[The Weekend Bulletin] #126: Industry Cycles, Difficult Questions, Market Lessons, Disconfirming Evidence,...
...Living the moment, De-stressing, Unfinished Tasks, 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
In their latest, Michael Mauboussin and Dan Callahan explore how industries develop. They, very interestingly, liken an industry cycle with that of the neural connections in the brain of a child. The report posits that just as the neural network develops a lot of connections and then prunes then, so do companies in an industry. They go on to explain why this happens, and why investors should take interest in it. This is a timely read at a time when the existence of a lot of start-ups is being questioned.
The last couple of years have been a testing time for many investors. On the one hand, newer investors have rejoiced the rally that followed the Covid crash, and are now wondering why it all comes crashing down. On the other hand, a number of seasoned investor have questioned the rally that followed the record breaking money printing by the Fed. Over a long career, most investors will face such times, when they are faced with some probing questions about the behaviour of the market and their own investing acumen. This article lists some such difficult questions that every investor introspects over, and the effect that such questions have on them.
“If you have a three year period where something doesn’t work, it ages you a decade. You face an immense pressure to change your models, you have bosses and clients who lose faith, and I cannot explain the amount of discipline you need.”
Only when the tide goes out, do you discover who has been swimming naked, or so goes the famous quote from Warren Buffett. The seeds of a bear market are sown in a bull market. What these quotes point at is the fact that in a state of euphoria, many investors let their guard down. When stock prices are rising, and fast, focus shifts from downside protection to upside participation - invest first, investigate later. This is when investors are the most gullible - either of their own doing, or lured by someone looking to take advantage. The following are some such incidence from the current receding tide as well as the past:
First up is a story from 1890's about how one investor satiated the need of the general public to be guided into quick returns.
Next up is this incident from the 1920's about how margin investing didn't spare the father of value investing as well.
There is a similar story about margin that his protege Warren Buffett once shared about one of his partners.
Moving from history, to the current times, this article is an account of how speed and agility replaced research and deliberation in the venture capital / private equity world, leading to the current meltdown that we are seeing in tech valuations. This is also an important corporate strategy lesson here: when one big player decides to change the rules of game, most others have no choice but to follow (even as they cry foul) or quit.
Lastly, moving to the shiny new tech innovation - crypto. This thread narrates how illiquidity can doom investors even when they have been realising big returns.
Section 2: Mental Models & Behavioral Biases
“The human understanding when it has once adopted an opinion, draws all things else to support and agree with it. And though there be a greater number and weight of instances to be found on the other side, yet these it either neglects and despises, or else by some distinction sets aside and rejects.”
We have all read and understood the pitfalls of confirmation bias - seeking evidence that supports out hypothesis and ignoring evidence that says otherwise. Since confirmation bias works at a subconscious level (like all other biases), it is best that we overcome this bias by actively seeking disconfirming evidence i.e. dig out data that does not support our hypothesis. Darwin did this, Munger advised it, and this article explains why.
Section 3: Personal Development
This personal account of a 'military spouse' encourages us to live each moment to the fullest. A very nice read (and no, its not about death). Some quotes from the article:
"Live like you're running out of time—because you are."
"Being human is to exist in a world of finite time, vulnerability, risk, and uncertainty. In this milieu, you have to make a choice—play it safe and live small or go all in."
"All we have is now. Take nothing for granted and make it count. Build a life that would make goodbye hurt and leaving hard."
"if the ending hurts, it usually means something went right."
This short video conversation between Shane Parish of Farnam Street and Andrew Huberman talks about the relationship of stress with our field of vision (physically and cognitively) and what we can do to quickly release stress.
We've all had this situation when we look at our to-go lists and feel the despair and burden of unfinished tasks. At times, looking at unfinished tasks can demotivate us to the extent of not taking any action, instead switching to social media or netflix to de-stress. However, unfinished tasks can also be a power motivator, as this article suggests. Sometimes a small change in perspective can make a big difference in how we react to stimuli.
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 #51:
We’d all wish that investing was as simple as finding a growth machine that generates high returns on capital and riding it over decades. However, investing is simple but not easy. The long term is a long-winding road, and a lot can go wrong as your traverse the distance, including growth remaining elusive for a long stretch. In fact, in a study of over 400 companies that appeared in the list of Fortune 100 over a long period, and around 90 similar corporations outside of US, it was observed that 87% of the companies in this group had suffered one or more stall points - an extended period of low or no growth. Thus, even high quality companies suffer growth pangs, making it imperative for investors to understand why this happens. This long form article looks in to some of the common factors that lead to a growth stall, arguing that most of the factors are internal to an organisation, knowable in advance, and are controllable by management. It also goes on to provide a checklist for managements and investors to identity such growth stalls in advance. If there was only one article that you’d want to read this weekend, let it be this one.
If you were to find a common thread between companies like Levis Strauss, Dominos, 3M, Apple, Caterpillar, Daimler-Benz, Toys “R” Us, and Volvo, you’d discover that all of these companies went through long period of ‘growth stall’.
Morgan Housel argues that two are kinds of history that we can learn from. One is a specific event like a cricket match, a war, a pandemic. The other is to observe history from a distance for behaviours that show up time and again in multiple areas. He further argues that specific lessons cannot be applied widely, while the general observations are the most relevant. He then goes on to draw some of the big lessons that we can learn from history.
You have the ability to put in far more effort into things than you normally do. The reason you don’t is that, most of the time, a full effort isn’t necessary.
We think that a full effort will be draining, that we ought to save our energy for when we really need it. Yet, more often than not, the opposite is the case. When we really use our full effort toward a central concern that matters deeply to us, we feel more energized—not less.
The paradox is that life is often easiest when it is hardest. When you’re working on a pursuit that may fail if you don’t take it seriously, you find the energy to take it seriously. And, in doing so, you find the other nagging things in life that needed effort weren’t so hard either.
The key is to find the one thing that will necessitate all the rest.
Section 5: Readworthy Passage
Let's read together a random, but read-worthy, passage from a randomly picked book.
IS SUCCESS ABOUT LEARNING—OR PROVING YOU’RE SMART?
Benjamin Barber, an eminent sociologist, once said, “I don’t divide the world into the weak and the strong, or the successes and the failures. . . . I divide the world into the learners and nonlearners.”
What on earth would make someone a nonlearner? Everyone is born with an intense drive to learn. Infants stretch their skills daily. Not just ordinary skills, but the most difficult tasks of a lifetime, like learning to walk and talk. They never decide it’s too hard or not worth the effort. Babies don’t worry about making mistakes or humiliating themselves. They walk, they fall, they get up. They just barge forward.
What could put an end to this exuberant learning? The fixed mindset. As soon as children become able to evaluate themselves, some of them become afraid of challenges. They become afraid of not being smart. I have studied thousands of people from preschoolers on, and it’s breathtaking how many reject an opportunity to learn.
We offered four-year-olds a choice: They could redo an easy jigsaw puzzle or they could try a harder one. Even at this tender age, children with the fixed mindset—the ones who believed in fixed traits—stuck with the safe one. Kids who are born smart “don’t do mistakes,” they told us.
Children with the growth mindset—the ones who believed you could get smarter—thought it was a strange choice. Why are you asking me this, lady? Why would anyone want to keep doing the same puzzle over and over? They chose one hard one after another. “I’m dying to figure them out!” exclaimed one little girl.
So children with the fixed mindset want to make sure they succeed. Smart people should always succeed. But for children with the growth mindset, success is about stretching themselves. It’s about becoming smarter.
One seventh-grade girl summed it up. “I think intelligence is something you have to work for . . . it isn’t just given to you. . . . Most kids, if they’re not sure of an answer, will not raise their hand to answer the question. But what I usually do is raise my hand, because if I’m wrong, then my mistake will be corrected. Or I will raise my hand and say, ‘How would this be solved?’ or ‘I don’t get this. Can you help me?’ Just by doing that I’m increasing my intelligence.”
- From MINDSET by Carol S. Dweck
Quotable Quotes
"WD-40 stands for Water Displacement - 40th Formula
Had the inventors given up on their 39th attempt, it wouldn’t be a $3.3 billion company today."
"The heat of the sun has a very different effect on petal of a rose than it does on the head of a banker."
- Dee Hock
"I can't tell you how much time is spent worrying about decisions that don't matter. To just be able to make a decision and see what happens is tremendously empowering, but that means you have to set up the situation such that when something does go wrong, you can fix it. When something does go wrong, it doesn't cost you or your customer an exorbitant amount. It isn't ridiculously expensive. When you get in situations where you cannot afford to make a mistake, it's very hard to do the right thing. So if you're trying to do the right thing, the right thing might be to eliminate the cost of making a mistake rather than try to guess what's right."
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That's it for this weekend folks.
Have a wonderful week ahead!!
- Tejas Gutka
[June 25, 2022]