How Deep Do You Swim? (Issue #88)

Investing is like swimming, snorkeling, and scuba diving. What kind of investor are you? This is of course a metaphor for knowledge, research level, and complexity of markets that are being operated or invested in.

Investing is often compared to biology, for example, ecosystems, jungles, and more. Today let’s compare it to the aquatic counterpart of these. Swimmers are dabblers they stay mainly on the surface and rarely venture to see much below them. They stay inshore keeping things simple and are not as concerned with what is happening further offshore. However, swimmers are often scared by cautions like warnings of sharks or condition hazards from authorities. Cautions like these often keep swimmers out of the water. Do you see where I’m going with this yet? Lower-level investors do not do in-depth research so they rarely have high conviction in any given position and can lose all conviction on a whim based on an article or small piece of additional information. This means that swimmers shouldn’t try to conquer the ocean and instead stick to a more curated experience in the form of a mutual or index fund. And most importantly the best returns are made the longer you trust the process.

Now onto snorkelers, they are much more aware of their surroundings. They have a clear view of the basics. They are still potentially susceptible to surface effects, but the first few levels of thought process are informed. This ability and style’s effectiveness is extremely dependent on what’s immediately apparent. For example, what can you see from the surface or within the first 10 feet of depth? Is it apparent from shore or an easy boating spot? The equivalent in investing would be industries that sell straightforward products or services (think Proctor & Gamble, Nike, Colgate, etc.). These are often great businesses and snorkelers can be great investors. A good snorkeling mindset of safety and simplicity can perform just as well as anyone else. The confidence of having some view of beneath lets these investors have more conviction and perspective. The danger of the snorkeler is when they try to push past their boundaries. This is very apparent when there’s additional due diligence necessary for example in more complexly structured businesses or businesses like banks or insurance companies that operate uniquely. The best-performing snorkelers are the ones who know their limits and operate within them.

Finally Scuba Divers, the most advanced and sometimes unnecessarily complex investors. Scuba divers can reach further than any other type of researcher but sometimes it’s not even enough to see the whole picture. That said, divers see more than any other role. This is important because they are the least affected by surface changes (i.e. waves and wind don’t matter 100 feet down). When it comes to simple industries it can be overkill to dive but you’ll see more the whole picture. The place where divers separate from the pack is when they need to go deep and into something one or two levels more complex than the typical snorkeler. As I previously mentioned this can be industries like banking or insurance. They do not operate in the same way as other businesses and shouldn’t be analyzed the same way either. It requires a specialized skill set and a more complete understanding of the ecosystem and business. Divers can accomplish this better than swimmers or snorkelers. Generally, more expertise is a good thing, however, there are drawbacks. For example, scuba diving requires extra training, equipment, and with that liability. Many partake who are not ready for the true dangers that are possible. Overconfidence and a naive spirit can get scuba divers into a lot of trouble that can be difficult or impossible. These can be characterized by ways to invest like options or shorting or by simply the complexity of companies some divers opt for without realizing their lack of understanding.

If you can’t tell I have a bias here. It is clear within most of my holdings and throughout the publications of this newsletter. I like simplicity. It’s a lot harder for things to go wrong when there are less variables to optimize. There is a common misconception that you have to be a genius to analyze stocks at a high level. This is an idea created by scuba divers but I’ve found you can see plenty of fish, coral, turtles, and more as a snorkeler staying within your bounds and the risks are much lower. Even in swimming, there are risks you assume, but people still get in the water all the time because they can conceptualize and prepare for the risk. What type of aquatic participant are you? There are many hybrids and many more options than the three talked about here. All styles can be successful it is more about being the best within your choice of activity.

Watchlist Update:

Portfolio Update:

Until Sunday,

Soren