards system pays for extreme specialization. You’re usually way better off being a deep expert than someone an inch deep in a lot of disciplines. It [Synthesis] is helpful to some but not the best career advice for most people. The trouble is you make terrible mistakes everywhere else without it, so synthesis should be a second attack on the world after specialization. It is defensive, and it helps one to not be blind sided by the rest of world.”

On being rational: “I worked at being rational young and kept doing it. Do it til you’re as old as me, it is a good idea and it is a lot of fun if you’re good at it. I can hardly think of anything more fun. And I have a lot of cousins [like-minded folks] in the room. You don’t have to be emperor of Japan. You can be a very constructive citizen by being rational. Just avoid where the standard result is awful. Anger, jealousy, resentment, self-pity, etc. They’re a one-way ticket to hell, and many people wallow in them, and it’s a disaster for them and everyone around them. Self-pity won’t improve anything if you’re dying of cancer. Keep your chin up, and forget about it.”

Value investing: “Fundamental value investing will always be relevant . To succeed, always buy for less than what it is worth, and be smarter than market. It will never go out of style. High frequency traders have all the contribution to economy of a bunch of rats to a granary, sucking out while contributing nothing to civilization.”

Exceptional Investment Managers - MIT Investment Management Company

Src:http://www.mitimco.org/wp-content/uploads/2014/12/the-manual-of-ideas_mitimco_2014-12.pdf

MOI: You have stated on your website that “since exceptional judgment is crucial to virtually all investment strategies, a critical element of our due diligence process is to evaluate historical decision points.” What are some examples of such decision points and how do you go about evaluating them?

Joel Cohen: I’ll give an example from a manager we recently underwrote. In the mid-2000s, he stumbled across a small, sleepy community bank that had earned high ROAs and ROEs for decades. He thought to himself, how on earth do they do that? As he explored further, he discovered that there were quite a few others as well, and eventually it became clear that these were gems of businesses if they had certain characteristics. Of course, banks at the time were very overvalued because it was a boom time for the financial industry. Nonetheless, he knew the industry was prone to the occasional crisis so he did his work and identified a handful he would love to own – at one-third the valuation, of course. Four years later the financial crisis hit, and these great banks were babies thrown out with the bathwater, so he got the chance to participate in their high rates of internal compounding at discounts to book. 

Now, what does this tell us about the manager’s judgment? First, he correctly identified these banks as quality assets. Second, he had the discipline and patience to wait four years before touching them. Third, he had the stomach to buy them in the midst of a financial and economic panic. These things are all as unusual as they are impressive.

.........

MOI: What are the attributes of exceptional managers/firms?

Joel Cohen: We try to be humble about thinking that we can crack the code of what makes a firm exceptional, even though we will spend our whole working lives trying to do it. We have developed our own, constantly evolving, always imperfect view of what constitutes an exceptional investor based on many years of working at it. If you define an exceptional firm as one which achieves outstanding returns over a very long period of time, one trait they all seem to have is that they view investing less as a job and more as a vocation or a form of self-expression. There are a lot of nice side effects that you often see from people who come to investing this way. First, they tend not to take a cookie cutter approach to investing or try to cater to what they think allocators want,  but instead spend more time tailoring their methods to their own personality and what works for them. For example, with the manager I mentioned earlier who studied small community banks, he realized that the intellectual engagement of identifying great assets regardless of price, adding them to his list of things to follow, and then waiting for a crisis felt natural to him, and leveraged the skills he has that are most uncommon. Second, if investing is someone’s passion, they are going to be thinking about it in the shower, on the subway to work, etc.. 

Most importantly, their efforts are going to be sustainable. Time spent working is not a sacrifice, but an indulgence. Those who pursue investing for intrinsic reasons seem to keep performing at a high level for long after those who were in it for the money.