I was interviewed by Market Sentiment
Special Edition #8: 'Interview: Investing as lifestyle design with LibertyRPF'
Friends-of-the-show at Market Sentiment (📊) had some questions for me and I had a good time doing my best to answer without going on too many tangents (maybe I failed a bit at that one 😬 but hopefully it’s interesting stuff!).
The original version was published here. With their permission, I’m reprinting it for those that missed it. I guess this counts as 𝕊𝕡𝕖𝕔𝕚𝕒𝕝 𝔼𝕕𝕚𝕥𝕚𝕠𝕟 #𝟠. Enjoy! 💚 🥃
Introduction: Using what you know
First off, I want to say that I’m a big fan of the way you approach life and investing - I never know what I’ll find when I open your newsletter, but there’s the possibility of finding some interesting insight or perspective from which to think about things that can change the way I see things. And I love that you don’t restrict yourself to investing - Who knows, maybe the best ideas are cross-disciplinary!
Thank you! I appreciate the kind words, but mostly, I appreciate that you are reading! I know everybody is busy and has countless options of things to spend their time on, so I take it very seriously when someone decides to allocate slices of their life to my stuff.
The thinking behind the newsletter was that I want to always keep it a top priority to have fun doing it, because nothing is forcing me to spend so many hours every week on this project, so if it’s not fun, I’ll just do something else – any other long-term goals for the newsletter won’t be achieved if I don’t stick with it, and I won’t stick with it if it’s not fun…
This constraint has informed all other choices. It’s why I don’t restrict myself to just business & investing. There are so many interesting things out there that don’t fit neatly into that category, and I’d be sad if I felt I couldn’t cover them. I also think that on the other side of the screen – on the reader side – people are multi-faceted, they want a variety of stuff, and what matters most to them is whether it’s good or not, not whether it fits into category XYZ.
But I think you’re right that many great ideas are found at the intersection of fields, or by combining things learned here and there. I’ll never beat specialists at their game, so I have to lean into being a generalist and try to leverage the 80/20 rule with as many fields as possible so that my ‘100’ turns into ‘400’, so to speak.
What you are doing is probably every retail investor’s dream - To be able to read and study the topics that you are interested in, while also using that information to get positive returns in the stock market.
I think it’s indeed a lot of people’s ‘dream’ to do something similar, achieve some independence, and have the freedom to work on what they want to work on, but I don’t think that many people actually want it enough to put a plan in place and execute on it. It’s more of a passive dream, in other words. I think most people are more secure following a conventional path when it comes to career and lifestyle. It takes a certain contrarian streak to do things differently from all your peers and family, and because it takes a long time for the plan to bear fruit, you have to be comfortable spending years with everyone doubting you and your decisions.
Once I decided that the thing that made me happiest was control of my time and the freedom to decide how I spent my days (I didn’t pick the name ‘Liberty’ totally at random, after all), it took me 11+ years to get to the point where that was possible.
I never had a particularly high-paying job, but I had a plan and my wife was on board (she’s as frugal as I am, if not more), so we just executed. The math works if you make the trade-offs required, but most people seem to want the results 1) quickly and 2) without downsides, so that’s why it stays mostly a passive dream.
How was the road to the place you are at currently? You started out reading about things that interested you, technology, aerospace, etc. but at what point were you confident enough in your abilities to start investing based on your insights? Was there a defining moment to take the leap?
I’ve always been curious about lots of things. I grew up obsessed with fighter jets, computers, music, video games, movies, etc. There’s never really been a thing that was obvious to me growing up that I should dedicate myself to at the exclusion of all others – in large part because it didn’t feel possible to me, growing up in a relatively modest background where few achieved much, and not speaking English until in my mid-teens – so I kind of always picked paths that left me with options, but if I had to redo things I’d do them differently (we make bad decisions when we’re 16-17…).
Science & Technology always fascinated me because through them you can understand so much of the world, and there are always new things to learn, either by digging deeper into something or by following the new things as they are discovered and built.
But I never wanted to spend my days on just one piece of tech or science. Learning about it is the part that I like, not the day-to-day minutia of execution, spending 6 months on some bit of code that is part of some API, or synthesizing some proteins to see if they react in useful ways or whatever.
It’s only later in life that I discovered that business & investing were also great lenses through which to understand the world. When humans want to do something difficult, they usually have to band together and get equipment and tools and build things, and the best way to do that is to form companies, which are financed by investors, etc.. So by understanding these companies, I could understand more of the world, but it had the added benefit that I could also try to earn a living doing it!
I think that’s why I settled on investing as a full-time gig. So during that decade+ when I had a real job, I learned about investing in parallel, maybe spending 50 hours a week at the real job, and 20 hours on investing. That worked until my wife and I had kids – thankfully around then I had been saving most of my income and investing it for enough years that I could go full-time with the investing.
Does being an individual investor need a minimum corpus to be viable, in your opinion?
I feel like as an investor, you can never know if you’re any good or be sure that you’ll make it, but you can do your best to mitigate risks and to build confidence over time, from experience. So you need a minimum amount of capital to get started, but that number will vary a lot depending on your expenses (which are largely under your control, don’t let anyone tell you differently. It just may mean hard choices and trade-offs), where you live, do you have a partner, etc.
There’s a video by Pete Adenay (aka Mr. Money Mustache) that I often recommend to young people who are kind of thinking about becoming financially independent – not to go on a beach and do nothing, but to have more options and because working is more fun if you don’t need the money:
Investment as lifestyle design
You’re a huge fan of Richard Feynman (so am I), and have also talked about your fascination with Shannon - Two thinkers who were wildly original, thought from first principles, dabbled in a variety of fields, and also prioritized fulfillment over profit. Has your study of Feynman and Shannon influenced you or given you any principles that you can use to think about stocks?
My first son’s middle name is “Feynman”!
I’m not sure how much of a direct impact Feynman and Shannon have had on my investing, but they have had a big impact on my general decision-making and thinking, and what is investing if not that? So definitely a big indirect impact.
When it comes to physics, you can strip down a problem to the basics and build from there. But when it comes to stocks, it’s not quite clear what the basics are. “Are stocks correlated with their companies? Does value investing work? Does macro matter? Is it all about emotions or price action?” There are so many directions to choose from.
How do you build fundamentals or a framework to think about the market when it’s not clear what the first principles are?
There are so many ways to invest, it feels a bit weird to call all of them by the same name. The analogy I like is this:
Everything at the Olympics is “sports”, but it’s very different to do power-lifting vs sprinting vs decathlon.
So I’m sure some quants have a very physics-like approach to investing, treating stocks and macro as probabilistic clouds of elements with certain properties that can be analyzed and predicted to some extent, trying to make money by identifying inefficiencies and aberrations and overlooked correlations and all that.
That’s not my approach, I’d have no idea how to execute such a strategy.
I’ve long ago accepted that I’ll never be the best investor out there, and that I need to be clear on what my goals are if I don’t want to drift into directions that lead to bad outcomes (either losing money in avoidable ways, or making moneys in ways that make me miserable day-to-day).
I call the concept ‘Investment Style and Stock Selection as Lifestyle Design’ and wrote about it here.
What’s that approach like?
The general idea is that whatever I invest in, I’ll spend my days thinking about (reading about, learning about, discussing with others). So I don’t want it to be things that don’t interest me.
Maybe I could make more money by constantly following the “best forward IRR” around, but if that means being bored or miserable, I’d rather have a lower CAGR and be happier by looking at things that I find inherently interesting, on top of being potentially good investments (there’s still a hurdle that needs to be cleared).
In the same way, maybe I could become a better investor if I cut everything out of my life that isn’t helping me be a better investor. But would that make me happier? I’m making these kinds of trade-offs to achieve satisfactory returns AND do things that I find interesting day-to-day.
Too many people forget to optimize for happiness, they just assume that “more money = more happiness”, but that’s clearly not true, especially above a certain amount that covers life’s basics and a few niceties.
Assessing funds and understanding crypto
You once mentioned that you started out by studying index funds and then realizing that Berkshire is an index fund of just “good companies.” And then you went on to find others like Fairfax, Leucadia, Constellation, etc.
How do you assess such funds and managers? Because past performance is no guarantee of future performance, but more importantly, if there’s a drop in performance, it could be the fund failing OR it could be the market - How do your emotions play out and how do you handle them?
It’s a good question. I think it comes down to a judgment call every time, but you can build your confidence in companies and management teams over time.
It’s why I tend to hold positions for many years. It takes a long time to get to a point where I’m really comfortable with a company, and so to replace it with something else, the new thing doesn’t just need to have a better return profile, but it needs to be better enough to compensate for the fact that I’ve known this new thing for a lot less time and have a lot less confidence that I’m not misjudging it or that management will really deliver.
For example, I’ve owned Constellation Software for almost a decade. In that time, I’ve seen it all – good times, bad times, short attacks, changes in capital deployment approaches, etc – and all this ‘data’ helps me interpret what happens going forward.
There are other companies that I’ve only been following for, say, 1 year. I really haven’t seen them go through ups and downs, I haven’t seen management under fire in the trenches. I may have read about their history, and that helps, but it somehow is never quite the same as living through it myself.
My approach to assessing companies and stock strategies is usually just to look at the numbers - historical performance, benchmarks, etc. But there’s a risk with that, because there might not be sufficient data to analyze funds or companies that have a very short history, which might go on to do really well! How has your focus on stories helped you identify good opportunities here?
I like NZS Capital’s approach (can’t predict the future, so focus on a barbell of companies with resilience and optionality). I think it’s a probabilistic call, so if a company doesn’t have much of a track record, it’s in a fast-moving industry, it’s growing fast and could become huge, but maybe it could fail to become profitable or a competitor could win the space, etc… I feel like this falls into the optionality bucket, and I would tend to size these positions smaller.
This way, if they don’t work out, not much capital was at risk, and if they do work out, they may turn into big positions organically, and by then they tend to be more predictable and resilient with a more dominant position in their niche, so they deserve the bigger portfolio allocation.
Case in point, this is one of my favorite illustrations of yours: How to think about crypto. Especially because this is such a nascent space and it’s driven so much by stories, finding the good investments is quite difficult. How would you approach the problem of finding a good investment in this space? Making sense of the stories?
With my approach, I do focus a lot on qualitative aspects. Some may call it stories in a pejorative way, but I think that if you’re in a relatively new space, you have to understand products, competitive dynamics, secular trends, management quality, R&D velocity, the stickiness of products, that kind of stuff.
The numbers alone don’t tell you enough to make a bet if things are very new, very fast-changing, or very competitive. Two companies could have the same set of numbers – same gross margin, same growth rate, same EBITDA margin, etc – but one may have a commodity product that is easy to swap for a competitor’s and be selling something that isn’t mission-critical and will be cut at the first sign of economic trouble, while the other may be selling the equivalent of an Oracle database that will still be used by customers in 30 years.
On crypto, I kind of don’t feel it’s a separate thing from the rest of the businesses out there, so the same criteria should apply. Are you solving a real problem for your customers? Are you doing it in the best way? Can someone else replicate what you’re doing easily? Is management high-quality (integrity, intelligence, etc)? Is management aligned with shareholders? Stuff like that.
Too much of the crypto I’ve seen have been ways to speculate on crypto, ways to lever up your crypto speculation, etc. I don’t find speculation inherently interesting, so I tend to stay away from it and wait until I see other kinds of hard problems being solved by projects.
Designing your own information stream
One of the things that you do, apart from creating “serendipity” and introducing people to new things, is that you also curate information for your readers. That’s a great advantage to the people who follow you - They might be specialists, but they get exposure to great ideas from many other fields while focusing on what they are interested in. I want to understand your process a little better:
What does your day look like? How do you identify ideas to explore or things to read?
How do you design a good reading feed?
Thank you. That’s the goal! There’s way too much stuff out there for most people to sift through, and social media isn’t doing a great job of it because it isn’t aligned with giving people what is most interesting, what makes them learn, what makes them think about life differently, etc. It’s optimized for “engagement” and “time on platform” and “ads clicked” and such…
So human curation with a point of view, a personality, not just some bland list of links or machine-learning generated summaries - I think that’s valuable.
“And since it’s curation all the way down, my own day is largely based on how I’ve curated my sources. It’s a mix of who I follow on Twitter (lots of other good curators), my RSS feed, Google Alerts, etc.
One way to think about the importance of curation is that who you decide to follow now largely defines the thoughts that will be in your head later.”
That’s why I don’t understand people who follow 2,000 accounts on Twitter, including lots of noisy ones. Or even just switching from the algorithmic to the chronological helps, because the algo optimizes for engagement, so they’ll show you tweets by popular accounts that get lots of clicks. But some of the best accounts I follow are small accounts that post rarely, but have a very high signal to noise – I don’t want the algo to hide those from me…
You have discussed Personal Knowledge Management tools - what’s your process for integrating all the random bits of information you find in your day so that you actually end up using them? (Because I find that a large portion of my notes remain isolated and unused. Though they sound interesting on their own, they don’t integrate with my main body of thinking)
My personal knowledge management is mostly split between Notion for newsletter stuff, and Obsidian for everything else (which includes all the investing stuff). I have a “working memory” Apple Note file that I keep open on my desktop and phone and I can dump anything quickly there, and then process it later into longer-term storage if necessary.
I did a mini-podcast where I discuss my note-taking a bit:
Are there any reading/educational suggestions for our readers that will make them better investors? (Books, newsletters, podcasts, courses, etc.)
There are lots of them, and that’s kind of what I put in the newsletter.
But here’s one that I’ll recommend: Founders Podcast by David Senra.
He has read hundreds of biographies and memoirs from entrepreneurs, founders, and other interesting people (leaders, scientists, filmmakers, etc). So much to learn from the lives of these people!
Liberty’s investing process and advice
How is your process for studying investments different from your general reading?
How do you go deeper into studying companies?
You once mentioned that a company’s ability to iterate fast is a good characteristic. Is there such a set of qualities that you look for in a company that you plan to invest in?
It’s a very organic thing. I look at lots of things, and most just bounce off me fairly quickly. There’s something I don’t like, or something I don’t understand, or I’m just not interested in digging deeper, and so that goes into the “no” pile or the “maybe later, we’ll see” pile.1
But some things just obsess me for a while. I start reading everything I can find, I start talking to people who have been studying it for years or work in the industry, and over weeks and months I build up lots of notes.. It all swirls around in my brain for a while, and at some point I just know that this is something I want to own.
The actual qualities and characteristics to look for and avoid aren’t particularly original, they’re the same as most people are looking for to determine what’s a good business likely to generate good returns for shareholders (mix of business quality and valuation).
For some businesses, you can clearly see what the ROIC and FCF/share trajectory is, for others you have to guess at what a more mature state may be, because they may be in fast-growth, heavy-investment mode. But at the end of the day, it’s about someday getting the most FCF/share that you can for the lowest price that you paid.
I’d like to understand your investing process a little better. This might be the most helpful part for our readers.
Do you agree with Peter Lynch’s “Invest in what you know” philosophy, or are there some caveats that our readers need to keep in mind?
I’m a bit more Phil Fisher than Peter Lynch, but with my approach, it definitely helps to invest in things that I feel like I understand well enough that I won’t be the last to know if things change in the space.
But I also know that it’s entirely possible to invest well without knowing much about the actual business, just generating a large portfolio with tons of positions using quant factors.
It’s more important to know yourself and what works for you than to try to find the optimal investment approach in the abstract, I think.
What is your typical time horizon for investments? Have you experimented with this?
Time horizon tends to be multi-years, ideally decades, but it’s not really up to me. I can’t know in advance which businesses will keep executing and which will stumble, so it’s about watching what you own carefully and keeping a flexible mind to whatever may come (opportunities and problems).
What does your portfolio look like? How do you manage risk and the emotional side of investing?
I try not to give too much details on my portfolio mostly because I want to strike a balance between being able to discuss what I own to get feedback and learn more, but not get so publicly identified with ownership of certain things that it becomes harder to make changes if I need to (Another thing to note is that there are some of my big positions that I don’t talk about because there’s not much to say, and some of my small positions that I write about frequently because they’re more interesting and more is going on with them – people shouldn’t assume that because I talk a lot about something that I own a lot of it, or even own it at all, because there’s a lot that I follow that I don’t own, though maybe I sometimes wish I did…)
Risk management: Ego can lead to mistakes in investing as in the rest of life, so finding the balance that works for you where your ego doesn’t get wrapped up in investments tends to help results over time.
How have the portfolio’s returns been so far? How do you measure its performance?
Everything about how I measure performance is pretty vanilla. I just know what kind of returns I need to achieve my goals, and as long as I’m above that over the long term, everything else is fine. I do benchmark against indices because that’s my alternative if I decided not to invest, and so far I’ve been doing well there, but I try not to see it as a day-to-day, quarter-to-quarter competition.
I know sometimes I’ll be ahead, sometimes I’ll be behind, but there’s no finish line, no prize when I’ve made it (as an investor, you can always lose it all tomorrow, whatever your past track record was). I just want to keep playing the game, that’s my goal.
Which article of yours is the most popular, or most talked about? Does it surprise you?
Probably my first interview with David Kim (aka Scuttleblurb). He’s great in it, so all credit to him:
Which article or idea of yours is your personal favorite?
Hmm, that’s another really good question… I know there’s a bunch of stuff I’ve written about that is really close to my heart and important to me, but like in #1 above, I can’t really put a finger on it…
I do really like the conversation I had with my friend David Senra on a podcast we did here:
Last question: Do you have any idea or suggestion that our readers can take away to become more well-informed investors, or even make investing a little more enjoyable and stress-free?
The answer is of course to become a paid supporter of my newsletter! Haha
I feel like in my early years, I used to read lots of investing and business books. Now I mostly read biographies and history and science/tech stuff. I think it has helped my investing a lot by broadening my knowledge base.
There are real diminishing returns to always reading about the same things, so I would recommend branching out and trying new things. You may not like some of them, but maybe others will become your new favorite things, and who knows when an idea that you’ve learned in some other field will be extremely valuable to you?
Thanks again to Market Sentiment for doing this! 🤜 🤛
If you enjoyed it and want more, the closest thing is probably this podcast interview I did with Jim O’Shaughnessy (💚 🥃 ☘️).
For even more, please subscribe and consider becoming a paid supporter. Thank you! 💚 🥃
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