[The Weekend Bulletin] #121: Why Zebras Dont Get Ulcers, ?(Volatility=Risk), 4 Horsemen,...
...David Tepper, Some Lessons and Few Beliefs, Secular vs Cyclical Markets, 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
I quite enjoy reading investor profiles, and Frederik Gieschen of Neckar does a wonderful job of collating them. In a recent two part series (part 2 is paywalled), he profiled David Tepper.
The following best describes David:
"Investing with David is like flying, with hours of boredom followed by bouts of sheer terror," a long-time client commented. "He's the quintessential opportunist, investing in any asset class, but you have to have a cast-iron stomach."
After successfully buying distressed debt in 2002, Alan Fournier gave Tepper a pair of brass testicles, “cartoonishly huge and grotesquely veiny” as New York Magazine described them. The balls came with a plaque inscribed with the words ‘The Most Valuable Set of All Time.’
This short article asks a very important question: When Does Volatility Equal Risk? It then goes on to highlight three out of four scenarios in which volatility is indeed a risk for investors.
This article makes an important distinction between various market moves. It asserts that investors would do well in knowing the difference between secular and cyclical markets.
Stock markets are very rewarding. They reward you either with wealth or with lessons. The following two articles highlight some beliefs or lessons that if you remember across cycles will help you avoid the lessons and protect/grow the wealth.
Morgan Housel - A Few Beliefs
Michael Batnick - Twenty Lessons Learned
I found the following passage about the four horsemen of investor apocalypse from this article to be quite interesting (the rest of the article is skippable; hence reproducing some text here):
"Complexity, concentration, leverage, and illiquidity are the four horsemen of the investor apocalypse, perennial threats that wreak havoc on portfolios and undermine even the best-laid plans of diligent investors and their advisors. Unfortunately, these same four horsemen are also profit generators for Wall Street, thus creating a continual tug of war in investment management between what’s advantageous for the provider and what’s beneficial for the investor.
Consider Jack Bogle’s beloved traditional index fund. This investment averts the four horsemen at every turn. It is simple, diversified, unleveraged, and highly liquid. In contrast, the typical hedge fund is complex, concentrated, often leveraged, and generally illiquid. The differences are reflected in their pricing. The perceived sophistication in the hedge fund allows its purveyors to charge higher prices, while the simplicity of the index fund commoditizes the offering and demands a low price. That’s why cost is such an effective first-stage screen in selecting investments: Not only do lower-cost investments save money, but they also keep the four horsemen at bay, thus upping the odds of investor success."
While I generally agree with the above, I also believe that all noble intentions have some unintended consequences. Maybe the consequence of a large-scale adoption of indexing will be an extreme polarization of markets. Or maybe that is just first order thinking; the second order consequences maybe completely different. Who knows? Only time will tell.
Section 2: Personal Development
If there was only one link in this issue that you would want to click on, I would suggest this talk by Dr. Robert Sapolsky. Talking about his 1994 book Why Zebras Don't Get Ulcers, he provides a seemingly logical explanation of what stress is and what it does to our body (including the kind of stress signals you send you body when you go for that 5k run). You may have heard or read about this topic, but you would not have come across anything close to how Dr. Sapolsky puts it. He is a talented scientist and a gifted speaker. This talk is a mix of humor and horror. I wouldn't skip it.
Section 3: 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 #47:
One of my all time favourite quotes on investing is that ‘investing it simple, but not easy’. What makes investing simple are mathematical deductions likes returns being the sum of dividend yield, earning growth, and change in valuations. However, what makes it not easy is the fact the changes in valuations are not easy to estimate. A number of factors play an important role in determining valuation multiples, some of which act as an invisible hand, as this short note highlights.
On a related note, this article draws attention to a similar invisible hand because of which share prices of a slow growth company can react positively while that of a high growth company can react negatively.
Section 4: Readworthy Passage
Let's read together a random, but read-worthy, passage from a randomly picked book.
Let me start with a story that is likely to be familiar to you.
One of the greatest computer programmers of all time grew up near Seattle, Washington. He saw an upstart company, Intel, making computers on a chip and was among the first people to see the potential of these so-called microcomputers. He dedicated himself to writing software for the new device and, by one account, “He wrote the software that set off the personal computer revolution.”
In the mid 1970s, he founded a company to sell software for microcomputers. In the early history of the company, “the atmosphere was zany,” and “people came to work barefoot, in shorts,” and “anyone in a suit was a visitor.” But the company was soon highly profitable, and by 1981 its operating system had a dominant share of the market for personal computers that used Intel microprocessors.
For all of its early triumphs, the company's watershed moment came when IBM visited in the summer of 1980 to discuss an operating system for its new PC. After some negotiation, the two companies struck a deal. In August 1981, retailers offered the company's software alongside the brand new IBM PC, and the company's fate was sealed. The rest is history, as they say.
In case this story's not familiar, here's the ending. This pioneer of computer technology entered a biker bar in Monterey, California, on July 8, 1994, wearing motorcycle leathers and Harley-Davidson patches. What happened next is unclear, but he suffered a traumatic blow to the head from either a fight or a fall. He left under his own power but died three days later from the injury, complicated by his chronic alcoholism. He was fifty-two years old. He is buried in Seattle and has an etching of a floppy disk on his tombstone. His name is Gary Kildall.
You'd be excused for thinking that the first part of the story is about Bill Gates, the multibillionaire founder of Microsoft. And it is certainly tantalizing to ask whether Gary Kildall could have been Bill Gates, who at one point was the world's richest man. But the fact is that Bill Gates made astute decisions that positioned Microsoft to prevail over Kildall's company, Digital Research, at crucial moments in the development of the PC industry.
When IBM executives first approached Microsoft about supplying an operating system for the company's new PC, Gates actually referred them to Digital Research. There are conflicting accounts of what happened at the meeting, but it's fairly clear that Kildall didn't see the significance of the IBM deal in the way that Gates did.
...
When asked how much of his success he would attribute to luck, Gates allowed that it played “an immense role.” In particular, Microsoft was launched at an ideal time: “Our timing in setting up the first software company aimed at personal computers was essential to our success,” he noted. “The timing wasn't entirely luck, but without great luck it wouldn't have happened.”
- From THE SUCCESS EQUATION by Michael Mauboussin
Quotable Quotes
"Markets are quoted in numbers, but what they trade in is emotions. Markets simply determine prices for risks and rewards over time. Among those risks are not just financial losses, but the surprise and fear and regret they bring. Among those rewards are not just monetary gains, but hope and greed and pride."
"You can’t predict a multibagger on Day 1; you only learn over time. When opportunity meets execution with good governance; that’s when the magic happens! Only the context or environment and the opportunity set changes over time"
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Before we go, here are some good wishes that I received, and I want to pass them onto you:
Today, I hope for a series of matches for you:
May your execution match your strategy.
May your actions match your intentions.
May your habits match your desires.
In short, I hope who you want to be matches what you do and leads to the outcomes you want today.
Source: Framed Perspectives
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That's it for this weekend folks.
Have a wonderful week ahead!!
- Tejas Gutka
[May 21, 2022]