The investment process we follow at Mayar Capital rests on many pillars, among the very important ones is to think of risk before return. The key driver of permanent loss of capital is paying prices above the intrinsic value of assets either because the buyer is driven by greed, or because they have miscalculated intrinsic value. Our goal is to avoid both kinds of mistakes as much as humanly possible.

This emphasis on minimizing mistakes may be one of the least appreciated tricks in successful investing. Charlie Munger offers some insight here, “It is remarkable how much long-term advantage people like [Warren Buffett and myself] have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”

A very important way to minimize investment mistakes, is to be very cognizant of one’s fallibility. While I, like most fund managers, have yet to be accused of being a humble human being, I try to employ every tool at my disposal to minimize the encroachment of my ego into our investment process.

Using tools such as checklists are very important in helping us achieve that. Charlie Munger has talked many times about the benefits of using a checklist. He said, “No wise pilot, no matter how great his talent and experience, fails to use his checklist.” And in another instance, “I’m a great believer in solving hard problems by using a checklist. You need to get all the likely and unlikely answers before you; otherwise it’s easy to miss something important.”

We have designed our checklist and investment process with mistake-minimization in mind. When an investment idea comes through our funnel, the first few steps in our process are totally focused on “killing the idea”. This serves two purposes; the first is trying to avoid as many obvious mistakes as possible. That would include companies with things like accounting irregularities and poor governance. The second purpose is more practical; it allows us to optimize the time we spend on research ideas by avoiding as many potential dead-ends as early as possible. We will naturally make mistakes from time to time, but I believe that starting out with this mindset gives us a tremendous edge over time.

Like everything in life, however, our filtering process comes with a cost, which is the presence of some false positives (Type II errors); companies that we eliminate for red flags that are actually good investments. We are willing to accept that cost to avoid the really big mistakes. Our checklists are not set in stone, however. Every time we make a mistake, we will go back and adjust our checklist with the goal of always improving its outcomes.

Another trick we use in our checklist is breaking down complex questions into simpler ones. There is strong evidence that doing that helps avoid some behavioral biases that we as human beings are prone to. For example, instead of asking ourselves a question like “are there any accounting red flags,” we break down that question into more than a dozen “sub-questions” such as “did Days Receivables have any inexplicable big moves in any year in the past 10 years?” We then score each one of these “sub-questions” on a 4-point scale and come up with an aggregated score for the whole “big” question of whether there is any obvious evidence of accounting irregularities.

This method of breaking down questions produces less bias than simply asking ourselves the “big” question. Of course, answering this question won’t rule out all possible account irregularities, but it will catch a lot of them very quickly, allowing us to “kill” many potential ideas within minutes instead of spending days studying them. As an important side benefit, I also believe that by getting us to first answer questions about bad stuff, we are less likely to be overexcited by the positive stuff.

Bear in mind that using a checklist is not the same as automating a process. For starters, a lot of the questions in the checklist need subjective judgment to be answered. The goal of the checklist is not to be a substitute for rational thought but to act as a systemic guide to standardize the thought process which, in turn, helps us avoid missing something important, minimizes behavioral biases, and creates a feedback mechanism to learn from mistakes. This last benefit is why our checklist is a “living document” continuously updated based on learnings from both our experiences and the experiences of others. Over time, we believe, the checklist “hit rate” should continuously improve.


This post has been excerpted from the Mayar Fund March 2016 Letter.

Disclaimer: This document is prepared by Mayar Capital Advisors Limited, an Appointed Representative of Privium Fund Management (UK) Limited (“Privium”) which is authorised and regulated by the Financial Conduct Authority (“FCA”) in the United Kingdom. It is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation. Within the EEA the Fund is only available to Professional Investors as defined by local Member State law and regulation. Outside the EEA, the Fund is only available to Professional Clients or Eligible Counterparties as defined by the FCA, and in compliance with local law. This document is not intended for distribution in the United States (“US”) or for the account of US persons, as defined in the Securities Act of 1933, as amended, except to persons who are “Accredited Investors”, as defined in that Act and “Qualified Purchasers” as defined in the Investment Company Act of 1940, as amended. It is not intended for distribution to retail clients. This document is provided for information purposes only and should not be regarded as an offer to buy or a solicitation of an offer to buy shares in the fund. The prospectus and supplement of the fund are the only authorised documents for offering of shares of the fund and may only be distributed in accordance with the laws and regulations of each appropriate jurisdiction in which any potential investor resides. Investment in the fund managed by Privium carries significant risk of loss of capital and investors should carefully review the terms of the fund’s offering documents for details of these risks. Mayar Fund follows a long-term investment strategy. Short-term returns will vary considerably and will not be indicative of the strategy’s merits. This document does not consider the specific investment objectives, financial situation or particular needs of any investor and an investment in the fund is not suitable for all investors. Investors are reminded that past performance should not be seen as an indication of future performance and that they might not get back the amount that they originally invested. Comparison to the index where shown is for information only and should not be interpreted to mean that there is a correlation between the portfolio and the index. The views expressed in this document are the views of Mayar Capital Advisors and Privium at time of publication and may change over time. Where information provided in this document contains “forward-looking” information including estimates, projections and subjective judgment and analysis, no representation is made as to the accuracy of such estimates or projections or that such projections will be realised. Nothing in this document constitutes investment, legal tax or other advice nor is it to be relied upon in making an investment decision. No recommendation is made positive or otherwise regarding individual securities mentioned herein. No guarantee is made as to the accuracy of the information provided which has been obtained from sources believed to be reliable. The information contained in this document is strictly confidential and is Intended only for use of the person to whom Mayar Capital Advisors Limited or Privium has provided the material. No part of this document may be divulged to any other person, distributed, and/ or reproduced without the prior written permission of Mayar Capital Advisors Limited.