Mental Models discussed in this podcast:

• Mr. Market

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Should you invest in Private Prisons? - Show Outline

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Expectations Investing

• Investing involves evaluating current and future business performance.
• The greatest returns are often made when two things are true:
  • Your expectations of future business performance differ from market expectations
  • You are correct
    • This second point cannot be understated enough.
    • Contrarian alone is not a useful strategy

Mr. Market is Vague

Often the market is unclear on what exactly it wants the business to do or what standard management needs to meet to be considered a positive performer. 

Mr. Market is fickle

Expectations can change quickly, often as quickly as an analyst report or price target revision

Mr. Market is short-term

You can win with a longer time horizon

Conviction is Critical

• You must be confident and specific about what your expectations are
• The market will challenge your conviction
• Without conviction, even your best ideas are unlikely to make you money.
• If you know what you are expecting, and management continues to perform according to your expectations, then ignore how the market chooses to respond. You can't control the market, you can only control your own actions. 
• Example: I was recently challenged by a company I own. A recent earnings release largely met my expectations. However, the market disagreed and the stock price dropped by 40%. 

Summary

Investing expectations drive short-term changes in the market. However, your personal expectations of management and business performance will drive the strength of your conviction in a company. Don’t let Mr. Market dictate your investing decisions. Mr. Market’s price offers should only ever be seen as an opportunity, not a necessity to act.