Pabrai's Perspectives on Investing - Part 2

Pabria said, "Things that are approximate and probabilistic don't lend themselves too well to Excel modeling. For me, if I find myself reaching for Excel, it is a very strong sign to take a pass. The thesis ought to be painfully simple in your head."

Emil Lee the interviewer commented, "Buffett and partner Charlie Munger have often remarked that discounted cash flow models are unnecessary if the investing idea "screams" at you."

I honestly believe that most investors make investing too complex; however, in my current endeavor I'm learning how to make it complex. Let me explain.

I am currently a level 1 CFA candidate and I'm finding that I don't see the relevance in many of the "Learning Outcome Statements" that I'm responsible for mastering. For example, I don't personally believe that risk is measured in terms of beta and Sharpe ratios or that studying either is going to make me a better investor. There are many other examples in the curriculm that in my opinion add complexity to investing and portfolio management for the sake of exclusivity.

What are your thoughts on the CFA, complex spreadsheets, and other ways that we might be overcomplicating buying a dollar for fifty cents?

I haven't read a book on investing since I started studying in November and I think I'm worse off for it.

OK back to studying,
Nick

I agree completely with the idea that if you're reaching for Excel you're in trouble. The only time I use a calculator is when I need to translate my thoughts into precise numbers I can lay down for someone else to understand (I probably do this way too much on my blog). Anyway, A full DCF is only ever good for explaining the idea to someone else, not for thinking about it yourself. Whether such a complex (and sensitive!) construction really is useful in explaining the idea to others is an open question – but even if it adds nothing to understanding, most people are more receptive to an idea with a lot of exact numbers and projections in it regardless of how absurd such precision is.

As for the CFA, I think it's a great idea, but it's obviously not the ideal preparation for successful investing. It is however a mark of distinction that demonstrates commitment if nothing else. And, really, if you think about it, a lot educational accomplishments turn out that way.

The difference is that the CFA is a professional designation and so you expect it to mark the mastery of practical, professional skills – but really there's no agreement on these because of the field itself. What's useful is uncommon and what's common is useless – except insofar as ethical, professional conduct. That's a good thing even if everyone is practicing it. But, realistically, you can't design as useful a "curriculum" as you can in professional preparation within the field of medicine or even law where constant competence is often stressed over insight and that's to everyone's benefit.

After all, being a highly skilled investor, analyst, etc. means to most people being equipped to deliver unusual results – and you can't turn out large numbers of people with the ability to do that.

Have you ever read a blog called Value Discipline? Rick, who writes that blog, has mentioned the CFA a couple times. I thought his ideas about the CFA were spot on:

"As many of you may know, I hold the CFA (Chartered Financial Analyst) designation. I am very proud to have completed this rigorous program. For many of us, the deeper learning and understanding only begins after this point. Continuing education through seminars, workshops, abstracts, and our professional journal, The Financial Analysts Journal (FAJ) is available."

I think he's right to stress that second part. To the extent that the CFA fosters professionalism in a field that is inherently susceptible to unprofessionalism and amateurism of the worst kind it's a net benefit for everyone, even if the curriculum isn't sufficient for the kind of understanding of investing we'd all like. Of course, the good news is that in the field of investing many of the best practitioners have put their thoughts to paper – even Buffett, who hasn't written a book has produced a lot of study material.

As for the CFA, I think it's a great idea, but it's obviously not the ideal preparation for successful investing. It is however a mark of distinction that demonstrates commitment if nothing else. And, really, if you think about it, a lot educational accomplishments turn out that way.

You're right many things are about the commitment and sacrifice, not about the "thing" itself. In this case the thing is education. Ultimately, the CFA is very tough and should go along way in facilitating a career change for me.

The difference is that the CFA is a professional designation and so you expect it to mark the mastery of practical, professional skills – but really there's no agreement on these because of the field itself. What's useful is uncommon and what's common is useless – except insofar as ethical, professional conduct. That's a good thing even if everyone is practicing it. But, realistically, you can't design as useful a "curriculum" as you can in professional preparation within the field of medicine or even law where constant competence is often stressed over insight and that's to everyone's benefit.

That is a very good point. I hadn't looked at it that way. I always look at investing as craft or skill. The type of endeavor that rewards hardwork and mastery.

To many people, including the investment community when looked at as a whole, still see investing in marketable securities as an art or otherwise worthless. Those that think its an art don't look at a stock as though its a business and those that find stock picking worthless see the market as perfectly efficient. In fact, it might be better for us as investors if we stop waving the Grahamanian Banner. Then again if Buffett couldn't convince the world, I doubt there is much risk that I will.