Notes From The Beauty Contest
An Introduction
Welcome. I’m a buy-side investor and thought it might be fun to write about stocks in my spare time and in my own way - it’s an experimental project, so I’ll see where it goes, if anywhere. I’m hoping to learn something along the way.
Why now and what’s in the name?
There are many ways to invest successfully, depending on skills, temperament and time horizon - I offer no opinion about which is best. Investment paradigms come and go, sometimes in recurrence, while new ones emerge and some go extinct - adaptation therefore seems like one universally beneficial trait. Adapt or die, so say the Darwinists.
Throughout 2024 and as I write at the start of 2025, I keep returning to Keynes’ analogy of the newspaper beauty contest as the central dynamic that prevails in equity markets today - given that Keynes wrote of this almost 90 years ago, it’s safe to say the dynamic has been present in markets a long time.
In his General Theory of 1936 Keynes critiques professional investment behavior, noting that experts focus on predicting short-term market psychology rather than assessing long-term investment value. This isn't due to incompetence but is a rational response to market structures: For it is not sensible to pay 25 for an investment of which you believe the prospective yield to justify a value of 30, if you also believe that the market will value it at 20 three months hence. The market becomes a sophisticated game of timing rather than genuine value assessment. And here we come to the‘Keynesian Beauty Contest’:
to change the metaphor slightly, professional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. It is not a case of choosing those which, to the best of one's judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practise the fourth, fifth and higher degrees.
The beauty contest never goes away, rather, it’s a matter of degree - sometimes all-consuming, sometimes moderate. My premise is that the beauty contest is about as extreme today as it’s ever been, as evidenced in particular by the increasingly extreme moves on and around earnings releases: +/- 10% one-day moves are now extremely common, while +/- 30% one-day moves are no longer rare events reserved for accounting shenanigans and the like. At the first degree, a positive or negative guidance revision is often the proximate cause of these wild moves, but once we get past the second or third degree of second-guessing things get interesting - this explains why a company can raise guidance and still see its stock get killed, and vice versa. It matters not what a company’s prospects offer for the years ahead, but instead what investors think that other investors think are the key datapoints and considerations from one quarter to the next.
Famously, Keynes was himself an accomplished market operator, trying his luck at various forms of speculation, making and losing fortunes along the way - through a variety of market paradigms. In the crash of 1929 he suffered a particularly severe setback, and this point largely marked the end of his career as a speculator attempting to predict the market’s shorter-term movements. By the time his General Theory was published in 1936 he had multiplied his capital by 23 times, during a period when the market returned only 3 times. Keynes ultimately developed a philosophy of ‘faithfulness’, electing to stick with a handful of carefully selected stocks (his ‘pets’) throughout the ups and downs. He came to see his prior speculative efforts as a “mug’s game”, while after a decade of trying to beat the market, he concluded that his new approach was “the only rational response to uncertainty”.
This is not a blog about Keynes and I don’t intend to write much about him. But I find his beauty contest analogy very relevant for where we are today and it seems to capture the 2024/2025 market zeitgeist superbly - hence Notes From The Beauty Contest. Moreover, I write at a time when ‘faithfulness’ is starting to look like ‘foolishness’ in the eyes of many. Having a view that is ‘long-term’ is starting to look like intransigence, nothing but an excuse for poor performance - again, pertinent.
As a footnote: I used Claude 3.5 Sonnet to help choose the final version of my title, with Claude having suggested “Notes From” as the lead-in - I liked the subversive undertone that is vaguely suggestive of Dostoevsky’s famed novella.
What am I going to write about?
Mostly about stocks! I will publish deep dives on stocks that I either own or that interest me - this will be my principal focus. I’m a buy-side investor, so I’m going to write about stocks that I think are worth owning and while I’m not going to teach grandmother how to suck eggs, I will write about stocks through my own lens (see below).
Right now I have plenty of ideas, so I envisage deep dives being near-term actionable for the time being at least, but we’ll see how this develops over time. It’s goes without saying, but I’m not giving investment advice - please do your own research. I think there could also be periodic thoughts on earnings and investor events and the like, and perhaps sporadic thought pieces or even occasional notes on interesting books - we’ll see.
Who is the target audience?
Both individual investors and professionals.
Who am I and why should anyone listen?
I am a generalist investor from the buy-side. I’ve been in this business long enough to learn that adaptation is key to longer-term success - I have adapted over time and will continue to do so. I don’t intend to start posting performance numbers, such is the trend of recent years (particularly when markets go up!) - why should you trust such numbers anyway. I’m hoping that my research will speak for itself.
My promise
I’m a big believer in ‘skin in the game’. When I publish a deep dive, I’ll tell you whether I own the stock and the approximate portfolio weighting it carries - I think you deserve to have this information.
My philosophy
I’m old enough to recognise what I’m not good at. I have little to no competence in playing the beauty contest game, so I don’t try. Likewise making predictions about interest rates, inflation, GDP, currencies or stock market indices - I’m no good at it, really.
As you’ve certainly guessed, I fall somewhere within the general vicinity of the ‘faithfulness’ camp. It’s fair to say my preference is for compounding, where possible. In a prior life I’ve tried various ways of investing and this one seems to suit me temperamentally. That said, I’m not opposed to shorter holding periods - sometimes they’re warranted if you like a business, but not quite enough to get married.
I try to use conservative but realistic assumptions, while only trying to predict things that I feel able to. If the investment case is contingent on a wide range of possible outcomes skewing to the positive, I’ll pass. But I am especially interested in optionality - the more the better. While the size and frequency of outsized option payouts can’t be reliably predicted either, I know that if I buy enough optionality on the cheap, I’ll do well over time.
I notionally like the idea of a double over a five year period, as a threshold - equating to a 14-15% IRR. At a sensible discount rate it provides a significant cushion if my base case proves over-optimistic, yet significant upside if I’m right and average down - even more so when optionality goes my way.
I’m always learning lessons, and 2024 was no exception. While I had some stocks that faired exceptionally well, I had others that caused a considerable drag (one of these, Regeneron Pharmaceuticals REGN 0.00%↑, I have owned for years and it will be my first deep dive). One lesson is to sharpen my thinking on entry points for new holdings - primarily around catalysts. There’s no exact science around catalysts and insisting on them or looking for too much certainty can also mean opportunities are occasionally missed, but I think they might be a necessity for benchmarked money managers, if not for those running money PA.
A brief note on qualitative versus quantitative: I certainly do a fair bit of quantitative work. I’m thoughtful about margins, cost structure, cash flow and more - but I don’t get lost in the numbers, as analysts sometimes do. My principal focus is qualitative and especially around the credibility of management. Keynes viewed ‘faithfulness’ as a rational response to uncertainty and I think this is one of the reasons why - if investing is inherently uncertain, who is better placed to know what lies ahead than those most involved. So I believe that if you can find competent and credible management teams, you should take them seriously - especially when others do not.
I don’t use labels such as growth, quality or value. You’ve already seen that I like to buy stocks for less than they’re worth, but it’s not to say that a low P/E is required. And I do insist on at least some level of growth - sustainable growers in the 10% (+/-5%) range are perhaps the sweet spot for me. I also insist on a minimum level of quality in order to keep assumptions and predictions manageable. Naturally, things tend to get most interesting on those occasions you can find under-appreciated growth and quality together.
What about genAI?
As you already know I use it myself. Given its oddities, you can probably tell I used it to generate my artwork too. I also used it to summarise parts of chapter 12 of Keynes’ General theory.
I am a believer, make no mistake - these technologies are revolutionary. As students of history will know, revolutions can have extremely unpredictable effects of the nth order for economies and societies. For the time being, this environment is particularly accommodating to astute beauty contest practitioners because the only thing that does seem to be predictable is that near-term investment in AI model training and deployment is going up - the main variables being the amount that investment goes up by and the share of spend going to the various suppliers. Beyond the near-term (or medium-term at a push), things soon become very hazy. Can anyone honestly look out five years and confidently predict what the revenues and cost structures of today’s perceived AI winners will look like? I don't think so - the pace of change is extreme and unpredictable (look at the recent emergence of inference-time compute or impressively resource-light models from DeepSeek for example), while the largest and most profitable companies in history invest truly unprecedented sums in order to gain an edge. I will continue to observe developments and evolve my thinking, but for now I’m quite interested in: 1) businesses where the pace of change brought by AI is likely to be slow or moderate and 2) unlikely and overlooked beneficiaries of the revolution.
End
Once again, welcome to Notes From The Beauty Contest. Please reach out here or on X if you have any comments, questions or suggestions - I would love to hear from you.
References:
John Maynard Keynes, The General Theory of Employment, Interest and Money
Robert Skidelsky, John Maynard Keynes: 1883-1946: Economist, Philosopher, Statesman