[The Weekend Bulletin] #108: Lessons from 2021, Playing Easy Games, Essentialism,...
Digging in a graveyard, Compounding Mediocre Skills, Our Shangri-La and more.
A digest of some interesting reading material from around the world-wide-web. Your weekly dose of multi-disciplinary reading.
Section 1: Investing Wisdom
We are the end of the first month of the new year. The year gone by, however, still continues to give. Here are some lessons from it:
This thread draws lessons from the winners and losers of 2021 and in turn provides some good frameworks to think about stocks.
This two-part series draws 10 broad investment lessons from the market. When you look at the markets on a daily basis, it becomes difficult to see long term trends. Articles like these are good reminders of what matters or works in the long term. Some of my favourite lessons were 1, 4, 7, and 9. You can pick your favorites here: Part 1, Part 2.
We all know that the pendulum of investor sentiment, and market valuations, swings in both directions. And while we enjoy when it swings towards optimism, we generally fear the other way. When excesses are corrected, they make for quite a graveyard. And nobody likes to dig (for ideas) in a graveyard. However, sometimes, the best long term investments come out of such graveyards, as this thread explains.
In this recent interview, Michael Mauboussin talks about how science moved from reductionism to consilience, the difference between a hedgehog and a fox in organisations (#83 carried three articles on this concept), the fundamental law of active management and why dispersion of returns matter, the paradox of skill and why it's important to find easy games (we looked at it in #90), and expectations investing - the framework as well as the book.
Section 2: Mental Models & Behavioral Biases
We've always thought of and looked at compounding from the perspective of investing and habits - small incremental changes over a long period of time can lead to outsized results. Interesting, this article presents the idea from a skills perspective. It agues that sometimes a combination of seemingly mediocre and disjoint skills can create great outcomes - just as when you mix two metals to create an alloy. The article then goes on to list some skills/behaviours that can work wonders when combined together.
Section 3: Personal Development
Why is it that a lot of successful people and business find it difficult to succeed further? Why is it that most achievers hit a glass ceiling? Greg McKeown, author of the book Essentialism: The Disciplined Pursuit of Less, claims that this happens as success is a poor teacher, and it leads to chaos. He explains further in this wide ranging talk by stitching together trade-offs, FOMO, JOMO, Gandhi, and Salt March (Dandi March). In case you are wondering that this is a problem for highly successful people and not for me, then maybe you want to consider the idea that the lack of success is probably due to an undisciplined pursuit of more. This talk is as much for those who don't think they are successful as much as it is for someone successful.
(h/t to Anand Tandon for sharing his notes from the book and pointing at this video)
Section 4: Blast From The Past
Revisiting articles from a past issue for the benefits of refreshing memory and spaced repetition, as well as for a fresh perspective. Below are articles from #34:
Private investor journeys make for very interesting reads, for their actions are not bound by the pressure of investment committees or demanding clients. Their investment results are a true reflection of their own skills, brevity, and biases. This is a story of two brothers that have remained under the radar for decades (despite the article being dated in 2006, not a lot has been heard of the brothers since). But their story is intriguing: not more than ten investments at a time usually, invest for 2-5 years at least, investments are based on a lot of macro analysis, unconventional valuation methodologies, heavy dose of activism, a very high rate of compounding (i'll leave it to you to calculate how much). Pretty unusual for us regular stock market investors and therefore definitely worth a read. Don’t skip this one.
This is a very interesting observation of a new mental model called ‘empowerment loops’. Think of it as a subset of network effects. However, rather than building a network of buyers and sellers, it bridges the gap between the ‘elite’ (not necessarily financially, but creatively) and the ‘masses’. For example, blogging (Internet) took writing from the professionals to the masses; Substack (the platform hosting this newsletter) is now helping bloggers and journalists monetise their talent directly without the need for aggregators like newspaper. Others: Ford -> automobiles, Harley Davidson -> race motorcycles. What businesses come to your mind after reading this?
Section 5: Readworthy Passage
Let's read together a random, but read-worthy, passage from a randomly picked book.
Question 2: When Is the Best Time to Invest in Great Businesses?
It’s tempting to conclude that wide-moat businesses are so rare and so great that you should buy them whenever you find them and hold on to them as long as their competitive advantages remain intact. However, the competitive advantage of a business is only part of the story. Our research shows that while wide moats can be a tremendous source of alpha, or excess return, for your portfolio, the advantage of owning wide-moat companies is much clearer and more persistent when you purchase them at a discount to the underlying business value.
The Importance of Valuation
Valuation is an incredibly important aspect of investing—you could argue, the most important. It makes sense when you think about it: You wouldn’t want to pay $650,000 for a house that’s worth $500,000, because even if it were a great house, it would take many years for the market to recognize the value of the house as $650,000, and at that point, you would have likely lost purchasing power in real terms after inflation. Even if you bought that same house for $500,000, or fair market value, you would see it appreciate only at the market rate of return. Ideally, you’d get an even better price on the house, perhaps buying it for $450,000, so you could benefit not only from the future market rate of return, but also from having the price converge from your discounted price to the fair market value.
While many investors get caught up in daily stock price movements, we prefer to think about valuation in the same way as you would a real asset, such as the house in the example above. There is a fair market value of any business, and opportunities to purchase great businesses at less than that fair market value give investors an advantage in generating future returns.
- From WHY MOATS MATTER - THE MORNINGSTAR APPROACH TO STOCK INVESTING by Heather Brilliant and Elizabeth Collins.
Quotable Quotes
As a tribute to Thich Nhat Hanh, a Buddhist Monk, Vietnamese Zen, Peace acvtivist, Poet, and author of over 100 books, who passed away last week, below are some of this famous quotes:
"Our true nature is the nature of no birth and no death. We do not have to go anywhere in order to touch our true nature. The wave does not have to look for water because she is water. We do not have to look for God, we do not have to look for our ultimate dimension or nirvana, because we are nirvana, we are God. You are what you are looking for. You are already what you want to become."
"When you are a young person, you are like a young creek, and you meet many rocks, many obstacles and difficulties on your way. You hurry to get past these obstacles and get to the ocean.
But as the creek moves down through the fields, it becomes larges and calmer and it can enjoy the reflection of the sky. It's wonderful. You will arrive at the sea anyway so enjoy the journey. Enjoy the sunshine, the sunset, the moon, the birds, the trees, and the many beauties along the way. Taste every moment of your daily life."
"The Earth will be safe when we feel safe in ourselves."
“Letting go gives us freedom, and freedom is the only condition for happiness. If, in our heart, we still cling to anything - anger, anxiety, or possessions - we cannot be free.”
“Many people think excitement is happiness.... But when you are excited you are not peaceful. True happiness is based on peace.”
#JustForFun
Song I am listening to (on loop) while writing this newsletter:
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That's it for this weekend folks.
Have a wonderful week ahead!!
- Tejas Gutka
[Jan 29, 2022]