Ideas

Let me tell you about an extremely stupid thing I used to do with money.

There was a time, not so long ago, when I couldn’t bear to put money in an idea I didn’t come up with myself. This was dumb. I compounded the dumb with a preference for esoteric, off-the-run stuff with a lot of hair on it. gReEdY wHeN oThErS aRe FeArFuL. nO eDgE iN aNyThInG wElL-cOvErEd. Something like that.

In retrospect this was pure ego. Unearned arrogance.

The small self-directed investor has two key advantages:

Key Advantage Number 1: She has no capacity constraints (there is little slippage when she trades).

Key Advantage Number 2: She does not have career risk to manage.

The small investor is ideally suited to parasitism. The concept of parasitism has a negative connotation. Parasites are pretty gross. (Botflies. Yuck) For Americans like me, parasitism is the antithesis of the whole rugged individualist mythos that is deeply ingrained in our culture. Parasitism is icky.

But for the small investor, parasitism is beautiful.

As a small investor, you can buy almost anything. And you can do it without having to write 75-page diligence memos or pitching positions to investment committees. You are not under pressure to justify a management fee. You are not imprisoned in a small cell in the equity style box. You don’t have to fire yourself for style drift. This is beautiful. It is an enormous advantage.

All you have to do is look for money the big players are leaving lying around.

Then pick it up.

(it’s not that easy, of course, but that’s what it feels like when it’s clicking)

Actually doing this can feel incredibly stupid. Things that can make you a bunch of money are often incredibly stupid. From intellectual point of view, dip-buying large cap equities is super lame. There isn’t going to be a Michael Lewis book about a bunch of pikers dip-buying Facebook to scalp a quick 50% return.

Ignore this feeling of stupidity. The only lame ideas are the ones that lose money!

People expend a lot of time and energy editorializing about how there is no edge in picking large cap stocks. There was a time when I did the same. Now I see it differently. Now, I think an issue is that a lot of strategies are not designed to take advantage of the best opportunities in large cap stocks. Perhaps some of the more interesting opportunities in large caps come from thinking more like a trader than an investor? This is just one silly example.

Muni closed-end funds offer these kinds of opportunities every couple years. The market gets scared. Liquidity dries up. Discounts to NAV blow out. There’s money lying around all over the place, and all you have to do is pick it up. (assuming you’ve got liquidity, of course)

This isn’t to argue that simple ideas are always best, or that complex ideas are never good. This is an argument for maintaining an open mind, and an argument against allowing ego to filter ideas.

Be open to a good idea whenever it may find you! There are no point adjustments for originality or degree of difficulty. It took me too long to realize that and accept it.