Can an investment process, Rust?

Only entropy comes easy.

– Anton Chekhov

Have we ever wondered why things rust? I mean apart from the chemical process permanently changing metals, rust is quite a fascinating phenomenon. For investors like us, rust comes in the form of two things, inflation & cost of capital. For the physical world, rust is still the chemical process where metal corrodes as it ages. As investors, what we fear though is a threat of moral corrosion than a physical one. More on that later.

I have been reading this really fascinating book on Rust, called Rust – The Longest War by Jonathan Waldman.

Rust: The Longest War by Jonathan Waldman

The book plays a very important role in introducing us to the technological, social, & political impact of something as common as “rust”.

This book captures the same romance of everyday life like the book American Steel, which captures the rise of Nucor or The Box, which shows us how a metal, shipping container changed our lives.

Recently at our annual OctoberQuest 2016 Event, a speaker mentioned something about investment process. He said that, “20% of your investment process gets commoditised every year”. What it might also mean is that the market catches up to our ideas continuously and prices them beyond the reasonable comfort zone to hold on to them.

I like this thought. What a motivating idea to push ourselves constantly to hunt for new ideas! But when we sit through and think, it’s not really an easy task. A lot of times, we really are a slave to our line of thinking. If we’ve found a comfortable corner for investing, it is really hard to step out of it & try something else, just because the situation demands it. While thinking it through, I wondered what would a budding value investor do, when he / she comes face to face with this kind of investing “Rust”?

One method is trend following. Just follow the prevailing trend and don’t bet against it. It’s a very popular investment strategy, which is recommended by several traders. Something that has made enormous money over time. All it needs is a thorough understanding of trends (long term and short term) to really take advantage of them. It also needs acknowledgement of luck, if we stumble upon a really strong trend. What Mr. Raamdeo Agarwal at OctoberQuest 2016 called as, “strong tailwinds”.

But reality isn’t always what it seems to be. If we’re are courageous, it makes it worth our while to understand the cycle & estimate the evolution of a company’s balance sheet. We can stay doggedly contrarian because we think / believe that we know better than the market. This is another amazing way to beat the corrosive nature of consensus.

One more method is to re-visit our current investment ideas with a fresh set of eyes to really find where we were right / wrong while processing it. Poke holes in our data.

But if we zoom out a bit, all this seems fraught with self doubt and cynicism. Investing principles rarely change over time, what changes is our ability to stick to them through different market cycles. If we are ok to look stupid for a while & willing to accept that we will always be in the learning mode, we can try to galvanize ourselves from commoditizing our investment process over time.