Jake Taylor, Farnam Street Investments, Daniel discussed on Invested: The Rule #1 Podcast

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Jake taylor if you missed the first half of our interview go back and listen to the one from last week because it introduces all of the stuff that we're about to talk about. Jake taylor is the ceo of farnam street investments. He's the host of the popular show value after hours. He's also the host of a series called five good questions which is a great author interview series. He is also an author himself so many also. But that's how things work in life. He wrote the rebel alligator which is a fantastic book. We've talked about it. A ton on this podcast. If you haven't ready at go read it and he lives in folsom california jake. Thanks for coming back on. Thanks for having me back daniel so we are just going to jump right into it and what we're talking about here is your paradigm of investment hygiene. Which is another way of thinking about investing practice investing process how we as investors can set up our space. Our environment ourselves to make better investing decisions every time. Really right. that's right. I think that's you just hit on a really key point as that. Having a repeatable process is hugely important. One just because it's most likely to produce good results but to like any good scientific study you need to have controlled in the environment. Control variables And test like you know one thing at a time. Otherwise you don't know why something changed or not so. Having a repeatable process allows us to be much more scientific in our approach to to improving and understanding how our process is helping or hurting us. Yeah absolutely and i think as we were saying at the end of the last episode data is the key to that. Data's the way that we can really find out if we have been improving or not because our subjective experiences usually that we're fantastic. Everything and cruelly. The only thing that screwed up was some external factor. So i've been thinking about this one. In in kind of different contexts. Lately and supposedly eighteen percent of of the universe is at the mass of the universe is visible and the other eighty two percent is probably like dark matter or dark energy. So there's this entire part of the universe that we can't even really see and i think that that same proportion may exist for what you might call like the dark matter of your investment process. There are all these data that we could be capturing about ourselves that we don't at the moment because it's kind of a pain and it may be it's hard to figure out So instance let's say that you you reject you don't want to buy a company and you reject it okay great. Do you keep track of how that went on to do like how you know. What was the opportunity cost of you not buying that most. Don't do that. I torture myself constantly. I would say that you're in the minority doing that Now do this daniel. Do you do you code the reason why you rejected that company. I have never written it down. But i know why i remember why at least i think i remember why so. Maybe i'm wrong about that. So that's i think are filtering process. How do we decide what becomes goes into our portfolio or not can be dramatically improved and informed by track ing y. We rejected something. So we don't you know you can calibrate your filtering. Based on looking at the things he rejected a why. And how did that go on to do. So let's talk about like a practical example. Warren buffett famously. Has this this basket on his desk. That says too hard. And it's like that's the too hard pile right. You put things in here there too hard all right so we're going through and we're looking at best man ideas when we go. Oh man this is complicated. This is too hard. I'm gonna put it my heart pile good for me. I'm like warren buffett right okay. that's that's fine. And i think knowing your circle of competence is obviously very important. However when you're just starting out especially how do you know if you're being like a little bit too lazy about putting things in the too hard pile and what if you were. You could see that boy. Everything i put in my to pile has done really well. Maybe i need to dig just a little bit deeper under the surface and add some more things into my circle of competence and my results might dramatically improve. We don't know that about are. We don't know what the cost of our filtering is unless we actually keep track of it. Yeah absolutely and that's actually exactly my experience. I think of particularly. I was talking recently about Missing out on amazon was like you know such a classic thing to say and the other one is. I've talked a lot about is missing lululemon which i was so close to and i just had really just started learning about investing and i just wasn't confident enough in my own decisions and i think looking back. That was actually probably the right choice. Ace from a learning perspective from a like was. I really able to make good decisions. I don't really know probably not you know but that companies done insanely well and i was right and my reasons were good and so it's one that tortures me. So if i and i do have notes on on that one and why. I liked it and everything. So yeah i don't know. I often debate if mistakes of omission are really mistakes or if they're just good learning opportunities. That's torture you like chinese water torture drip drip drip on your head. They condemn torture you. I think one of the problems is that like anything with human experience. The bigger and louder the data point the more that it sticks out in our mind is something like amazon. Where it's gone up. You know whatever hundred x may be from when you looked at it. yeah that hurts and like that is like big ringing data point that says god. I really messed up in this classification of widen i invest in that you know whatever. The criteria was that rare criteria. Were that you use to reject it why you do that. Well how let's look at all of the bases. All of the data points of why he rejected for that specific reason and actually survey that entire data set. Because there's probably a bunch of things in there maybe that went two zero that you're not even keeping track of that That you know you have to know what that entire portfolio did and how what that looks like. As opposed to the one big data point that sticks out in your mind. That's not a good way. Probably for us to assess just sort of like anecdotal remembering like man. I bought this one right. Like you're going to skew you're going to skew. What history actually happened if you only use anecdotal data that sticks in your head. I think that's exactly right. We notice the ones that are giant loud misses and we don't even remember the ones that have steadily faded away into the night and if we probably bought all of those we would be doing really badly portfolios. That's exactly right and it's very hard to know that unless you actually keep track of it. Is that what you call signal versus noise.

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