This insight is a very personal one. Early in the days of Kawa, I was fortunate to meet a very successful investor at a lunch organized by a mutual acquaintance (ironically, to discuss politics and not investing!). Andrew Fredman was one of the two senior partners at FirTree, then a $10 billion + hedge fund. Over the years, we became closer and consistently debated the most diverse topics: investments, how to run a business, politics, philanthropy, amongst many others. He ultimately became a meaningful investor in Kawa, but most importantly, a mentor and someone I always looked up to when considering investments.

Early in my career, and despite my significant inexperience compared to him, and being about 15 years younger, he always listened intently to whatever I pitched as an investment. His questions were sharp, to the point, and very objective. Andrew’s answers were thoughtful and deep. He was always able to discern what was important and what was not. And, more often than not, after a long debate where I felt drained and was sure he hated my idea, he would end by committing meaningful dollars to it. I was always amazed at his ability to do so, and to see ideas and investments strictly on their merits rather than his ego. Andrew honestly didn’t care if his initial impression was positive or negative.

Andrew was probably the most impactful person in my investment career. Very sadly, he passed away a little over 2 years ago, at a young age, leaving a family and many friends behind. I miss him dearly, especially when I need someone to exchange frank ideas with. A few weeks ago, his son introduced me to another fund manager that worked for him for a long time, and we reminisced about his investment acumen. This fund manager then showed me a crumpled note he kept on his desk, which were his former boss’ “11 Lessons Learned”. They are priceless. Interestingly, many of these have made it into Kawa Insights over the years. Others, we are always reminded of when making investment decisions at Kawa. And all of them are precious pieces of advice that all investors should heed to. I hope you will value these as much as I have. While we no longer have Andrew with us, we have these to be reminded of him. Below, in bold are the lessons learned, with my commentary and additional thoughts on them.

11 Lessons Learned:

1. Up/down is everything. Investing is not about the direction in which you expect an investment you purchase to move. It’s about how much money you will make if you’re right, and how much money you will lose if you’re wrong. You want to make meaningfully more on the “up” than you will lose on the “down”. In other words, and how we like to say it at Kawa, we like to make investments when in the flip of a coin we have odds where “heads I win, tails I don’t lose that much”.
   
   
2. Prediction is hard. I couldn’t have said this more elegantly. Investors consistently ask us what is our expectation of “X”. That is: will the S&P move higher, will Congress be Republican, will CPI go up or down, you name it. Predicting anything is very hard. The best investments are those that don’t require a prediction, and that make money regardless of the direction of markets. Those are few and far between, and when you find them, be bold.

3. Buy when there is blood in the streets, even if it’s yours. This is much easier said than done. It is similar to “be fearful when others are greedy, and greedy when others are fearful”. I have found this to be particularly difficult for investors, and it can only be achieved when you have complete confidence and knowledge of your own investments. Knowing what you own, and why you own it, is the only thing that allows you to buy more when things look dire.

4. Cash is king. Many thought this truism was dead during our recent experience of 0% interest rates and Quantitative Easing. We never did. Having liquidity and the ability to buy when there are problems is one of the most important components of compounding capital over the long-term. But it’s only as good as your ability to execute on lesson 3 above.

5. Leverage kills. Simple and powerful. It is very difficult to lose all your money if you don’t have leverage (long investments rarely go negative). Yet, this is not to be confused with “never use leverage”. There are many smart ways to use leverage (i.e., non-recourse, in limited quantities, against the appropriate assets), but more often than not, investors abuse the use of it. And if abused, it can destroy you. So users, beware.

6. Find the other side of the argument. Investors have a tendency towards confirmation bias, that is, to find arguments that confirm our views. Yet, for a trade to occur there are always two parties with different views. So, what is the view of whomever is on the opposite side of the trade? Understanding the other side of the argument is a powerful way to see our blind spots, and to ensure that our arguments indeed stand on good foundations.

7. Expand your horizons. There is always more for us to learn, even if it is outside of our comfort zones. The more diverse our knowledge is, the more inputs we can use in making investment decisions. If you like biology, try learning about philosophy. If you like philosophy, try learning about computer science. The combination of different sources of knowledge is the most powerful knowledge of all. 

8. What happened yesterday won’t happen tomorrow . Another way to say this is “every crisis is different”. Most likely, the next crisis won’t be pandemic related, the same way that after 2008 housing and systemic bank failures were not likely to be the ensuing culprit. Yet, preparing for something that is not going to happen is not necessarily a problem. Rather, it is to assume that what was safe in a prior crisis will be safe in the subsequent one. Be particularly careful of sectors that have endured well in prior crisis: senior bank loans, private equity, to name a few. The past is not a good predictor of future performance.

9. Volatility can be good. If only we could have more of it! Volatility brings dislocations, and dislocations bring more opportunities to make good investments. It allows for the differentiation between investments, and to have different prices at which to buy and sell. With knowledge, confidence and patience, volatility is the essence of outperforming markets!

10. Do nothing when there is nothing to do. Simple. Deciding not to invest is an investment decision on its own right. Remember Lesson 4 (Cash is King) above, and having the patience to make the right investment, at the right time, is as important as not making any investment at all. I wish all investment professionals realized that. More often than not, there simply isn’t anything that needs doing!

11. Explain while standing on one foot. I used to tell investors that if I couldn’t explain one of our trades in less than 5 minutes to an unsophisticated client, the trade was not worth pursuing. Generally, the best investment ideas can be explained in few convincing bullet points. The research and analysis required to have such confidence may be significant, but at the end of the day, if you can’t explain it simply, than likely you don’t understand the full essence of it!

 

So here you go, the 11 lessons learned from the person I consider the best investment professional I have ever met. Andrew was a genius, a friend, and a soul that is missed in this world. May these 11 lessons live in his honor.

 

Warmest Regards,

Daniel Ades