Guest Interview: 10-K Diver

(Edition Number: Thirteen)

Good morning,

Get a cup of coffee, because, in this interview, we have 10-K Diver with us today, the thread-machine of Twitter.

Despite this edition marking number thirteen in this guest interview series, I feel lucky to have this gentleman with us today.

In today’s interview, we dive into the background of 10-K Diver, his investment approach, and discuss some potential easter eggs pertaining to the future.             


10-K Diver

Today we have Mr 10-K Diver with us, who remains anonymous for professional reasons, which I fully respect. This gentleman is the “face” behind the magnificent range of threads posted on Twitter under the @10KDiver handle.

Threads so long, they could be books.

As a product of the Indian education system, 10-K studied a wide variety of subject matter, which possibly explains the exquisite variety in his threads. Ranging from investing principles to mathematics to psychology and physics, each thread teaches me something new each week.

Below, you will find an example of one of his more recent threads, tackling the topic of distinguishing the fair price to pay, for a wonderful business.

You will find that 10-K posts one thread every week, all with consistent and impeccable quality, and shares them both on his Twitter account, as well as on his website (Link Below).

10-K Diver Threads

Now that introductions are over, I think it’s about time we dived into the interview.


The Interview

Investment Talk:

Good morning 10-K, I think this is the time of the interview where the readers get a cup of coffee, correct?

I am excited to have you here today, I feel this will be a refreshing interview, and allow readers to find out a little more about you. So, we know all about your great threads which cover a broad range of topics from physics, statistics, finance, psychology, and investing.

However, I think it would be nice to get some history of you as a human being.

So, could you perhaps tell us about your background and where the knowledge of these topics you discuss stem from?

10-K Diver:

By all means, readers should get a cup of coffee!

And many thanks for inviting me on here. It's an honour. I grew up in India. In many ways, I'm a product of the Indian education system.

In high school, for example, I was fortunate to study alongside some extremely bright and motivated classmates. At the time, we were all trying to crack the IIT JEE. This is a very competitive exam. Hundreds of thousands of students all over the country write it. And if you manage to score in the top half a percentile or something like that, you get admitted into one of the highly sought after undergraduate engineering programs in the country.

Anyway, cracking this exam required a deep knowledge of math and physics. Math topics included everything from algebra to geometry to combinatorics and probability to differential and integral calculus. Physics topics included everything from Newton's laws to electrostatics and dynamics.

So, we were all trying to learn this wide range of topics -- and learn each topic in sufficient depth to solve some fairly advanced problems in the field.

This is where I learned the most important lesson of my life. If you want to learn a subject really well, there's no shortcut. You can't "skim through" stuff. You have to spend quality time and focused effort. You have to drill deep down to the fundamental concepts in that area and keep thinking about and exploring them until you feel confident in your understanding.

I was fortunate to have some excellent teachers and extremely bright fellow students who repeatedly instilled this in me.

This is how I approach getting familiar with a broad range of topics. Just spend enough time with each of them, and try to get to the "core concepts" in the field.

These core concepts are the "signal" -- they don't change with time, or they change very slowly with time. In investing, for example, the core concepts are earnings, cash flows, durable competitive advantages, returns on invested capital, etc. They don't change much with time.

If we focus our energies on learning such core concepts that seldom change, sooner or later we'll be able to connect the dots and build up our "latticework of mental models", as Charlie Munger likes to call it.

Investment Talk:

Next up I wanted to ask you about 10-K Diver. I can see you joined Twitter in April of 2020. What was the motivation for joining Twitter under this alias?

And if you could share your thought process that would be great.

Did you join Twitter with this specific mission in mind, or was it more so something that just kind of happened?

10-K Diver:

I was a "passive" Twitter user well before 2020 -- maybe since 2015. I had a Twitter account. I followed a bunch of people in finance, politics, math, and science. I used to spend maybe 10 hours a week on Twitter, reading things these smart fellows posted.

But I never posted anything myself. Nor did I like/retweet anything. I was a completely passive user -- just a "consumer" of information, a fly on the wall.

But over time, I witnessed "the rise of FinTwit". It was clear that a very special community was developing around finance and investing. A lot of people were selflessly sharing high-quality information, analysis, and knowledge with the whole world.

And folks were also meeting other like minded folks on Twitter, forming deep personal friendships and bonds. This all appealed to me very much. I also wanted to become part of this growing community.

I thought I could add value by sharing my knowledge and perspectives. And I loved the idea of being able to connect with the world's top minds in finance/investing.

But for several months, this remained just an idle thought. I never got around to it. Until the pandemic hit us in 2020, and we were all in lockdown.

Then, I suddenly had some time on my hands. And I sensed that a lot of other people would also be in the same boat as me -- with more time to spend on Twitter.

So I jumped in, created a new account, and started posting stuff and interacting with folks on the platform. And it's been great! I wish I'd done it sooner.

As for doing it under an alias instead of my real name: it's because I wanted to fully abide by my employer's social media policies, which is much easier if I'm "anonymous".

Investment Talk:

Thinking back over your year of running 10-K Diver, what are some of the things that have surprised you after growing over 63,000 followers in such a short space of time? In addition, where do you feel this journey has most benefitted your life, if at all?

10-K Diver:

To be honest, I had no idea that my account would become so popular in such a short time.

I've always felt that most people have a deep inner curiosity -- a desire to understand things really well at a fundamental level. But they don't have the time to research things deeply -- to go down several rabbit holes.

So, anyone who can take difficult concepts that a lot of people are interested in, and break them down into simple language, can really add a lot of value.

And I thought I could do that when it came to finance/investing related topics.

But the sheer power of Twitter to amplify my voice came as a surprise.

For example, I had maybe 300 followers when I posted my first thread about The Kelly Criterion. I shared this thread with @borrowed_ideas via DM, and he was kind enough to retweet it. At the time, he had ~10K followers.

That retweet set off a chain reaction. In the next 2 days, I got hundreds of comments (most of them complimentary!), likes, retweets, etc. Over that weekend, I added almost 2K followers. That's when the power of a well-crafted thread -- combined with the serendipity of a retweet from a "big account" -- hit me.

Since then, I've had similar experiences a few more times -- each time after a retweet from a "big account" (@mjmauboussin, @Sanjay__Bakshi, @chamath).

If I'd started a blog or something like that, and posted the exact same content, I wouldn't have gotten the same level of traction. The "amplifying ability" of Twitter was key.

As for how the journey has benefitted me: Thanks to Twitter, I've had enjoyable interactions (via public Twitter, DMs, phone calls, etc.) with many extraordinary and wonderful people.

I'd have never met such folks if I hadn't embarked on this journey.

Investment Talk:

I am a huge advocate of writing frequently. I feel it keeps the mind sharp and allows the writer to question their own ideas more often. What is your take on that?

10-K Diver:

I absolutely agree.

Just the act of putting something down on paper -- in an attempt to coherently explain it to another person -- can help identify gaps in our own understanding.

We may think we understand something well, but only when we try to teach it to another person, we realize the many ways our understanding is incomplete.

This is the crux of The Feynman Method. Explaining something to 5-year-old forces us to think more clearly, and in the process helps us improve our own understanding of the thing we're trying to explain.

Investment Talk:

So, whilst we have you here, I wanted to prod a little into your own investing style. For someone who writes so eloquently on the subject, I am assuming you participate in the investing sphere in some fashion.

If that is correct, would you care to paint a picture that represents your investing style or process at all?

10-K Diver:

Yes, my wife and I do have most of our net worth invested in stocks.

Our investing style tends to be fairly boring and risk averse. We invest only in companies that we feel we understand reasonably well.

I read 10-Ks and 10-Qs, and most of my effort when I do that tends to be focused on understanding the movement of capital in and out of the business.

I try to work out where the capital comes from (internal cash flows, debt/equity offerings), what kinds of business operations the capital is invested in and at what returns (eg, depreciation vs capex, working capital efficiency, owner earnings, unit economics, etc.), and how management allocates surplus capital (dividends, buybacks, debt paydown, acquisitions, or do they just let the cash accumulate on the balance sheet).

Based on this understanding of "capital flow" in the business, we try to form a view about the long-term returns (maybe 5-10 years out) a shareholder is likely to get if he buys the business at the current market price. Typically, there's a range of possible return outcomes, and each outcome has a probability.

If the return distribution seems decent relative to other opportunities we're aware of, we invest money in the company. We generally don't allocate more than 10% to 15% of our portfolio to any one company. But that's at the time of purchase.

Subsequently, if the business does well and becomes a bigger part of our portfolio, we don't trim the position unless it becomes very large (like 50% or more).

That's pretty much our process.

There's one wrinkle. Sometimes, we like a business, but we feel our returns from an options strategy are likely to exceed our returns from a pure stock strategy.

In such cases, we may decide to invest via options (or a combination of stocks and options, depending on our assessment of the opportunity).

Investment Talk:

I notice that you have mentioned Buffett somewhat frequently in your work.

I especially liked when you replaced your weekly thread with a notification suggesting that readers observe the Berkshire annual letter on February 27th.

Who are the investors you most admire and why? Moreover, do you feel any of these investors have influenced your current investing style in any way?

10-K Diver:

To those who follow me on Twitter, it's no secret that I'm a big fan of both Buffett and Munger.

In addition, I very much like Tom Russo's philosophy. He invests in consumer-focused companies with a strong franchise, and patiently holds them for decades in his portfolio.

I also very much admire Chris Bloomstran of Semper Augustus. Over time, he has built up a vast knowledge of several industries, businesses, and companies. His sheer wealth of knowledge, acquired through years of deliberate and focused effort, is something we should all aspire to.

I also love the simplicity of Terry Smith's 3-step investing method:

    - Step 1. Find wonderful businesses,

    - Step 2. Buy them at reasonable prices, and

    - Step 3. Do nothing.

Then, there are those I admire for how well they *write* about investing and related topics -- even though I don't know much about how they actually invest their money. In this group, I'd include Michael Mauboussin, Howard Marks, Aswath Damodaran, Nassim Taleb, and Ed Thorp.

Investment Talk:

Sticking with the topic of influence. What are the three most influential books that have changed the way you think? These can be books from any facet of life.

10-K Diver:

1. "Buffett: The Making of an American Capitalist", by Roger Lowenstein. This was one of the first books I read when I started learning about finance and investing. It's a wonderful book about Warren Buffett -- his childhood, how he thinks and what makes him tick, and the sacrifices he had to make in order to pursue his life's work of "compounding capital" with a single-minded focus.

2. "The Lord of The Rings", by J. R. R. Tolkien. OK, I cheated a bit. This is not one book. It's a trilogy. I first read it when I was in high school. And I've read it many times since. In the books, Tolkien dreams up a whole new world -- Middle Earth. His absolute dedication to his craft shines through on every page. Every character, every species, every object that appears in the book -- has a rich history behind it. But readers don't see this full history; they only get occasional glimpses of it. That's because the readers are pretty much in the same boat as the book's characters.

They see the world in a particular state at a particular point in time. But they don't necessarily know the history of how the world got to that state.

Even though readers never get the full historical context, Tolkien didn't "half-ass" anything. He laboured on every tiny detail -- from the script used by the Elvish language, to the ancestors of Gandalf's horse, Shadowfax.

Tolkien's work should motivate us all to focus obsessively on every tiny detail of our life's work, sparing no effort in our quest for perfection. Don Knuth (one of the world's greatest computer scientists) has this trait.

Knuth designed a system called TeX -- for publishing scientific books and papers. While designing this system, Knuth realized that he had to devise a new way to describe a font to a computer. He called this METAFONT. And he used METAFONT to design a family of fonts (called "Computer Modern"), which would be the default used by TeX.

And he spent 3 days and nights figuring out the exact shape of the letter "S" in this font. That's dedication. That's attention to detail.

Labouring hard to get the tiny details right -- no matter whether others will see/appreciate it or not -- should be part of every creator's mindset. And I first learned this from Tolkien.

3. "The Code Book", by Simon Singh. This is a beautiful book on the history of cryptography -- the science of encoding and decoding messages so that unauthorized third parties cannot read them.

Modern cryptography is full of complicated math. Very few people are capable of doing this math. But this book explains the key ideas in such a simple way -- so that even non-technical readers can appreciate the *ideas* without needing to delve into the *math*.

Simon Singh is a master at taking a complex technical/mathematical idea, understanding it well, removing all the jargon from it, and distilling the essence of it into simple English so that pretty much anybody can understand it. And this book showed me how communication of this sort looks -- at its finest.

Investment Talk:

When assessing a company. What are the must-have factors that must be present in the company before you would even consider allocating one ounce of capital into their business?

10-K Diver:

As I said before, one "must-have" is that we should understand the company --particularly, how capital moves in and out of it.

Second, I like to see good returns on capital, maintained for many years. A lot of businesses enjoy good returns -- but only for a short time. After that, competition steps up, or the industry gets disrupted, or something like that happens and the good returns go away. So, to invest in a company, we'd like to not just see good returns on capital, but also understand the factors responsible for the good returns -- so we can be reasonably sure that these factors are likely to stay in place and not disappear.

Third, I don't like to see big risks -- like heavy customer concentration, or huge amounts of debt relative to equity/earning power, or a big derivatives book that's hard to understand, etc. Basically, we're seeking a margin of safety.

We're asking "what can go wrong" with this business. The fewer the number of things that can go wrong, and the smaller the consequences if they do go wrong, the better we like the business.

Fourth, I like to see *some* growth in the business. Ideally in all 3 -- revenues, earnings, and cash flows. It can be a small amount of growth -- maybe no more than 3% or 4% per year. But I don't like to see *negative* growth year after year.

Some people can do really well investing in melting ice cubes. But I've learned that this style is not for me.

Investment Talk:

As long-term investors, a great deal of the discussion can often circulate around buying, with less emphasis on selling.

For me, I operate under the option that I never sell my positions, unless they trigger a pre-defined batch of sell-allowances. This can range from funky movements in management, an acquisition I do not like, the original thesis being broken, and so on.

What are some of the conditions that must be apparent for you to consider selling a position?

In addition to that, I am wondering if you could share with us your thoughts on the importance of time horizons with respect to the dynamic between buying and selling.

10-K Diver:

When we buy an investment, it's a good idea to write down our thesis for it, and what we expect to happen in the business over the next several years.

If what we expect ends up *not* happening, our analysis may be incorrect. So, we should re-do the analysis in light of new information. When we re-do the analysis, if we realize that our investment thesis is indeed broken, we shouldn't really have a problem recognizing our mistake and selling the position.

Sometimes, the business performs well, but the stock gallops much further ahead than what the business performance warrants. In this case, should we sell the stock or not? This is a super hard question, and I don't have a great answer.

Surely, there is some limit -- where the stock is so far ahead of the business that it's very hard for *future* returns to be anything other than disappointing. But where exactly is that limit? I think it depends on the business, the optionality it has to surprise us to the upside, etc.

Regarding time horizon: the longer we can hold a great business, the better our after-tax results.

Buffett made an excellent point in one of his letters. Which would we rather hold -- a single business that doubles in value every year for 10 years, or a string of 10 businesses that each double in value over the 1 year we hold them (ie, every year, we sell out of the business we currently hold, buy the next one in line, and hold that for the next year, during which it doubles).

In the former case (holding one business for 10 years), we get to convert $1 into $1024 over 10 years. If we then pay, say, a 20% tax on the $1,023 in profits, we're left with $819.40.

But in the latter case (holding 10 businesses in succession, 1 year per business), we have to pay the 20% tax every time we take a profit. Over 10 years, this leaves us with just ~$357.05 -- less than half of what we'd have in the first case.

So, as far as possible, finding businesses that we're comfortable holding for long periods will serve us well.

Investment Talk:

Where do you see the 10-K Diver brand going in the next year or so? Or perhaps more generally, do you have any longer-term goals or aspirations for the platform you have built for your work?

10-K Diver:

This is a great question!

For the moment (say, for the next year or so), I'm planning to just continue on the current course. Posting 1 "long-form" thread per week, with occasional one-off tweets if I think of or come across something valuable.

But long term, we definitely want to go beyond just Twitter. Twitter is great for building an audience. But there's a mismatch between my content and the sort of thing Twitter is built for.

I like to think my content is evergreen -- fundamental finance/investing concepts that don't change much with time. But Twitter is really for more ephemeral content -- what's posted today gets forgotten tomorrow.

The other problem is that, as we create more content, it becomes more difficult to structure and organize it. For example, suppose someone new to investing finds my Twitter handle. If I have hundreds of threads, how does this person make sense of it all? Some threads cover basic topics. Some are more advanced.

And they're in random order. Plus, there are important topics that don't yet have a thread written about them.

So, we think it makes sense to create a book, or a course, or some product like that. This product should guide a new investor through the fundamental concepts of finance and investing -- organized in a nice way.

We're not exactly sure what form this product should take. But we want to build something that I would have been glad to have when I first started out investing.

Investment Talk:

That is a great idea. I can assure you, whatever publication you decide to put out there, I am supporting it.

They say that in investing, inactivity can be one of the most powerful activities to aid the pursuit of sufficient long-term compounding.

Do you agree with this sentiment, and if so, how do you rationalise holding a position for a lengthy period of time?

10-K Diver:

Absolutely!

We have to remember that "activity" does not necessarily mean "progress".

Activity makes us feel good. When we buy this, sell that, trim this, etc., we feel we're positioning ourselves better for the future. But we're racking up fees and taxes, and we may not be as clairvoyant as we think we are.

So, we must eschew activity for its own sake.

But of course, *some* activity does result in progress. We must of course pursue that kind of activity. Very often, though, this "activity" takes the form of simply reading and thinking. It does not involve logging in to our brokerage accounts.

I feel that my example above -- describing how taxes can affect us adversely if we adopt shorter holding periods -- is on point here as well.

I read this quote somewhere, and I love it: "Your portfolio is like a bar of soap. The more you handle it, the smaller it gets.".

And Morgan Housel has this gem: "Housing isn't a great investment. But for most people, it’s the best investment they'll ever make. Because it's the only asset they'll leave alone and let compound for 10, 20, 30 years.".

And of course, Buffett said this: "Lethargy bordering on sloth remains the cornerstone of our investment style".

And finally, one from Munger: "The first rule of compounding is to never interrupt it unnecessarily.".

Investment Talk:

Lastly, I like to round-off this segment with my favourite quote, which comes from Graham.

“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”

What is your favourite quote, and why? Feel free to pick a few if you like.

10-K Diver:

I've already quoted a few people above, but I love quotes that convey important ideas in a pithy way.

Here are a few of my favourites:

1. "Everything should be made as simple as possible, but no simpler." -- Albert Einstein

2. "It's better to be approximately right than precisely wrong." -- often attributed to John Maynard Keynes, but he may not have said it or been the first to say it.

3. "Over the long term, it's hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years, and you hold it for that 40 years, you're not going to make much different than a 6% return -- even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you'll end up with one hell of a result." -- Charlie Munger

4. "Not all those who wander are lost." -- J. R. R. Tolkien

5. "The old that is strong does not wither. Deep roots are not reached by the frost." -- J. R. R. Tolkien

6. "Email is wonderful for people who want to be on top of things. But not for me; I want to get to the bottom of things." -- Don Knuth


Questions from Twitter:

In this segment, we collected questions from the Twittersphere, and present them to 10-K.

@aagha: "I’ve always wondered how long-term investors think about capital preservation. How much do you invest versus how much do you keep dry?"

10-K Diver:

This really depends on what opportunities we can find at any given point.

When the businesses we understand and like are all trading at what seems to us like exorbitant prices, we keep more cash on hand. When we can find good opportunities at reasonable prices, we tend to be more fully invested.

In the last 10 years, we've been 10% in cash, and also 80% in cash.

@IrnestKaplan: "What are the 3 most important things to get right or understand properly when assessing an investment for the long-term?"

10-K Diver:

I'd say the 3 most important things are:

1. Movement of capital in and out of the business. This will tell us whether the business is "high quality" or not and whether it's likely to stay that way. For more details, please see my answers above.

2. The range of possible outcomes for the business/investment, and a rough idea of the relative likelihoods of these outcomes, and how sensitive they are to various assumptions regarding growth, margins, etc. It's important to think in probabilities and distributions, rather than in "point forecasts".

3. Price. Are we paying a sensible purchase price for the business? At this price, what return outcomes can we expect over the long term, and what are their relative likelihoods?

@IrnestKaplan: "What do you use to make the lovely sketches in your threads?"

10-K Diver:

For the hand-drawn sketches, I use an iPad, an Apple Pencil, and the GoodNotes app.

For other sketches, I use Inkscape (a vector graphics editing program) and Gimp (a bitmap graphics editor).

For tables, I use Python + the prettytable module, with some manual post-processing.

For charts and graphs, I use Python + Matplotlib.

For animations, I sometimes use Matplotlib (+ the celluloid library if necessary), and sometimes Manim (@3blue1brown's mathematical animation package).

@IrnestKaplan: "What is your favourite coffee?"

10-K Diver:

I come from India. I love South Indian filter coffee!

I also very much like Peet's Coffee. I used to live near the very first Peet's location -- in Berkeley, California. They had divine lattes! Sadly, I now live hundreds of miles away from the nearest Peet's.

The coffee shop I go to most often is the local Starbucks. There, I usually get a flat white with an extra shot of espresso.

At home, I'm not much of a coffee snob. I have a very simple "one switch" (no fancy buttons or other programmability) Mr. Coffee coffee maker, which I use with Costco's Kirkland Colombian coffee powder.

@Fiducia_invest: "What catches your eye most in a 10-K, positive or negative?"

10-K Diver:

I mentioned above the importance of understanding things like "capital flow" from a 10-K.

What really catches my eye is a 10-K that's written to be easy to understand. With the armies of lawyers and accountants and investor relations and management personnel whose efforts go into preparing a 10-K, it's usually a safe bet that nothing in there is an accident.

So, a 10-K that's easy to read and understand often indicates a management team that's pro-shareholder. They want to be open and honest with shareholders, and they want shareholders to understand the business and how it's evolving over time.

On the other hand, there are 10-Ks that seem to be deliberately written to obfuscate and confuse. I'm generally wary about investing in these companies.

@Fiducia_invest: What are your top 3 valuation books you would recommend?

10-K Diver:

To be honest, I don't think I've ever read even one valuation book from cover to cover.

But I have read *sections* of the following books. And I think they're decent.

But I don't know if I'd recommend them, as I haven't read them fully.

1. Ben Graham's "Security Analysis" (of course!).

2. McKinsey's "Valuation" (another classic!).

3. Simon Benninga's "Financial Modeling" (not exactly a valuation book, but one can argue that financial modelling is the first step towards valuation).

I also like Aswath Damodaran's YouTube videos on valuation.


Concluding Remarks

I would like to thank 10-K for agreeing to answer some questions today, I had been looking forward to getting to know the man behind the thread-machine.

I learned a great deal, and I hope you did too.

Remember, you can find 10K over at @10KDiver on Twitter.

Stay tuned, as we have more excellent guests coming soon.

You can find previous editions of the guest interview series below:

• Edition One: Bill Brewster

• Edition Two: Kris FromValue

• Edition Three: ValueStockGeek

• Edition Four: AdventuresInFI

• Edition Five: Brian Feroldi

• Edition Six: Brad Freeman

• Edition Seven: Mostly Borrowed Ideas

• Edition Eight: Richard Chu

• Edition Nine: Kermit Capitál

• Edition Ten: Liviam Capital

• Edition Eleven: David Belle

• Edition Twelve: Mark Cooke

• Edition Thirteen: 10-K Diver

• Edition Fourteen: Richard Moglen

• Edition Fifteen: Matthew Cochrane

• Edition Sixteen: Michael Mitchell

• Edition Seventeen: Pythia Capital


Conor,

Lead Analyst at Occasio Capital Ltd