There are two kinds of problems in this world: puzzles and mysteries. Puzzles can be solved by collecting information. Mysteries, on the other hand, require insight – they can’t be solved simply with more information.
Here’s writer Malcolm Gladwell explaining the difference between a puzzle and a mystery in a 2007 article:
“The national-security expert Gregory Treverton has famously made a distinction between puzzles and mysteries. Osama bin Laden’s whereabouts are a puzzle. We can’t find him because we don’t have enough information. The key to the puzzle will probably come from someone close to bin Laden, and until we can find that source bin Laden will remain at large.
The problem of what would happen in Iraq after the toppling of Saddam Hussein was, by contrast, a mystery. It wasn’t a question that had a simple, factual answer. Mysteries require judgments and the assessment of uncertainty, and the hard part is not that we have too little information but that we have too much. The C.I.A. had a position on what a post-invasion Iraq would look like, and so did the Pentagon and the State Department and Colin Powell and Dick Cheney and any number of political scientists and journalists and think-tank fellows. For that matter, so did every cabdriver in Baghdad.”
I believe investing is a mystery, and not a puzzle. There are seldom clear-cut answers in the financial markets.
Investing is a mystery-problem to me because you can have billionaire investor Bill Ackman invest in a company (formerly Valeant Pharmaceuticals, now Bausch Health Companies) after conducting such deep research that he had to sign confidentiality agreements and yet have the company’s share price do this:
The slide below shows the extent of the due-diligence that Pershing Square (Ackman’s investment firm) conducted on Valeant:
I’m not trying to have a dig at Ackman. I have immense respect for his long-term accomplishments as an investor. I’m using his experience with Valeant because I think it is a wonderful example of the puzzle/mystery dichotomy in investing. Having a mountain of information on Valeant had no use in the eventual outcome that Pershing Square had with the company.
Investing is a mystery-problem to me because you can give two great investors the exact same information about a company and they can arrive at wildly different conclusions about its investment merits.
Credit card company Mastercard currently has 39 analysts covering its stock, according to its own website. Its market capitalisation is more than US$330 billion right now and it was never below US$200 billion at any point over the past year. It’s very likely that the investing community knows all there is to know about Mastercard’s business.
Chuck Akre runs the Akre Focus Fund, which had generated an impressive annual return of 16.8% from inception in August 2009 through to 30 September 2019. Over the same period, the S&P 500’s annual return was just 13.5%. Mohnish Pabrai is also a fund manager with a fantastic long-term record. His return of 13.3% per year from 1999 to 30 June 2019 is nearly double that of the US market’s 7.0%.
At the end of September 2019, Mastercard made up 10% of the Akre Focus Fund. So Akre clearly thought highly of the company. Pabrai, on the other hand, did not want to touch Mastercard even with a 10-feet barge pool. In the October 2019 edition of Columbia Business School’s investing newsletter, Graham and Doddsville, Pabrai said:
“Is MasterCard a compounder? Yeah. But what’s the multiple? I can’t even look. Investing is not about buying great businesses, it’s about making great investments. A great compounder may not be a great investment.”
Investing is a mystery-problem to me because even the tiniest investment firms can beat the most well-staffed ones.
I once spoke to an employee of a US college endowment fund with an excellent history of investing in fund managers who go on to produce stellar long-term results. During our conversation, I asked him what was the most surprising thing he found about the best fund managers his endowment fund had worked with. He said that the fund managers with the best results are the one or two-man shops. If investing is a puzzle-problem – meaning that collecting information is the key to success – there is simply no way that the two-man-shop fund manager can beat one with 50 analysts. But if investing is a mystery-problem – where insights matter the most – then you can have David triumph over Goliath.
So what are the key implications for investors if investing is a mystery and not a puzzle? I have one.
Investing can never be fully taught. There are the technical aspects of investing – such as how to read financial statements and the workings of the financial markets – that can be learned. But there will come a point in the research process where the collection of more information will not help us, where insight is necessary. And the development of insights, unfortunately, can’t be transmitted from teacher to student. Insights depend on an individual’s life experiences and knowledge-base. The books I’ve read are different from the ones you have. Even for the same books, our takeaways can be wildly different.
I believe one can become a competent investor by following rote methods. But to become a great investor, I don’t think there’s any manual that can be followed, because investing is a mystery, not a puzzle.
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Note: An earlier version of this article was published at The Good Investors, a personal blog run by our friends.
Disclosure: Ser Jing does not own shares in any of the companies mentioned.