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  • Chris Mayer

What is it, really?

Two little boys were playing on a sand pile. One heaped the sand up and said, “It is a mountain.” The other boy insisted, “No it isn’t. It’s a house.” They argued this way for a few minutes until their mother said, “You stop your fighting. Neither of you is right. That’s really just a pile of sand.”


Which was it really?


- From Language Habits in Human Affairs (1941) by Irving Lee


Alfred Korzybski (the above quoted Irving Lee was one of his best students and popularizers) used to say, “whatever you say something ‘is,’ it is not, because the something is not words.”


Sometimes we forget this seemingly obvious truism. I’ll give you an example of how this is playing out in markets today. And I’ll also tell you about an idea I almost missed because I thought I knew what it was.


Consider this recent WSJ headline: “Is Bike-Maker Peloton a Tech Company? A Lot Is Riding on the Answer” by John Stoll.


Stoll writes:


“Peloton’s internet-driven exercise scheme underpins the company’s fundamental pitch: That at its core, it’s a tech company, not just another get-fit program. It’s a premise that has powered many upstarts in recent years: Uber is a tech company, not a taxi company; WeWork’s a tech company, not a real-estate company; Tesla’s a tech company, not a car company.”


Of course, “tech company” is just an idea. It’s not a definite thing. It’s not real. In a more rational world, it wouldn’t matter what you call Peloton or what other people call it. We would all realize that such labels are just concepts. They don’t change how the business works, how it is financed, who controls it, etc.


Those who have read their Korzybski will be alert to the perils of that little word “is.”


This reminds me of one of my favorite Feynman quotes:


"'See that bird? It’s a Spencer’s warbler. Well, in Italian, it’s a Chutto Lapittida. In Portuguese, it’s a Bom da Peida. In Chinese, it’s a Chung-long-tah, and in Japanese, it’s a Katano Tekeda. You can know the name of that bird in all the languages of the world, but when you’re finished, you’ll know absolutely nothing whatever about the bird. You’ll only know about humans in different places, and what they call the bird. So let’s look at the bird and see what it’s doing—that’s what counts. I learned very early the difference between knowing the name of something and knowing something."


Perhaps you agree with me that it seems this idea doesn’t need much advocacy. It is common sense right? If so, then why do so many investors take labels like these so seriously?


I recently had a potential investor ask me “Do you focus more on value stocks or growth stocks?” (If this person is reading this, please note I am not picking on you. Many people fall into these same thinking errors.) My answer was: I look for stocks that I think are attractive and that meet the standards of what I am looking for. I don’t really care what labels other people slap on them.


I’ve long admired Korzybski’s aspiration to a high level of linguistic clarity. Of course, I’m not immune to letting words do my thinking for me. I made the mistake last year of paying too much attention to a label…


But, it is a retailer…


Early last year, an investor based in the UK told me I should look at Next, PLC. He is a good investor and has an approach similar to mine. He reads my blog and read my book 100 Baggers. He knows what kind of stocks I like. (Another advantage to having clear investment criteria: People bring you good ideas.)

But Next is a UK retailer, you see. I didn’t want to own a retailer. You know, all those troubles they have in online world… it is such a tough business… Amazon… yada yada…


So, I didn’t check it out…


Then, in the summer, I had another UK manager tell me to look at Next. And again, this manager is one with a good record and an approach similar to mine.

Well, now… Two different people, only months apart, pointing me to the same stock? I paid attention this time. And when I got back to my office, I pulled out the latest annual and started to read.


I really liked the letter, written by the CEO Simon Wolfson. (His track record at the helm of Next over the past 19 years leaves his peers and the FTSE in the dust.) It was thoughtful and sober. It was free of buzzwords and slick marketing. Reading it left you with a good idea of how the business worked, what challenges it faced, what it did well, etc.


It’s hard to give an excerpt here that does it justice. I will only encourage you to give it read yourself here.


There is one thing that’s unique about it: Wolfson goes through an exercise he calls “the fifteen year stress test.” As he emphasizes, this is not a plan or a forecast. As he says:


“Nonetheless the model is important because it demonstrates that, using a reasonable set of sales and cost assumptions, NEXT’s economic structure allows its profitable transition into the online world. It shows what is possible within the constraints of our balance sheet, current lease structures, warehousing and distribution capacities, infrastructure costs and likely changes to our revenue cost base if we continue to see a migration online similar to that which we are currently experiencing.


It is not necessarily the path we will follow but it is a way through the woods: a realistic scenario under which we might deliver a growing, profitable and potentially world-class online clothing and homeware business. And at the same time generate around £12bn of pre-tax cash flow over fifteen years.”


Keep in mind the market cap of Next is around £12bn. The stress test goes on for pages and includes a lot of detail. It’s a good discussion and I wish all of my CEOs would do some variation of this.


Anyway, Next was a much better business than I would’ve guessed – excellent returns on capital and strong free cash flow. And it was trading for a good price. I wound up buying the stock. Of course, Next was up big last year – along with much else. Still, I was late to it because I let the label “retailer” fog my view of the company for some months. I thought I knew what it was.


I bought it an average price under 60. Not as much as I would’ve liked, as the stock ran away from me a bit. But I may get another chance. As is, we’re up nearly 20%. I could’ve gotten in at about 10% lower if I hadn’t waited so long to give it a deeper look.


In the long run, that difference won’t matter. But this was the most recent example I could think of where I found myself under the sway of an “is.” Maybe you can relate.


Any time you see that little word “is,” pause and give it a think. Remember Korzybski’s little dictum: “Whatever you say something ‘is,’ it is not, because the something is not words.”


Thank you for reading.


***

Published January 23, 2020

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P.S. One more thing I would like append here. It’s not specifically related to investing – but broadly applicable, as you’ll see. I want to share a review of a book I read recently, Behave: The Biology of Humans at Our Best and Worst. It tackles many of these kinds of themes. Read on if you’re interested.


Sapolsky: “It’s Complicated”


If you want to answer the question why you’re so impatient when it comes to doing your taxes or why you can’t wake up on time, you might reach for one category of answer. It’s genetic. Or it’s hormonal. Or whatever.


“The goal of this book is to avoid such categorical thinking,” Robert Sapolsky writes in Behave: The Biology of Humans at Our Best and Worst. “Putting facts into nice cleanly demarcated buckets of explanation has its advantages – for example, it can help you remember facts better. But it can wreak havoc on your ability to think about those facts.”


Instead, Sapolsky shows that brain chemistry, genes, hormones, prenatal environment, childhood, etc., all impact how you behave today. In short, as Sapolsky says, “it’s complicated.” But as I hope is obvious, this applies not just to biology but to, well, everything.


Consider testosterone. This hormone is long thought to “cause” aggression. But… it’s more complicated than that. Sapolsky shows how testosterone does subtle things to behavior. It can’t generally explain why some individuals are more aggressive than others. It seems associated with aggression in different ways, but the relationship is not causal per se.


For example, if you’re already aggressive, lowering your testosterone doesn’t seem to affect this aggression – which points to aggression as more a learned behavior, or some other factors. It does seem to increase confidence and optimism. But there is a chicken and egg problem here: When you succeed at something, whether its sports or investing, testosterone levels go up, while decreasing fear and anxiety. But testosterone can also increase anxiety, causing aggression, in certain circumstances.


“It’s a crucial unifying concept that testosterone’s effects are hugely context dependent,” Sapolsky writes. “This context dependency means that rather than causing X, testosterone amplifies the power of something else to cause X.”


This context dependency is a big takeaway from Sapolsky’s book. All of this stuff – hormones and genes and personal experiences – all impact behavior and do so differently in different contexts. (The same is true in markets. How do rising interest rates affect stocks? It’s complicated. How GDP growth affect stock market returns? Ditto. And on and on for a host of other questions searching for cause and effect relationships…)


Even after all these biological insights about how different factors influence behavior, we still can predict very little at the individual level. As Sapolsky says, we can explain a lot and predict little.


And this begs a bigger question about how much we’re really in control of. I kept thinking, as I was reading Sapolsky’s book, about how strange it all is. Certain smells or sounds show they can influence what we decide to eat or how we answer certain questions. This is just what we know now. There is ongoing research that continues to map new influencers and new relationships among all these biological inputs and behaviors. We seem to be more and more the “moist robot” that Scott Adams talks about.


Makes you wonder. How much behavior are you consciously in control of? Perhaps not much. Sapolsky’s chapter on free will is excellent. I’d say if you still believe in “free will,” you’ll at least be on the fence, or heavily qualify your answer, after reading this.


One more thing before we leave Behave. Sapolsky hits on a familiar theme for anybody who has read Alfred Korzybski:


“Some human behaviors stand alone, without precedent in another species. One of the most important realms of human uniqueness comes down to one simple fact, namely that this is not a horse:”

It’s a representation, or a drawing or picture, of a horse. As Korzybski often said, “the map is not the territory.”


All is to say, human beings have a remarkable ability to confuse image/symbol/word etc. with the “real thing.” All of this is, of course, directly applicable and analogous to what goes on in the market, as the Peloton (and Tesla and WeWork and Uber) story shows.


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