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  • Writer's pictureChris Mayer

Buying and Selling

In today’s post, I’m going to share a few short thoughts on different subjects:

1. My call with investors - the inflation scare and other "macro" worries

2. Who needs the physical anymore - on the rise of profit per employee

3. Critical thinking - essential skills

4. Thoughts on portfolio management - my busy Q1, what I bought and my rule for adding new ideas

My call with investors

I had a call with my investors recently and I included in the presentation an appendix titled “Interesting charts to consider*.” The asterisk referred to a remark at the bottom: “But at the end of the day may not be that important.”

The charts referred to “big picture” concerns -- recent talk of inflation, rising interest rates, rising taxes, etc. All the usual macro concerns that people have at the moment… I felt obligated to at least comment on these concerns. But I do not think these macro concerns will matter.

There is another chart I wanted to include, but it was too messy to put in a slide. And now I can’t find it. But it was published by the FT. It had a month-by-month and year-by-year listing of macro concerns going back the last 10 years (I think), based on the number of mentions in the FT or Google searches or something (I forget now). Anyway, the table spanned everything from trade wars to the end of quantitative easing, from the “fiscal cliff” to a Eurozone crisis.

What should strike anyone looking at that table is how none of it really mattered to the long-term owner of publicly traded businesses. You could’ve slept through the whole thing. Of course, this is often the way.

What’s in the headlines today seems so important now… and then seems quaint even just a few years later. I believe it is a mistake to adjust your portfolio based on these concerns of the moment -- if you are interested in nabbing those wonderful 100 baggers (or any multi-baggers).

Those multi-baggers need time to come to fruition. You won’t get there trying to trade around recent events. You’ll need to own great businesses and leave them alone. As Marty Whitman used to say, "You make more money sitting on your ass.”

On this topic, read (or re-read) one of my favorites, Kirby’s classic “The Coffee Can Portfolio.”

Who needs the physical anymore

“Who needs the physical world anymore...? Now, we've got the internet and blockchain..and bitcoin…”

Ever since my business partner, Bill Bonner, wrote this in an email to me, it’s been rattling around in the old noggin, in part because I’ve wondered about it myself…

Evolution Gaming (which we own) recently bought a business (Big Time Gaming) with 11 employees that generated revenue of EUR 33 million and EBITDA of EUR 29 million for the calendar year 2020. (Not a typo -- yes, the margins are that high). The price, assuming the max on the earn-out, will be about EUR 450 million.

Think about that. This business barely has a physical presence, in terms of human beings, but is quite consequential as an economic entity. And enormously profitable.

I know there are other more extreme examples. But the Evolution deal was what got me thinking more about this topic. That, and I'm still reading McLuhan, who writes all about how a new medium creates a new environment and destroys (or modifies) old ones. In this case, online gaming seems to be the new-ish medium eating away at the old.

The creation and proliferation of such valuable businesses -- businesses worked by so few human hands -- may be a genuinely new thing in 21 century markets.

Then again… I did a little searching on “highest profit per employee.” The top two? I wouldn't have guessed -- the GSEs, Fannie Mae and Freddie Mac:

I wonder what the trend -- if any -- “profit per employee” will take over time? I don’t know, but if you’ve come across anything, I’d be curious to see it.

Critical thinking

My friend Kevin Duffy ( and I were exchanging emails about all the things a money manager has to juggle. And Kevin wrote, “I started a list of the toolkit [of skills] useful for investors.” And then he listed a bunch of things, some obvious (like accounting) and some maybe not so obvious (like recognizing behavioral biases).

I thought of one to add to his list: critical thinking skills.

Part of what critical thinking skills entail is the ability to pick apart an argument, even your own. Critical thinking uncovers faulty assumptions, picks up on false analogies, flags questionable labels and much more.

I am sure there are many “systems” and “models” out there to improve critical thinking. For me, I’ve found Korzybski’s general semantics a great aid. Korzybski fleshed out his system in a big, fat book called Science and Sanity in 1933. Since then, plenty of other smart people have expanded upon it -- Wendell Johnson, Irving Lee, S.I. Hayakawa, Anatol Rapoport and Neil Postman, to name some of them.

The biggest pushback I usually get when I start talking about general semantics is that it seems self-evident and obvious. For example, one of its central tenets is “the word (or symbol) is not the thing.” People are like, “Well, obviously the word is not the thing. Who doesn’t know that?”

But then stories appear that show people don’t know the word, or symbol, is not the thing. Kyrie Irving stomps on the Celtics logo as he leaves the court -- and it becomes news. Why? A more enlightened people, who were more aware of the differences between symbols and things, would act differently.

Or read philosophy and see how philosophers capitalize things like Truth or Beauty -- and treat them as if they were things. Or look at how journalists write about “China” or “France” as if they were people with interests, likes and dislikes, etc. Or see how investors talk about “Small Caps” and “Value Stocks” and the “Economy” as if they were things. Instead they are symbols of made up ideas. We live in a world of spooks of our own making.

As S.I. Hayakawa put it when told that people “everyone” knows that words are not things: “The hell they do!” He added, “Treating words as things is a tradition of long standing in our culture.”

One aspect of general semantics provides a number of tools so that you never fall for this kind of linguistic sleight-of-hand again. And once you get it, you see it everywhere.

There's more to it, of course. Korzybski’s book was over 800 pages long with a lot of math and footnotes. My book “How Do You Know?” is an introduction to many of the tools of general semantics.

My point is not necessarily to sell you on general semantics (I’ve forfeited all my future royalties from How Do You Know to the Institute of General Semantics), but to recommend studying some kind of system, or way, to improve your critical thinking skills. I believe such skills are essential for success as an investor and remain mostly unappreciated. I see lots of book recommendations for “how to’s” and business histories and biographies, but not much on critical thinking.

Thoughts on portfolio management

Any good investor knows you wind up spending a lot of time researching names and then not buying them. And you have to be comfortable with that. You have to enjoy the hunt. Long periods of inactivity are fine.

I run a fairly concentrated portfolio of only 11 stocks. For me, swapping in one or two new stocks would be a fruitful year. I had a busy Q1, adding Evolution (EVO) and Topicus (TOI). Both of which I expect to be in the portfolio for a long time. (I also dumped two stocks to make room).

Still, I am always eager to find the next great thing. It’s almost addictive. Yet over time, I find the bar as to what gets in the portfolio getting really high. And it makes it tougher for new ideas to crack the list.

I am reluctant to make switches solely based on valuation. I think if I was, it would be easier. But there are many problems selling one great business because you think it might be over-priced to buy another one you think is cheaper. Think of all the ways to go wrong:

  1. You could be wrong about the stock you are selling

  2. You could be wrong about the stock you are buying

  3. You have to pay taxes on your gains

I could add a fourth, which a friend of mine used to like to say: the most risky position in your portfolio is the newest position. It’s the idea you know the least. Doesn’t matter how much time you spent researching it, there is something about owning a position for a period of time. You know what you own better than what you don’t. Ergo, in any kind of tie, favor what you already own/know.

Add all that together, and I get a basic rule of portfolio management: Any new idea has to be significantly better than what it replaces.

I find businesses that might be better than what I have… but not by much. For me, to make a move, it’s gotta be really obvious. Buying Evolution and Topicus were clear upgrades to what they replaced: better growth, higher returns on capital, etc. And, crucially, higher prospective stock returns. These are special businesses, at the top in terms of quality, and both became full positions very quickly.

Anyway, I think this is a good way to keep your portfolio trimmed up. Only replace when something is clearly better. Don’t talk yourself into taking marginal upgrades. Keep that bar high. Stay concentrated. And learn to enjoy those periods of inactivity.

That’s all for now. Thanks for reading.


Published June 8, 2021

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