Successful investing is about making good judgments and then acting on those judgments. We in this industry constantly learn from books, others' stories, observations, and experience. Our brains are wired to place our own experience at the top of the "how we learn" pyramid. Over my career, I have been fascinated by this topic of how we learn and how we make decisions. I am currently reading three books on the subject of learning. I am still a recovering book-aholic and, even in this digital age, find books a great source of "learning." Wonderfully, my iPad can hold hundreds of them, so I don't have to fill my backpack with them on trips.
I am writing this at 35,000 feet over Ethiopia. On the plane I watched the movie Founder, about Ray Kroc on the creation of McDonald's. The intensity of the learning curve that Kroc maneu-vered is the kind of story that movies are made of. He's a prime example of someone who followed his gut, tested his ideas, was incredibly persistent, and took great risks. What's especially interesting to me is how he learned from his earlier failures, which actually seemed to feed into the actions and decisions that permitted his success. In hindsight, just as with Apple founder's Steve Jobs' explanation of his life with his famous "connect the dots" story, it's as if everything Kroc read, experienced, or heard fed into that success.
In my own field of endeavor, creating investment portfolios that succeed, thrive, and perform is about making good decisions lots of them. Sometimes people working in portfolio management make decisions that seem to reflect a "set and forget" approach, because certain investments are held for years. However, decisions are made every day on that investment, as to whether to buy more, sell what's owned, or hold it. We chat about our portfolios being constructed each day as if we hold 100% cash so as not to let unhealthy or distorted thinking lead us astray. Today there is science to support this notion that successful decisions don't bear fruit only by luck though luck will always exist. Some will say luck is what made the success experienced by McDonald's, Apple, Amazon, and Ford, to name a few. If you look at how we learn and how the brain works, and then deconstruct the cause of success, it's easy to see the consistent threads, or "dots," that connect o reveal what the common characteristics were in successful outcomes.
Creativity is just connecting things. When you ask creative people how they did something, they feel a little guilty, because they didn't really do it, they just saw something. It seemed obvious to them after a while. That's because they were able to connect experiences they've had and synthesize new things. (Excerpted from Social Physics, by Alex Pentland, Penguin Group, 2014, iBooks)
Most people's brains are wired to let them simply "get by," to react to changes as necessary and to do nothing else till the pain becomes greater than the reward for changing. This is especially true for people with older brains. I make a distinction here because I am 62 and still exploring, finding joy in learning new things, and feeling humble when I make mistakes, or have a learning event, or see a failure in a portfolio (however you wish to frame that "failure" or "learning experience"). I meet 20- and 30-year-olds who have old brains; they seem to know it all, know what life is about, and possess all the answers. They don't have a dozen books sitting on their bedside table or in their Kindle or iPad reader filled with yet-to-be-discovered ancient wisdom or the latest science. They are not, as Alex Pentland would call them, "explorers." So old (read "lazy") brains are not actually the brains of old people rather, they are a mind-set that can be found in many people, both the young and the old.
The most consistently creative and insightful people are explorers. They spend an enormous amount of time seeking out new people and different ideas, without necessarily trying very hard to find the "best" people or "best" ideas. Instead, they seek out people with different views and different ideas. (Excerpt by Pentland)
Functioning successfully these days requires that we employ both a rigorous process and a desire to be creative and to explore the truth of what's going on in a world where things change at lightning speed. Even facts have become "fluid" in today's polarized news environment, in which thought leaders have learned that one's own brain will tend to hold the first belief it encounters, even if the evidence is overwhelming that that belief is false. It's hard to give up a belief if giving it up will cost us in social status, or a need to do more discovery, or a desire to learn something new. It's hard to teach an old
dog's brain new tricks; our own brains, if we don't train them to be constantly in a discovery/creativity/growth-oriented mind-set, will embrace whatever allows them to not have to learn, change, or use a few new neurons. The fact is, everything changes, and we must anticipate the change and be ready for it. Better yet, as Amazon, Facebook, Tesla, and many others are doing, we must "create it!"
The transformation of culture and society brought about by embracing a combination of new ways of thinking and new technology. A highly problematic concept in sociology and development studies, modernization theory assumes that all societies are on an evolutionary trajectory taking them from "primitive" to "modern" and that if they are not yet modern it is because they are reactionary and/or underdeveloped. (Excerpted from A Dictionary of Critical Theory, by Ian Buchanan, Oxford University Press, 2013, iBooks)
Learning is a process, a method, an area of mastery, and with effort, focus, and practice, we can get a lot better at gaining expertise. Find value. It's impossible to learn if we don't want to learn, and to gain expertise, people have to see skills and knowledge as valuable. (Excerpted from Learn Better, by Ulrich Boser, Rodale, 2017, iBooks)
One day, when I was chatting with a friend of mine who does team building for Ugandan companies, I pulled out a Pinter-est posting to show her. She looked at it and said, "Pinterest that is my favorite!"
A few years ago, I thought of Pinterest as a place for crafty knitters, cake decorators, and a few wedding planners to exchange ideas. Not really relevant to me, I thought then. Now, I find it a site that has great resources for thoughtfully created ways to communicate, convey rants, and share edgy stuff that helps me to think more clearly and to learn from others. One posting of "15 Styles of Distorted Thinking" that I have saved on all my iPads is reprinted here. I don't use items from the list to win arguments or to point out flaws in others' thinking. Better yet, I use them to reflect on my own thinking and my decision-making processes, to help me get to reality and, with any luck, to help me make sure I'm thinking properly about my own contemplation/thinking process.
Over the years, I have watched McDonald's hold onto its core systems, which are built around customer experience, cleanliness, consistency, efficiency, simplicity, and a sort of engineered, efficient, design elegance in their "stores." I have also watched them remake themselves as consumer tastes have changed, as competition has affected key bits of their franchise, and as technology, systems, and "best practices" have changed. There is no such thing in managing a business as "set it and forget it." Things change! At FIMgroup, we spend a lot of time thinking about how we think, and striving to have a discovery/learning/growth/success/humble/creative-truth-seeking mind-set. Today it seems that much of society is looking for the "set it and forget it" governance system as a kind of religion, a reactive decision matrix, and such. At least from my experience, the oversimplified "set it and forget it" systems are doomed to fail, either by breaking under stress or by melting like ice cubes as things slowly change. It appears that in today's investment world the seductive ways of indexing, robo (computerized) advice, and cheaper, simpler, easier ways to "invest" and manage portfolios are all influencing capital flows and creating manias in many markets.
We are in this business for long-term success and we realize that distorted thinking is not helpful if our goal is positive, consistent, long-term performance. We look at McDonald's Ray Kroc, who was stubborn about trying over and over again, keeping his mistakes small, and when something worked having the guts to fully invest in it, while others were saying, "huh just a few items on the menu, no place to sit down, eating out of paper?!" These were highly revolutionary at the time. As we watch the evolution of self-driving cars, the retailing havoc caused by Amazon and its like, plus increasing Internet connectivity and vast changes in how we are entertained, it's easy to see that those who are scanning the horizon for "what's next" and who embrace the "best practices" and the new science and discoveries will find their lives and portfolios tilted a bit more toward success. And that's what successful investing today is about. Our goal at FIMgroup, then, is to always be actively scanning and constantly looking to the future for more and greater opportunities.
Filtering: You take the negative details and magnify them while filtering out all positive aspects of a situation.
Polarized Thinking: Things are black or white, good or bad. You have to be perfect or you're a failure. There is no middle ground.
Overgeneralization: You come to a general conclusion based on a single incident or piece or evidence. If something bad happens once you expect it to happen over and over again.
Mind Reading: Without their saying so, you know what people are feeling and why they act the way they do. In particular, you are able to divine how people are feeling toward you.
Castastrophizing: You expect disaster, you notice or hear about a problem and start "what if's. What if tragedy strikes? What if it happens to you?"
Personalization: Thinking that everything people do or say is some kind of reaction to you. You also compare yourself to others, trying to determine who's smarter, better looking, etc.
Control Fallacies: If you feel externally controlled, you see yourself as helpless, a victim of fate. The fallacy of internal control has you responsible for the pain and happiness of everyone around you.
Fallacy of Fairness: You feel resentful because you think you know what's fair but other people won't agree with you.
Blaming: You hold other people responsible for your pain, or take the other tack and blame yourself for every problem or reversal.
Should: You have a list of ironclad rules about how you and other people act. People who break the rules anger you and you feel guilty if you violate the rules.
Emotional Reasoning: You believe that what you feel must be true automatically. If you feel stupid and boring, then you must be stupid and boring.
Fallacy of Change: You expect that other people will change to suit you if you just pressure or cajole them enough. You need to change people because your hope for happiness seem to depend entirely on them.
Global Labeling: You generalize one or two qualities into a negative global judgment.
Being Right: You are continually on trial to prove that your opinions and actions are correct. Being wrong is unthinkable and you will go to any lengths to demonstrate your rightness.
Heaven's Reward Fallacy: You expect all your sacrifice and self-denial to pay off, as if there were someone keeping score. You feel bitter when the reward doesn't come.
On May 26, our daughter earned her high school diploma and is now running, arms held high with the joy of accomplishment, the victory lap of her race toward college. Her other coaches and I are there on the sidelines, high-fiving each other on our team's success.
As a financial advisor, I could share tips with you about reaching your family's education goals while maximizing tax savings strategies. I could recommend how to fund college saving, walk through the technical ins and outs of the current education tax credits, project college funding shortfalls, and help you develop a plan to pay off existing school debt. Those are great topics and I'm passionate about helping clients with these issues, but today I'm going to share some personal coaching tips to help you prepare the students in your life for the college selection process.
At first, selecting a college may not seem like a financial planning topic, but with the average recent college graduate driving away from campus with a stagnated* starting salary, a beat-up futon, and more than $37,000** in student loan debt, I believe thoughtful college selection is a crucial factor in the long-term financial success of students and their families.
I've learned from our daughter, who has trained for long-distance running throughout high school, the importance of warming up. She carefully prepares for every run by moving and stretching to warm up her muscles, and wouldn't consider running without a warm-up because she knows the price she would pay after if she skipped the prep.
Our high school does an excellent job of coaching students and parents to warm up for college selection as sophomores and juniors. These years are meant for exploring skills, interests, and career options through assessments and job shadowing. It's a time for building on basic education with specialized and advanced courses and for knocking out required placement exams. Juniors and their parents receive a pep talk about how vital the year is for college selection readiness.
In our home, we prepped by reading the book Beating the College Debt Trap: Getting a Degree without Going Broke, by Alex Chediak. Our daughter and I read and discussed Chediak's nine "traps" to avoid if you're interested in finishing college debt-free, which became the framework for her college selection process. Chediak's simple but revolutionary premise is that the critical time to avoid college debt is before you begin college.
One of the most transformational things we read was the advice to view college admissions counselors and athletic recruiters as salespeople. They are a great resource as knowledgeable individuals, but keep it in mind that their job is to sell you something. Our daughter was actively recruited by two small, private universities, including multiple personal contacts by their running coaches. Both schools had attractive features and made her short list. At the same time, our local, midsize state university, which boasts strong academic and athletic programs and which, having high selection standards, is known for turning away scores of applicants every year was noticeably silent. No texts, no phone calls. Contact was limited to mass mailings and impersonal group tours. This didn't necessarily mean the state school wasn't a good option for our daughter. Rather, it simply meant, for lack of a sales pitch, we had to work harder to research the school and evaluate its merits. Chediak's clarity about the purpose of recruitment led to our recognizing that communication from admissions offices and coaches is deeply affected by whether the school needs to recruit or to eliminate potential students and athletes.
Beware of making a college decision on the basis of an emotional impulse or a subjective impression. Some of the sales pitches colleges use aim at the heart, but they bypass the mind, discouraging prospective students from fully considering the price tag or the likelihood of success.
Beating the College Debt Trap: Getting a Degree without Going Broke, page 64
To kick off senior year, our high school invited parents to yet another pep talk. We were given the seasoned advice to back off and let our students take the lead in the final stages of college prep. We were assured our seniors would receive detailed checklists and ample resources to assist them, but, to help them succeed, it was critical that we stepped to the side. In that moment, I realized that my husband's and my job as coaches had become calling out the occasional "You can do it!" as our daughter ran her own race.
As our daughter developed lists of pros and cons, set up her own job-shadows and college visits, paid refundable deposits to lock in her acceptance at her top choices, and completed countless scholarship applications, I watched her critical thinking, time-management, and communication skills grow. In addition, both she and I began to trust her ability to make this weighty decision.
One of the resources I provided was a shared spreadsheet comparing projected costs at each school, along with the dollar amount my husband and I were committed to providing, her own savings, and open spaces to fill in scholarship offers and other income sources. Our daughter used this spreadsheet to initiate informed conversations with admissions counselors to explore whether their schools had anything else to offer.
Ultimately, our daughter passed up the private school recruiters and said "yes" to the local state college. Her school choice has all the academic opportunities she desires, possesses the reputation needed for building a strong rsum, and comes with the peace of knowing she can step into a career without the burden of debt. She doesn't yet know if she'll make its highly competitive cross-country team, but she recognized that the guaranteed spot at the smaller, private schools carried the guarantee of debt payments and, to her, it wasn't worth that price.
As our daughter begins her cooldown and is dreaming of the race that starts this fall, I encourage you to equip the students in your life to make informed decisions about college that are well-removed from the emotion-based sales pitches and personal dreams that will tempt them. Read and discuss books and articles together. Be open about your own financial struggles and successes. Tap into what your high school offers, as well as community resources near you. FIMgroup advisors would love to talk with you, and your student, about the other financial planning topics that affect meeting education goals!
*According to the Economic Policy Institute, as of February 2017, the real average starting wage for college graduates age 21-24 who do not have an advanced degree and are not pursuing further schooling is $19.18 per hour, which is a 1.4 percent increase over the real average starting wage for the same group in 2000. Source: Kroeger, Teresa & Gould, Elise. "The Class of 2017." Economic Policy Institute, 4 May 2017; epi.org/124859
**Source: The Institute for College Access and Success; ticas.org.
Sparx Group (Ticker: SRXXFWebsite: www.sparxgroup.com)
Share Price/Market Capitalization: $1.95/US$408m
Investment Thesis: Sparx is a top-performing Japanese investment company with high insider ownership, a conservative balance sheet, an increasingly diversified platform, and shareholder-friendly capital allocation policies. We expect that returns will be driven by continued asset growth in both its traditional core strength of Japanese equity strategies and its newer offerings in Pan-Asian equities, real assets, and venture capital.
Company Description: Sparx is an independent Japanese investment company established in 1989. It currently manages more than $8B in assets across a variety of strategies using a "bottom-up" (one investment at a time) strategy. In recent years, Sparx has won numerous awards from such industry organizations as Lipper and Morningstar for best-in-class investment performance.
Product strategy at Sparx is focused on four pillars. The first, Japanese Equity, accounts for 62% of current assets under management. The main strategies within this category are concentrated "all cap" (meaning companies of all sizes) funds, small and mid-size company funds, and a rapidly growing clean-tech fund. Real Assets (18% of assets) is the second pillar, which encompasses renewable energy investments, specialty commercial real estate (like medical facilities), and other infrastructure projects. The third pillar is One Asia (16% of assets), whose management is rolling out regional offerings based on the same investment process applied to the Japan Equity strategies. Mirai Creation (4% of assets) is the final pillar and the most recent addition to the platform. A joint venture with Toyota Motor, Sumitomo Mitsui Banking Corporation, and other partners, Mirai is focused on startups in artificial intelligence, robotics, and hydrogen fuel technologies.
In addition to the product strategy noted above, management is keenly focused on cost control and thoughtful capital allocation. The business model, which features both base and performance fees on the money managed and expenses that flex with investment results (bonuses), is designed to provide resilience through market cycles. Management has ambitious targets for assets under management (doubling by 2020) and has further growth ambitions from there. The company is in a good financial position to pursue this growth with a net cash balance sheet and strong internal cash flow generation. Recently, management initiated a stock buyback program, which, combined with a modest dividend, should contribute an additional 23% to expected annual returns.
Depending on the valuation measure, the broad Japanese stock market currently trades at a 1535% discount to U.S. stocks, despite similar outlooks for profit growth. Savers in Japan are gradually shifting funds from zero-interest-paying bank accounts to stock alternatives, while government pension funds are similarly rotating funds from low-yielding government bonds into the stock market. While the demographic profile of Japan poses challenges for overall economic growth, Japan Inc., in part due to pressure from Prime Minister Shinzo Abe's directives, is shedding excess costs and becoming more shareholder friendly. This is creating both better corporate profitability and improved sentiment among investors. Sparx, via its flexible model and solid performance record, is operationally leveraged to these developments and well-positioned to benefit longer-term from its increasingly diversified, high-quality investment platform.
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