Saturday, February 8, 2014

Why You Need An Investing Partner

My wife, Kate, would have made an excellent financial analyst had she chosen that career path. Fortunately for the world, she chose the much more socially-valuable profession of teaching science.

Once, when we were having dinner with some former work colleagues, out of curiosity, the company's CEO drew some random stock charts on a napkin and asked each one of us -- all trained analysts, except Kate -- to describe what we thought was happening in each chart. 

By far, Kate's answers were the most unique and insightful, as she applied her scientific mind to the question while us analysts searched our minds for clever technical analysis solutions. We were all impressed. In fact, the CEO offered her a job on the spot, which she ever so coolly declined.

Despite Kate's naturally sharp mind, I’ve been the self-appointed manager of the Wenning family portfolios with sole discretion on all investment decisions and portfolio allocations.

This arrangement might seem reasonable given my profession, but I’ve learned over the years -- sometimes the hard way -- that it’s much, much better to make investment decisions with another person -- and ideally, a person with a very different approach and background than your own.

Fortunately, I haven't messed anything up in our accounts, but I probably would have done even better had I consulted with Kate on my investing decisions all along.

A better system

Earlier this week and on her request, I helped Kate research and buy a stock in her "plush" (her words) teaching retirement fund. I wanted to find a company that we could both understand and a company whose products we enjoy buying.

After running some screens for promising dividend-paying stocks, I came upon Cracker Barrel Old Country Store (CBRL) and thought it was a good one for us to research together.

With family scattered across half the country, Kate and I do a bit of traveling for holidays and special occasions and typically stop at a Cracker Barrel restaurant along the way. Cracker Barrels are typically situated off the highways -- indeed, 40% of company revenue comes from travelers making pit stops.

Source: Cracker Barrel

I did some preliminary research on the company and brought the idea to Kate. Her first reaction was, "Hmmmm." I could see the gears turning...

She asked me a number of thoughtful questions like:
  • Where are their stores located around the country?
  • How well do they retain their wait staff?
  • How much can they grow?
  • Can the Southern country-themed restaurant brand translate into new markets like California?
  • How much money do they make from their retail stores?
  • How much do the shares cost? Is that a good price?
  • How have they done recently?
Good questions, right? Certainly all questions you'd want to have answered before investing.

She also made a number of astute observations, such as:
  • The restaurant is usually crowded and there's typically a line to get a table.
  • It's family friendly. Kids, and you, like to play the peg game
  • Of your food options on the road, Cracker Barrel has the best quality and is affordable.
  • Friends we've taken there seem to enjoy it.
The key point here is that some of Kate's questions and observations made me reflect on my initial investment thesis in ways I might not have otherwise. And that's what a good investing partner can do for you.

Where else can you eat your sausage gravy over biscuits while playing checkers in front of a roaring fire?
Financially, the company checked all the boxes for a potential dividend investment, it scored well on the Dividend Compass, and while the stock was by no means "cheap" on a Ben Graham scale, it did seem slightly undervalued with more potential upside than downside.

Kate's insights added to my conviction and she bought some shares at $95.96 on Thursday.

Bottom line

As much as we might try to shake our own emotional and cognitive investing biases, it takes Buddha-like self-awareness and self-discipline to recognize and subdue those biases on your own. Try as you might, you can find yourself making the same mistakes again and again.

In contrast, having an investment partner (or team) can serve as both a mirror and filter for your bias-laden ideas and improve your decision making process. Remember: even Warren Buffett has Charlie Munger.

Will our Cracker Barrel investment work out? Time will tell, but I believe our process was more thorough and effective than if I had done all the research and made the investment decision myself. Over time if our investment process remains sound, our results should also improve.

Note: I'm currently studying for the CFA Level III exam, so the frequency of CEI posts will be a bit slower in the coming months. Thank you for your patience and for following CEI!

Good reads this week
  • Napoleon's Fatal Mistake - Shane Parrish
  • Review: The Wolf of Wall Street - Monevator
  • Why the Middle Class Keeps Giving Itself the Shaft - Mr. Money Mustache
  • Whale Surfing: Why Buy Funds When You Can Ride Their Best Ideas - Ed Croft via Stockopedia
  • Balancing Risk vs. Return, Income vs. Growth, and Quality vs. Value - UK Value Investor
  • Jack Bogle's Advice for a Rocky Market: Follow Ben Franklin - Jack Bogle
Quote of the week