Clifford Cliff Sosin Carvana CVNA Jean Marie Eveillard Studying Broadly

Sharpening the Axe

Most of us, with good intentions, accumulate a great deal of reading material to go through at our leisure when time permits. Cliff Sosin explains why making time for such "leisure" can be a central contributor to investment success.

Editor's Note: First Eagle Funds' Jean-Marie Eveillard tells the story of describing to his six-year-old daughter what he did all day – which was basically half reading, and half speaking with colleagues – and how her immediate retort was, "That's not work!" CAS Investment Partners' Clifford Sosin, whose investment case for Carvana is featured in this issue, reflected last year in an investor letter on why he spends as much time as he does "studying broadly." This excerpt from that letter is reprinted with his permission.


When I describe our business to people, I often find that it is helpful to lay out how our portfolio is constructed and how infrequently it changes. "We own six investments, three of which we have held since the inception of the partnership, and in a typical year we might buy one new position and/or sell one position." Occasionally the uninitiated will inquire something to the effect of, "If you buy and sell so few stocks, what exactly do you do all day?"


Fair enough! It certainly doesn't seem like we "do" particularly much, and if measured in activity, it is pretty clear that we don't "do" very much at all. Certainly my brother in law – who manages teams that load and unload cargo in Charleston Harbor – can point to more concrete activity than I can. Still, how we allocate time and how those activities might lead to profitable investments is important, so I will focus on that topic for the remainder of this letter.


In my experience, a great investment is the serendipitous result of a prepared mind encountering and acting upon the right opportunity. I say serendipitous because it is difficult to know in advance how best to prepare one's mind to identify the best opportunities of the future (and avoid pitfalls), and it is similarly difficult to know in advance which investment opportunities to focus on.


Of course, while luck matters, it is possible to improve one's odds of finding great investments by a) cultivating a prepared mind and b) examining potential opportunities. We take this dual-pronged approach. As such, our day-to-day workflow is divided between studying broadly to prepare our minds and studying potential investments themselves.


What does "studying broadly" mean? Frequent readers of these letters will remember that we try to curate an understanding of mental models which are predictive of the behavior of social systems. The time spent studying broadly is the time we dedicate to learning these mental models and practicing their application.


For example, I've recently spent time studying academic work on how incentives really modify behavior (it is not as simple as "you get what you pay for"), learning how Google runs its human resources activities (differently than many companies that came before it), and studying the history of McKinsey & Company. In each case, the direct application to investing is unclear. However, done year after year, the cumulative effect of this effort is to arm us with a bevy of mental models and case histories, which can make, and have made, the likely outcomes of seemingly ambiguous situations clearer. This accumulated knowledge is (hopefully) the raw material for insights.


One positive attribute of these broad learnings is that they tend to have long useful lives and many potential applications. Insights into how people behave or how groups behave are likely to be true for many years and useful in many applications. By constantly practicing and adding to our mental-model toolkit, we can (hopefully) continually expand our advantage over those who never curate such a toolkit.


This focus on long-lived and broadly applicable wisdom contrasts sharply with more common efforts to focus on shorter lived and less broadly applicable learnings that dominate most investors' time. Time dedicated to determining if a company beat earnings this quarter, why a stock is down 3% today or how weather impacted auto sales this month, etc., is of little enduring value. Thus, while whiling away the afternoon with an Alexander Hamilton biography might not appear productive, the timeless learned lessons from such an activity may be extremely valuable, and the ability to dedicate time to such long-lived learnings is in fact a core competitive advantage.


Abraham Lincoln is quoted (apocryphally, as it turns out) as saying "If I had five minutes to cut down a tree, I'd spend the first three minutes sharpening the axe." Studying broadly is how we sharpen the axe. I don't know if we quite reach the 60/40 ratio of preparation to execution, but we certainly invest a great deal of time studying broadly.