Emergency and DEEP VALUE Investing (Lesson 1)

planeEmergency Inbound   Please JUST LISTEN (not watch) to the audio. Ignore the skill of the pilot.  What do you notice AS UNUSUAL?   How does this relate (if at all) to Deep Value Investing?

Emergency Inbound Simulation with Audio The two-minute video—please WATCH along with listening carefully to the Captain.

Full Simulation If you don’t grasp the situation (you are in a 50-ton aircraft that flies like a tank with wings once power is lost-the aircraft holds 155 passengers and several tons of fuel, you are over a DENSELY populated area.), watch that seven-minute video.  Thoughts about the Captain?  What was he thinking and doing? Any lessons here for us as investors?

Was he thinking about this? FEARLESS

Was his reaction similar to this? Here’s JOHNNY!

I used to be a pilot of small aircraft so I am biased. Is there any connection between how the pilot acted and investing? The situation and investing?   Was the pilot lucky?   Was the pilot a hero?  Would the pilot consider himself to be a hero?   Why don’t we give parades to mothers who don’t kill their children?

Take a break and go back to the first link.  Before listening again, think about what you would do as the pilot. How many decisions do you have to make and how much time do you have to decide?   What would you be fearful of? Why?   How should we handle fear?  Why are we the enemy?

Don’t hesitate to disagree, contradict or point out other questions.  Do you think that personality has a lot to do with how the person responds–the nature vs. nurture argument?   Buffett said that once you have over a 125 IQ then success is a function of temperament and character. Do you agree? What about this guy: Do You Love the Virgin Mary?.  Can you work around temperament? By the way, have you ever noticed any similar traits among Seth Klarman, Warren Buffett, Ben Graham, Walter Schloss?

One goal of this post is to reinforce the power of emotions in terms of your readings from lesson 1.

17 responses to “Emergency and DEEP VALUE Investing (Lesson 1)

  1. I remember reading about this in Soros’ book on Alchemy of Finance, which is captured in the following blog post (not mine):

    “One day in 1974, Soros was playing tennis with an acquaintance. The phone rang.It was a broker in Tokyo, letting Soros in on a secret: That year President Richard Nixon was immersed in the Watergate scandal that would eventually cause his downfall. The broker was calling to let Soros know that the Japanese were reacting poorly to Nixon’s troubles. Having taken heavy positions in the Japanese stock market, Soros had to decide what to do-stay in, get out. His tennis partner noticed that sweat had formed on Soros’s forehead that had not been there during the match. Then and there Soros decided to sell. There was no hesitation, no feeling that he needed to consult anyone else before taking such a large step. It had taken him a fraction of a second to decide. That was all.”


    To my mind – and perhaps others would disagree – Soros has a kind of instinct and decision-making process that is effective under extreme pressure, like the pilot. I tend to think of Klarman et al as patient and thoughtful, rather than being able to make snap decisions.

  2. What I find unusual is how calm the pilot remains. He’s clearly not getting put off by all the “noise” of the events and is focusing on what he knows. i guess a parallel can be drawn with the Behavioral investing paradigm, lose the emotion and focus on price distortions with respect to value. Don’t get drawn in by the noise of Mr. Market, CNBC, etc..

    I certainly think he’s a hero because it could have all gone wrong too (50 ton birds don’t always land so easily with engines out).

    I doubt he considers himself a hero, rather I think he sees himself as someone trained to think and act with a certain discipline. Again, that applies to ourselves in investing. Our bad habits and biases work against any discipline we may have.

  3. I think the comment on video 2 summed it up quite nicely-

    “He didn’t make a decision to “try to land in the Hudson”, he decided to land in the Hudson, and did so. This is how the disciplined, trained mind operates. When Captain Sullenberger said “we’re gonna be in the Hudson” his intention was clear and focused on his duty to his passengers and crew, without flinching. Quite a man, that one.”

    As an investor you need to make a decision and follow through knowing you have faith in your judgement and research.

    What did strike me in the first video was his calmness. However, a correctly trained, focused and decisive mind will always be calm under pressure. Specially trained military personnel vs street police come to mind here.

    Of course people will consider him a hero. In the end I wont be at all surprised if he felt he was just doing his job.

    In terms of temperament, I believe it might be a mix of nature and nurture. You must learn, as we are now, to not over think things and have confidence in your craft or training. It can be taught. Temperament goes a long way…

  4. I would describe the pilot’s reaction as different than calm. I agree that his demeanour comes off as calm. However, i don’t think that calmness is the root cause of his success.

    I think the pilot probably had all of those horrible feelings in the pit of his stomach – just like we all do when the stakes are high and something bad is about to happen. So rather, I would say that he is unrelentingly focused.

    He’s putting 100% of his concentration on the task at hand and doesn’t compromise by focusing on anything else.

    I can see how this directly relates to investing.

    Say the market is tanking and you’ve got those horrible feeling in your stomach because you’re losing thousands/millions on paper. You feel just like this pilot and your mind concocts all sorts of “what ifs” and worst case scenarios. You can’t see the forest for the trees. However, the talented investor accepts his emotions for what they are and wills himself to focus on the task at hand (For the Pilot: how can I land? /// For the Investor: how can I assess this investment for it’s true value?).

  5. One of my undergrad degrees is actually in aviation so I’m always seeing connections between that and investing. The pilot did what he was trained to do. You’re taught to always monitor for safe landing areas, and I’m sure he’s pictured the Hudson many times as a possible retreat if the first option, returning to airport, is not available. So once he lost engines, he had only one decision to make. Could he make it back to the airport or not. Once he decided no, the Hudson it was.

    The investors you mentioned and other successful people I know all have that certainty personality. The pilot made a decision and went with it. Buffett bought Amex and went with it. If they believe it to be right, other people’s opinions don’t matter. Despite, in this case, the air traffic controller recommendation to return to an airport and the 155 people freaking out on the plane. He had certainty in his assessment, and neither the air traffic controller nor the people going nuts on the plane would alter his decision.

  6. Angel investor Paul Graham stated that, rather than trying to predict the future in identifying investment opportunities, which he sees as a somewhat fruitless endeavor, one should instead try to be “super sensitive to the winds of change.” According to him, “the winds of change originate in the unconscious minds of domain experts. If you’re sufficiently expert in a field, any weird idea or apparently irrelevant question that occurs to you is ipso facto worth exploring.”

    This pilot was obviously an expert in his domain, and his instinctive grasp of the situation allowed him to filter out some of the noise from air traffic control (i.e. Mr. Market) relating to which landing strip would be ideal, and instead offered his direct, confident response of “we’re gonna be in the hudson.” His rapid fire responses to the previous inquiries were also admirable, as he was able to survey the situation, remain calm, while remaining flexible enough to change course on the fly (literally).

  7. Pretty amazing. In my opinion this has much more to do with training, simulation, checklists and whole lot. That does not make what they guy did less amazing, but doable by mortals who can grind themselves throught that training with dedication. You can draw a parallel with the training required to not avoid behavioral biases. I disagree with Klarman whan he says there is a value investing gene. In my opinion it is much more dependent on nurture than nature. Who you trainned with (in his case Michael Price) or if you are skeptic by nature (which I – biased – think seems much more likely to happen based on your history.

  8. Outstanding example of emotional discipline. I think the discussion here is interesting as well. Is this discipline taught or is it an innate genetic trait? Perhaps the group here can dig up some research on this.

    In terms of improving our abilities no matter our existing circumstance, I think we would do well to employ as much a systematic process as possible. One which intentionally targets and strips out the emotion. The Behavioral Portfolio Management example illustrates this nicely, I particularly got a kick out of the fact the the Manager intentionally does not know the names in his portfolio to try and eliminate bias.

    One approach that comes to mind is the idea of “filters” that Munger and Buffett talk about. If you have a set of criteria and stick to it rigidly, e.g. “Is this within my circle of competence?”, then you are less likely to make emotional errors. See also, Mohnish Pabrai’s investment checklist.

  9. Folks, I wanted to highlight a newspaper article in The Telegraph from November 2014, where fund manager Terry Smith criticises Buffett’s purchase of IBM:

    Check out the accompanying video at the end.

    Terry Smith is a very long-term investor, much like Buffett, so needless to say, the article talks a lot about the durability and substance of sustainable superior capital returns.

    You will also likely be aware that Jim Chanos is short IBM. I think Chanos is an investor who needs to be taken very seriously.

    I have my own observations to make about Buffett’s switch to quality, which I will likely talk about in another reply.

  10. Impressed by the pilot. It makes me think of Kahnemans theory about system 1 and system 2.

    Instinct and repetitive tasks are in 1. Emotions and learning are in system 2. If you’re emotional, your system 2 doesn’t work well and you switch to system 1. Stress and emotions drain your energy levels and ability to learn.

    With training at non-emotional moments you can move difficult tasks from system 2 to system 1. This makes even dificult tasks at high stress moments easy.

    Military or martial arts does the same. If you train what to do in stressful situations they just become part of your system 1 repetoire.

    Training, training, training. This also goes for investing in stressful situations. Train it. Do it. Profit 🙂

  11. I noticed a couple things

    Audio Only: Initially, the pilot’s voice was muffled and he sounded distracted. I thought something might be wrong with him. I don’t think he sounded calm Not being able to see what he was seeing, it was hard to understand what was occurring. When he said “Hudson”, I didn’t even know what he was referring to.

    With simulation: This time, it made sense that the pilot was not speaking very clearly. He had to make a major decision within seconds. Communicating with the tower was low on his list of priorities. After initially saying that they were turning back, his voice trailed off because he needed all of his cognitive abilities to make the decision.

    As it became clear that he couldn’t make it back, he made the decision to land in the Hudson. The tower tried to communicate with him, but all he could say is “We’re going to be in the Hudson”. The tower didn’t understand him, and he didn’t care. He was 100% focused on landing correctly.

    Sports: We see this frequently in sports. There are “clutch” players. In the high pressure situations, it is rare for a player to be able to maintain his usual level of performance. Some players perform even better under pressure. But most do much worse. Why? I think it’s because emotion becomes a distraction. Those who are less emotional may still be effected by the pressure, but they can either ignore it, or use it enhance their focus.

    Investing: I think it depends on both investment strategy and personality. Soros is more of a trader, so this kind of decision making is crucial. He has to make big trading decisions based on market movements, so he better be calm under pressue. Whereas, someone like Walter Schloss had an investment style which insulated him from making instantaneous decisions.

  12. Excellent advice video by Terry Smith. Thanks

  13. The pilot had his task cut out and he seems to be be focused on the job at hand. It reminds me of Buffett’s purchase of Coca Cola (1988?) when the stock price were depressed . It also means trusting your own instincts, research on a particular stock / sector.

  14. “Courage is resistance to fear, mastery of fear, not absence of fear”

    Mark Twain

  15. I think someone asked a very pertinent question – Is emotional discipline a genetic trait or a training outcome. I would like to add one more factor here, sometimes anxiety, depression, chronic pain/fear are an outcome of a physical condition/sickness. Having said that, in asia the overwhelming conclusion from ancient martial traditions and those of governance is that emotional discipline is taught and in fact the brain itself can be molded to support calm and rational behavior. This is accomplished by long term training in disciplines such as meditation and breathing exercises as well as by training the person to be aware and mindful in different scenarios. If you are interested you can also look up videos on how Navy Seals are trying to up their pass out rate by using these ancient techniques to teach their warriors to be calm and controlled under fog of war scenarios.

    • Great points. Being rational and calm/detached takes being fit/rested/not overly stressed. Practice, planning for bad scenarios, studying market and company histories to give you realistic assumptions. So today, in the US market there are increasing IPOs, rising margin debt, and big investor complacency–not a mix for good returns GOING forward for the thestock market in GENERAL.

  16. Was away on vacation so I’m finally catching up on the course, wanted to give my two cents.

    This is clearly a post about staying calm in the face of adversity. In the event of an impending Bear Market, will you be able to stay the course (stay calm) as the winds of change come in? Will you hold the stocks you believed in even if they are falling? Will you buy stocks that are on the way down knowing that they are a bargain anyway (even if they may continue to fall)? This is why so many resources point to value investors doing better in Bear Markets, because they seek value as discounted prices, which means they usually obtain the best deals when the prices adjust downward.

    Whether you pick Klarman, Soros or Ackman, it’s clear that these individuals thrive when the entire institution is crumbling in the wake of a bear market. Klarman is notoriously rational and emotionless in the face of bear markets (funny enough, he tends to outperform in them). If we can stay rational, pragmatic and focused in times when the headlines are telling us to sell and panic, then we can weather the storm as well, just as the Captain did.

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