[The Weekend Bulletin] #119: Betting With The Markets OR Against It, Factors Needed To Make Money, What Makes Us Happy,...
...Lessons From Buffett, Wise Words from John Neff, Diversification, How To Want Less, 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
If you had two investment choices - one that mostly goes up, and other that mostly goes down - how would you build your portfolio? Most of us would want to invest only in the one that goes up. However, as this thread explains, the ideal investment would be a combination of the two. This is one of the best explanations of diversification that I have read in a while.
Three short but educating reads:
Walter Schloss: Factors needed to make money in the stock markets
Wise Words from John Neff (one of the rare active managers at the index fund house Vanguard)
12 timeless principles from the greatest investor in the world
The Graham-Buffett-Munger school of thought treats the market as having a manic-depressive characteristic. The academic school of thought believe that market to be a self-correcting efficient machinery. Some others, look to the market as a signalling mechanism, seldom wanting to bet against it ('bhaav bhagwan che'). What does that mean for us mere mortals - should we look to the market for guidance, or should we bet against it? This article attempts to answer that question.
We often look at price charts in isolation. However, when we look at then in relation to other things, they offer a very different perspective. This article highlights 8 relative charts that explain the current situation better than most. The idea is not to build a view on the market, but to learn a different way of looking at things.
Section 2: Mental Models & Behavioral Biases
Narrating the story of how Elon Musk came to build rockets at SpaceX, this article explains First Principles Thinking, also called Reasoning from First Principles. The principle has been used by many great thinkers including inventor Johannes Gutenberg, military strategist John Boyd, and the ancient philosopher Aristotle.
Section 3: Personal Development
The following are two long but very interesting reads:
The first one, rooted deep into philosophy, is a meditation on why we are never satisfied. Here is a summary courtesy Swanand Kelkar and Saurabh Singh (who originally shared the article):
Some of my favorite passages:
The second one approaches the problem from the other side. Instead of asking why we are never satisfied, it seeks to find what makes us happy? This is probably the longest running research project where for 72 years (as at 2009), researchers at Harvard have been following 268 men who entered college in the late 1930s - through war, career, marriage and divorce, parenthood and grandparenthood, and old age - to find the answer to this question. The findings are quite interesting and unexpected.
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 #45:
This 2-min video is a very simple explanation of a chaotic system like the stock markets. How small changes in the initial conditions can lead to completely different outcomes - something that is difficult to understand but easy to observe. The video has three parts; below is my interpretation of each of the parts:
In the first part, green pendulum is how we think of the market - gyrating between cheap and expensive. The other pendulum is how the market actually works - taking different paths from cheap to expensive and back.
The second part of the video explains how the interaction of fundamentals and emotions (each being the half hand of the pendulum) have an impact on the market.
The third part is the same, but represents how stocks move with the market - how minor differences in fundamentals lead to vastly different outcomes.
Here is a visual treat worth savouring. A painstaking effort of visualising some interesting investment frameworks. Three of my favorites are:
Section 5: Readworthy Passage
Let's read together a random, but read-worthy, passage from a randomly picked book.
The Laws of Investing
When Pabrai discovers a subject that fascinates him, he attacks it with obsessive fervor. In Buffett’s case, the available resources seemed limitless, including decades of letters to Berkshire’s shareholders and seminal books such as Roger Lowenstein’s Buffett: The Making of an American Capitalist. Pabrai devoured it all. He also began to make a pilgrimage each year to Omaha for Berkshire’s annual meeting, showing up without fail for more than twenty years.
Eventually, Pabrai would develop a personal relationship with Buffett. Through Buffett, he’d also become friends with Munger, who invites him for meals at his home in Los Angeles and games of bridge at his club. But in those early days, Pabrai’s knowledge came entirely from reading. And the more he read, the more convinced he became that Buffett, with Munger’s help, had laid out “the laws of investing,” which are as “fundamental as the laws of physics.”
Buffett’s style of investing seemed “so simple” and “so powerful” that Pabrai considered it the only way to invest. But when he studied other money managers, he was perplexed to nd that almost none lived by Buffett’s laws. It was like meeting “an entire set of physicists who don’t believe in gravity.... Whether you believe in gravity or not, it’s fucking gonna pull you down!”
It was clear to Pabrai that most fund managers owned too many stocks, paid too much for them, and traded them too often. “These mutual funds are sitting there with one thousand positions or two hundred positions. How can you find two hundred companies that will all double? Then I look at what they own, and they own things that are trading at thirty times earnings.... I saw that they were all hosed.”
Pabrai had read a book by the management guru Tom Peters that told a cautionary tale of two self-service gas stations on opposite sides of the street. One prospers by providing high-quality service, such as cleaning windshields for free. The other does the bare minimum. What happens? Its customers inevitably drift to the better gas station. This error amazed Pabrai, since nothing could have been easier than simply to copy the superior strategy sitting in plain view.
“Humans have something weird in their DNA which prohibits them from adopting good ideas easily,” says Pabrai. “What I learned a long time back is, keep observing the world inside and outside your industry, and when you see someone doing something smart, force yourself to adopt it.” This sounds so obvious, even trite. But this one habit has played a decisive role in his success.
So, with the zeal of a true disciple, Pabrai committed to invest “the way Warren said I should.” Given that Buffett had averaged 31 percent a year, Pabrai naively assumed that it shouldn’t be hard to average 26 percent. At that rate, his $1 million would double every three years and hit $1 billion in thirty years. As a reminder of this compounding target, his license plate reads COMLB 26. Even if he missed by a mile, he expected to do ne; if, say, he averaged 16 percent a year, his $1 million would turn into $85.85 million in thirty years. Such is the glory of compounding.
Of course, he had no MBA from a fancy school such as Wharton or Columbia, no qualification as a certified financial analyst, no experience on Wall Street. But Pabrai, who regards his entire life as a game, expected his rigorous application of Buffett’s methodology to give him an edge over all of the fools who failed to follow the Sage of Omaha. “I want to play games that I know I can win,” says Pabrai. “So how do you win the game? You’ve got to play according to the rules. And the good news is, I’m playing against players who don’t even fucking know the rules.”
- From RICHER, WISER, HAPPIER by William Green
Quotable Quotes
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That's it for this weekend folks.
Have a wonderful week ahead!!
- Tejas Gutka
[Apr 30, 2022]