I recently read about Tesla’s autopilot software update being able to look one and two cars ahead to determine if they are safe or at risk of an accident and, if so, this would then trigger the Tesla to slow down to avoid it. A driver in the Netherlands had a dash cam that was able to take a video of this situation unfolding on the Autobahn and how the Tesla was able to avoid it independent of the driver’s observations and reactions. Check out the video here and listen for the warning signal far in advance of any human being capable of being able to detect danger. This is a great metaphor for investing and in life more generally.
Imagine if we could see ahead and identify the risks and when they were growing to a dangerous point that could subsume us if we didn’t take counter action? The best investors tend to have this uncanny ability to recognize risk and when they are not being compensated sufficiently for being exposed to it. I have written about Stanley Druckenmiller and this is what he said the job of an astute investor is, particularly a macro-oriented one like him.
“[N]ever, ever invest in the present. It doesn’t matter what a company’s earning. What they’ve earned. He taught me that you have to visualize the situation 18 months from now, and whatever that is that’s where the price will be, not where it is today. And too many people tend to look at the present, oh this is a great company, they’ve done this or this central bank is doing all the right things. But you have to look to the future. If you invest in the present, you’re going to get run over.”
Warren Buffett takes a bit of a different approach than Druckenmiller. Druckenmiller believes he can avoid accidents by thinking ahead while Warren Buffett would say that having a margin of safety is of paramount importance. In terms of driving this means keeping a safe distance from other cars so you have time to break, you’re not going too fast or slowly, particularly adjusted for the conditions, and your car is well maintained. The goal is to get to your destination on time and safely. From an investment standpoint (with a real estate bias) it means:
- Not being overleveraged and putting yourself in a position to have to sell when an accident happens.
- Ensuring that your debt maturities are managed in a way such that when loans come due they can be easily repaid.
- Managing the pre-payment flexibility of your debt so you can take advantage of selling or refinancing properties at the opportune times.
- Being able to support your investments if additional capital is called so you can avoid dilution.
- Have strong cash reserves (safe distance) as this can allow one to have strength during downturns and the firepower to take advantage of opportunities when they materialize during times of capital scarcity.
- Thinking independently and having the mental fortitude to be fearful when others are greedy and greedy when others are fearful (mental health, psychological fortitude – akin to the car being well maintained).
- Being open and honest with your investors through thick and thin so you have their trust and support when times get tough.
These are all basic principles but worthy of being reminded of. In the world of driving there are a few known risks: accident ahead, hitting another car or pedestrian, running stop signs and red lights, cars swerving into you or cutting you off, car breaks down, etc. All of these involve either not be prepared or not paying attention or, if so, then not having enough time to take counter actions. Focus, preparation, and space are the keys.
Spacing has great application in so many aspects of life. For example, one of the keys to the triangle offense of Phil Jackson is spacing. With proper spacing between you and your defender(s), many more options become available.
We all need our safe spaces, and I’m not talking about the ones on college campuses. We can all benefit from identifying what is dangerous to us or others and how we can be drawn to such situations or triggers that lead us to seek them out and figure out ways to keep a safe distance from them before we get in too deep. These can be created through the prudent use of boundaries, guardrails, discipline, core values, relationships, thinking ahead, delayed gratification, etc. These all give us space and option value in life. Space creates some distance which can offer perspective and the ability to reflect. Equally important, however, it cannot be used for escape or avoidance since you really haven’t created true space because you are now your own prisoner. Space is physical, psychological, mental, and financial.
Space is a powerful concept and principle to be cognizant of and to utilize in life, and not just in the world of investing. As we end 2016 and roll into 2017 I thought I would end this post with one of my favorite quotes from Viktor Frankl which I think is germane and one I discussed in my book:
“Between stimulus and response, there is a space. In that space is our power to choose our response. In our response lies our growth and our freedom.”
I hope you have a wonderful 2017.