[The Weekend Bulletin] #142: Solving the Investing Equation, Finding Fair Multiples, Doing Nothing,…

Brand Equity, Always or Never, Measuring Progress, Holding Attention, and more.

A digest of some interesting reading material from around the world-wide-web. Your weekly dose of multi-disciplinary reading.

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Investing Wisdom

• Soumil Zaveri of DMZ partners always has something interesting to say in his investor letters. In his latest, he presents a three variable framework for solving the investing equation. He posits that investors work backwards from an end-objective towards the right inputs needed to achieve it, and build resilience to stay the course in the crack of adversity.

• Sloth maybe one of the seven capitals sins in religion, but when it comes to investing, it may actually be a virtue, as one investor demonstrates here. There is always an appropriate Charlie Munger quote for all things investing:

  “The big money is not in the buying or selling, but in the waiting.”

• At a recent event, Michael Mauboussin sat with Berkshire Hathaway portfolio manager Todd Combs to discuss all things investing and Berkshire. The chat is a good window into not only Todd’s investment thinking but also his interactions with Warren and Charlie that reveal how simplistically they filter businesses.

• In a recent issue, we studied how growth rates do not persist over time. Following up on that research, this note looks at valuations in the context of growth rates not persisting over time.

  • If growth rates converge over time, should valuations multiples also converge for all types of businesses?

  • If not, then what factors help in differentiating valuations?

  • By how much should valuations differ, and do starting multiples have any meaning?

  Stuff like this should be required reading in b-schools and investment houses.

• Warren Buffet's has long been a proponent of brand equity - the ability of a brand to price its products to not just pass on cost increases but also improve profitability. Subsequently, so much has been said about owning brands that it's almost fashionable to own consumer companies. However, this led to rising multiples for such companies to levels that are now considered expensive. With inflation and interest rates rising, a lot of questions are being raised if it makes sense to own such businesses any more? Here is some interesting research: two researchers tested a simple investment strategy that invested in the 100 most valuable brands after they were announced each year. They compared the performance of this portfolio of 100 brands with a portfolio of US companies matched by characteristics like valuation, size, profitability, etc., and another portfolio of companies matched by industry.

  The results might surprise you (not so much the outcome but the reason behind the outcome).

Mental Models & Behavioral Biases

• This four-sentence post makes a very powerful point: don't use definitives in your thinking. It reminds me of something Prof. Sanjay Bakshi once said in his class: instead of saying this could be a reason, say this could be one of the reasons. That way you are instructing your brains that there could be more than one ways of solving this. It’s interesting how small changes in behaviour can have a big impact on our long term outcomes.(now, this explanation is probably longer than the underlying article!!).

Personal Development

• In a world marred with information overflow and easily distracted minds, it is very difficult to attract and hold someone’s attention. Here are some useful tips on how you can gain and maintain someone’s attention from Morgan Housel.

• What gets measured gets managed. It's the same with progress - it is determined by how you measure it. Therefore, before you set out to achieve something, make sure you are setting the right targets: a hefty bank balance, or a life changing product, or number of lives improved. This article explains.

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 #68:

• We all know that markets are cyclical. We also know that the best time to buy is when there is blood on the street. However, when an economy is brought to a grinding halt, how does one access the value of businesses? How does when know when there is enough blood on the street? Additionally, to some of the earlier points, how do investors identify a shift in trends? Or as we saw last weekend, is there an easier way to value firms in an environment that is as dynamic as last year was? The answer to all these questions, and more, form part of this wonderful presentation that was handed down to me by a friend, guide, and mentor last week. It's slightly dated, but a timeless read nonetheless. It covers a few important mental models that can help investors find answers to the questions raised here, and a few others: Investing by Design

• Shifting our focus away from markets in particular to learning in general, here is a deep meditation on the subject of learning. It argues that learning is not only restricted to when you were young - it is a continuous process, although adult learning is somehow looked down upon. It further goes on to encourage you to learn widely, to pick as many hobbies as you can, and tells you how that will help you improve at whatever it is that you do to make money. A very well written extract: The Joys of Being an Absolute Beginner – For Life

• When it comes to learning, it is widely believed that it is an activity that's best done in the early years of one's life, while your cognitive abilities (and neural connections) are being developed. Learning late in life is generally considered to be arduous and ill-advised. However, much as the above article argues, that is not true. This dated video (that references an even dated book) is a great example why. Whether you have an interest in learning or not, I would really insist that you watch this short video, for it will open up a completely new perspective: Alan Kay on Learning

Readworthy Passage

Let's read together a random, but read-worthy, passage from a randomly picked book.

Some people are into money. Some aren’t. Some people are inspired by helping the needy. Some aren’t. Some people are into fame, power, and prestige. Others are into anonymity and freedom from responsibility.

People have different preferences in different parts of

their lives. Famous online, but anonymous in their neighborhood. Generous with time, but stingy with money. Introvert when working, but extrovert when not.

You have to know your preferences well because no matter what you do, someone will tell you you’re wrong.

If you’re not into money, many people will say you’re foolish. If you’re not into charity, many people will say you’re greedy. If you’re not into crowds, many people will say you’re missing out.

Some careers come with excuses: The classic novelist thrives in solitude, alone in a cabin in the woods, writing books that reach millions. The classic journalist thrives in a crowd, talking with everyone, building the story from a thousand accounts. The quiet librarian. The aggressive lawyer. The flaky artist. No explanation needed.

But when you go against the stereotype, people get confused.

• The entrepreneur who’s not into money • The musician who avoids crowds

• The ambitious conservationist

• The artist who’s into discipline

If you expect criticism in advance and take pride in your unusual stance, you can bash on with a smile, being who you want to be.

Then every time they say you’re wrong, that’s a sign you’re doing it right.

- From HELL YEAH OR NO by Derek Sivers

Quotable Quotes

“My approach works not by making valid predictions but by allowing me to correct false ones.”

- George Soros

“I don't have a particular style of investing. More exactly, I change my style to fit the conditions. The Fund has changed its character many times. Put it this way: I do not play according to a given set of rules; I look for changes in the rules of the game."

- George Soros

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That's it for this weekend folks.

Have a wonderful week ahead!!

- Tejas Gutka

[Nov 12, 2022]