[The Weekend Bulletin] #111: Pricing Power, Mistakes, Algebra of Decisions,...
...Valuations, Ownership Filter, Simplification by Subtraction, 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
Warren Buffett rates pricing power as the single most important indicator of a business's strength. But what exactly is pricing power? Raising prices to pass on inflationary pressures is definitely not pricing power, claims this article, and then goes on to explain the kind of pricing power that investors should look for.
Despite their overtly bearish perception, I like reading letters from GMO for they are among the few that think and write across markets as well as asset classes. In their latest, they discuss some investment mistakes that the current market environment may induce investors into making. While the letter discusses mistakes in connection to the current market environment, each of the specific mistake is something that you'd observe across market cycles, and therefore worthy of your attention.
Here is another investor letter. This one, from Broyhill Asset Management, while discussing the current market outlook provides some interesting perspectives on the historical relation between starting valuations and prospective returns. The letter also provides a checklist observed by Goldman Sachs that characterizes an investment bubble (should be put up on your desk).
…is every stock now—maybe the market itself—more like an untethered balloon? When you stick a pin in a balloon, it doesn’t plummet toward the ground. It fires off at odd angles, sometimes shooting up to extreme heights, spinning and spiraling and seesawing—until it eventually runs out of air. Then it might drift back to the ground; or it might defy ration and reason, get caught in a stiff breeze—and rise up, and up, forever.
When you study investors that have done well over decades, you realise how different their paths have been (last year's book Richer Wiser Happier helps makes this observation easily). However, even as their philosophies have been different, there is a common thread underlying most of them. This article highlights three such commonalities, and also provides a useful lesson - less is more.
[We've looked at the concept of subtraction vs addition in various issues: #45, #72, #78, and most recently #109]
Two meditations in this note (with inputs from Warren Buffett and Joel Greenblatt): a filter to find great investments, and how many of them to own.
Section 2: Mental Models & Behavioral Biases
One of my professors used to assert that 'you've understood a concept well only if you can express it as an equation'. This article, breaking down decision making in to its key components, will tell you why he was right. This is one of the best articles on decision making that I have read so far.
Section 3: Personal Development
Stoicism matters not only in making good decisions (referencing to the article above), but in leading a good life in general, and becoming a good investor in particular. This article will make your journey towards being a stoic easy as it lays down 15 rules that stoics follow in general. While the number 15 may sound large, I see them fitting in to three large buckets: how we deal with ourselves, how we deal with others, and how we deal with external circumstances. Reading this article is equivalent to reading a book on the topic.
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 #37:
A couple of week's back we heard the story of Kat Cole. While that interview looked at her journey and personal traits, this one deals with her business lessons (specifically on brand, distribution, and leadership). If you haven't heard the first one, I would suggest you listen to it before you listen to this one as it provides some background to this conversation. While this interview has a number of business lessons, two of my favorites were Kat's perspective on brands being both relevant and different, and how price cuts can be used to increase revenues and margins. A very interesting conversation; highly recommended.
We often confuse between intelligence and intellect. Intellect - ability to understand - is a gift, something that we are born with. Intelligence, on the other hand, is a like a muscle - something that can be improved with exercise. For example, between two people with the same intellect, one may be more intelligent simply because s/he spends more time thinking about problems. An easier way to understand this is in terms of sports - between two players with the same talent (hand-eye coordination), the person who practices more will have higher skills. Here is how you can improve your intelligence.
Section 5: Readworthy Passage
Let's read together a random, but read-worthy, passage from a randomly picked book.
- From I AM THAT by Nisargadatta Maharaj
Quotable Quotes
"It is not the man who has too little, but the man who craves more, that is poor."
– Seneca
“Learn enough from history to respect one another’s delusions.”
- Will Durant (we read a passage from their book last weekend)
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That's it for this weekend folks.
Have a wonderful week ahead!!
- Tejas Gutka
[Feb 19, 2022]
[The Weekend Bulletin] #111: Pricing Power, Mistakes, Algebra of Decisions,...
As usual excellent read
Excellent and very interesting and useful
Keep it up