5 Investing Lessons I (Re)learned In 2023

“Knowing” things isn’t always enough

“Knowing” things isn’t always enough. Sometimes you must experience them personally to viscerally get them. When that happens, your mind truly internalizes the knowledge that was already there.

As the saying goes, fools learn from their own mistakes while smart people learn from those of others. With that in mind, I hope that my sometimes-painful lessons relearned during 2023 will help you avoid future pain:

1. Management matters more than you think

I always paid attention to management quality. My criteria of competence and alignment haven’t changed. What has changed is how much emphasis I put on management.

The typical management team has the following attributes:

• Low stock ownership relative to compensation which encourages principal-agent problems

• Conventional thinking based on what others do rather than first-principles behavior

• Cyclical capital allocation – stock buybacks when the share price is high, little to none when it’s low

• Propensity to throw around shareholders’ capital on large “strategic” acquisitions that frequently destroy value

Slightly above-average is just not good enough. It’s hard to think of material long-term wealth created by management teams that fit the above characterization, or even by ones that are one notch above. I challenge you to find multiple counterexamples over 20+ year periods.

Of course, one can bet on a reversion to the mean of a deeply undervalued stock that doesn’t require long-term company greatness for attractive returns. The problem with that is that mediocre management can mess that up as well. What you end up with then is just a cheap stock with no reason for that situation to change, and little-to-no direct capital return to allow shareholders to benefit without the market’s re-rating. In short, a classic “value trap.”

2. Betting on an overvalued stock to decline is very hard

Expensive stocks can stay expensive for a long time. Or they can get even more expensive. Usually there is some story that people psychologically buy into, and it is very hard to know when the herd will decide to change its mind.

You might think that fundamental developments might do it. However, think about a stock that is trading at 50x earnings. It usually trades at those levels because the current growth rate is high and people extrapolate it into the distant future. That might be right, or it might be wrong. However, investors can choose to believe the story for as long as they wish, regardless of any logic to the contrary or any current results.

On the other hand, betting that the price is too crazy to be sustainable simply on excessive valuation is a bet where time is against you. The worst part is that you can eventually be proven right, but still lose money. I concluded, after painful experience, that it is just too hard for me.

3. As an outsider, you can never really know what’s going on inside a company

I was researching, and getting close to investing in, a company with a good business and an impressive owner-oriented management with a track record of success. Then one day I woke up to see that the Board had just fired the CEO.

In the public back-and-forth that followed between the CEO, the Board and various shareholders, all kinds of things came out that I had no idea were happening. Apparently according to the Board the CEO was under-delivering on organic growth. Supposedly he pushed the Board to make large acquisitions outside of the core competency of the company. And so on.

I am not sure if we will ever know the truth, but what was shocking is how none of this was known to the shareholders despite supposedly it having been going on for multiple years. The next time you listen to management on an earnings call or read some bland statement from a Board, think about that. And wonder how much what they are saying publicly reflects what is really going on.

4. The best predictor of what people will do is what they have done

When learning how to interview, I was taught that data suggests that hypothetical questions are useless, and the only thing that has predictive power is what people had done in the past. In other words, you shouldn’t be asking “How would you…?” but rather “How did you…?”

In the absence of a track record of accomplishment, you should take a CEO’s plans as hopeful intent. That doesn’t mean they are lying, just that we really don’t necessarily know what they can or cannot do. There is a particular danger if they use language that resonates with you. More than once in my investment career did I fall for someone who said all the right things, except that they hadn’t done them – in the past, or as it turned out, in the future.

5. You don’t know your own or another person’s true measure until you go through challenging times

Psychological pain tolerance isn’t something that you can assess about yourself until you experience the pain. Nor can you know how others will behave during periods of adversity – either theirs or your own.

The good news is that sometimes others will positively surprise you. They will be generous and supportive during tough times, perhaps more so than can be reasonably expected. Others will act predictably as fair-weather friends.

The biggest learning isn’t about others – after all, you can choose whether to keep associating with them. It’s about yourself. If what you learn surprises you to the upside, then you can be proud of having weathered tough times with grace and resilience and use that as a source of well-deserved strength in future endeavors.

What were some of your learnings from 2023? Leave a comment or drop me an email, I would love to hear from you. I wish you a Happy, Healthy and Prosperous 2024!

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About the author

Gary Mishuris, CFA is the Managing Partner and Chief Investment Officer of Silver Ring Value Partners, an investment firm that seeks to apply its intrinsic value approach to safely compound capital over the long-term. He also teaches the Value Investing Seminar at the F.W. Olin Graduate School of Business.