[The Weekend Bulletin] #118: Feedback, Price and Valuation Decisions, Loss Aversion,...
...taking action, Money Monarchs, and more.
A digest of some interesting reading material from around the world-wide-web. Your weekly dose of multi-disciplinary reading.
A quick announcement:
I'll not be sending out the newsletter next weekend. I am looking forward to catching up with some childhood friends who are flying down after a long break post the pandemic. We’ll be back in business at the end of the month.
Section 1: Investing Wisdom
Michael Moubaussin and Dan Callahan pen a very informative piece on the importance of feedback in investment management. The report defines feedback as information that is applied to improve results. It discusses the various facets of the investment process that can be improved, both at an individual level as well as at an organisation level.
This article reduces the act of active investing to its simplest form. It claims that all active decisions are based on either price or valuation, and all investing styles lie somewhere in between. The position of an investment style along this spectrum is of importance as it determines the investor's time horizon as well as risk factors.
This tweet has a good collection of some open-ended questions that investors can ask managements.
Lastly, here is an interesting development (a couple of years old though): Warren Buffett’s Protégé Is Building a Mini Berkshire
In case you wish follow the story further, here is the firm's first annual letter outlining their thought process.
On a related note, I am sure you would have by now seen Warren Buffets new interview with Charlie Rose. Love the energy that radiates from WB’s face at the age 91.
Section 2: Mental Models & Behavioral Biases
When we think of loss aversion, we think that it has a linear relationship with age. Younger investors are more risk taking (robinhoods), while risk appetite diminishes with age - that the general belief. Research, however, does not confer to this generally held belief, as this article points out.
Section 3: Personal Development
“Inaction often feels better. It feels comfortable. It feels safe. But inaction won't take you to the places you want to go. In many cases, it will take you exactly where you don't want to go—a dead end job, a diabetes diagnosis, a finger burned with frostbite….
..Because if you don’t force yourself to act, you’ll be forced to watch as the best version of yourself flashes before your eyes, never to be seen again.”
There are times when the comfort of the couch is more inviting than the fruits of completing a task. I face this often on a Friday night when I want to go out for a drink, or watch a movie. Writing this weekly seems like a monumental task at such times. I have often thought of quitting in those moments, only to have felt silly after sending out the weekly (the likes and comments that you send my way act as strong motivators during such times). I am sure you feel the same despair about some task in your life currently. Let this short travelogue help you shake off procrastination and laziness, and get you going.
"…direct feedback to someone is your highest leverage option to get them to be better. It is the least work on your part for the most long-term impact."
Going back to the topic of feedback, it is important not just in investment management, but in all our interactions - work, relationships, sports etc. Especially at work, since most outcomes depend on the collective efforts of team-members, providing feedback is not only critical for success but also necessary to reduce effort. This article lays down the importance as well as the principles of good feedback.
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 #44:
This is a story of a billionaire who planned to die broke - not because he wanted to gamble his fortune, but because he wanted to give it all away for a cause, while he was still alive. An incredible story of one of the founders of the Duty-Free Shops who "pioneered the idea of Giving While Living—spending most of your fortune on big, hands-on charity bets instead of funding a foundation upon death. Since you can't take it with you—why not give it all away, have control of where it goes and see the results with your own eyes?”. As per this article, he has given away 375,000% more money than his current net worth.
Regret is inevitable in investing. You either regret having bought something or having not bought something. It shows up in bull markets, as well as bear markets. While regret is a negative emotion, it can have positive implications if used correctly. This article tells us how to deal with regret correctly.
Here is something that all investors should be doing. Arisaig Partners looks at some of the its past investment decisions to identify the various biases that were are at play at the time of making those decisions. While the biases were not as apparent then, they surely are more recognisable with the benefit of hindsight. This is an exercise that if conducted regularly will help identify many of these biases pre-mortem rather than post-mortem. More importantly, then can also help identify a pattern of flaw in decision making over time. This note is praiseworthy in that not only did Arisaig Partners undertake this exercise, but they also made it public which is really commendable.
Section 5: Readworthy Passage
Let's read together a random, but read-worthy, passage from a randomly picked book.
Define your selling style
Nemish is absolutely value oriented in selling. Manekbhai, on the other hand, had a wonderful ability and style of selling because he would never sell at a particular price. He would make a mental switch in his portfolio and shift his ‘sell’ value stock to his momentum side and as long as the stock was trending up, he would not sell it. Mentally he had sold it from portfolio A to portfolio B and he would only sell it completely when the price turned and the turn was confirmed. This almost always would give him a better average and allowed him to digest huge profits without getting unnerved like a classic value investor.
Similarly, on the buying side, he would never catch a falling knife. He would wait for it to bottom and then buy only once the upturn had been confirmed. So, he was never attempting to be the leader or set a price. Nemish on the other hand, has always had the conviction that if the price is right, he didn’t care if he was the person who was catching the falling knife and creating the bottom. Equally on the selling side, he is quite happy to sell early and let someone else make the momentum money over there.
Sell when your empirical mathematics tells you to . . .
What we have therefore developed are these absolute price bands. Once you go beyond that, you are in momentum territory. It is then up to you to choose to sell based on the reds or ride the momentum. This discipline is important since often I find people justifying fundamentals after the price has moved up, whereas clearly it is the momentum that is causing them to get swayed.
The reds on the screen flash at you and urge you to sell. If you neglect to do that, it is because you have in your own mind something more than what the quant is telling you.
Personally, I think my biggest failures in life have been when I thought that I was smarter than the empirical mathematics which we had worked out in advance. I paid a heavy price for it. A lot of people ask us about a lot of successes we have had on the buying side, but I think it’s equally important for people to understand that if you don’t have discipline on the sell side, you can actually destroy many many years of returns that you made. And that’s a painful lesson that I learned despite there being wiser counsel around amongst us.
. . . or when your original premise was flawed
Another way to sell, obviously the most painful one, is when your original premise was flawed. That your expectations on either volume, price, capital efficiency was wrong or management had gone off course. Especially in terms of capital allocation, at which point there is no use getting wedded to that stock and getting emotional about it. One would therefore just cut the loss and head for the exit door.
Another important discipline that we maintained on our portfolio side in the AMC was that we had decided very early that we would not have more than 20 stocks and one would not build a position unless we wanted to buy at least 5 percent of that in the portfolio. That was an important discipline since it forced us to weed out the weaker stocks as one kept getting newer and newer buy ideas.
- From India’s Money Monarchs: Conversations with Leading Investors by Chetan Parikh, Navin Agarwal, and Utpal Sheth.
Quotable Quotes
"You have to do your homework and kick the tires. It’s not the answers that make you good in this business, it’s the questions you ask. If you ask the right questions you will always find out more than the next guy."
- Michael Price
"Before success comes in any man’s life, he is sure to meet temporary defeat. The easiest and most logical thing to do is to quit. That is exactly what the majority of men do.
More than five hundred of the most successful men this country has ever known told the author their greatest success came just one step beyond the point at which defeat had overtaken them."
- Think and Grow Rich by Napoleon Hill
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That's it for this weekend folks.
Have a wonderful week ahead!!
- Tejas Gutka
[Apr 16, 2022]
So true! “We must all suffer one of two things: the pain of discipline or the pain of regret or disappointment.”
Which will it be?
Writting declutters your mind.