A digest of some interesting reading material from around the world-wide-web. Your weekly dose of multi-disciplinary reading.
Investing Wisdom
This article reiterates Warren Buffet's remark that growth and value are two sides of the same coin, rather than two different strategies as investors usually perceive them. By understanding the interplay between these two factors, investors can make smart decisions that lead to long-term success. One way to think about this balance is through the lens of the Gordon growth model, as the article explains succinctly.
Beyond growth and value, the other contrast that investors often make is that between large and small caps. Here are two article that challenge the traditional distinctions between them:
Historical studies have shown that smallcaps have outperformed their larger peers over extended time frames - a phenomenon known as the smallcap premium. This article examines this premium over time, and asks whether such a premium will exist in the future given how widely known this phenomenon is. There are some interesting revelations in the article.
Smallcaps are known to be very volatile as usually avoided during economic slowdowns. The wisdom on the street is that largecaps are safer during such times as they can survive a challenging macro environment better. However, as this article examines, this is only partly true.
This article discusses the importance of surviving market inflection points, which are periods of rapid change in the stock market. It outlines the journey of investor John Neff to emphasise the importance of building resilience as well as staying disciplined in the wake of underperformance during such periods. A number of investors would have had similar experience over the last couple of years.
At the recent Daily Journal annual meeting, Charlie Munger sat for 2.5hours answering questions around life and investing. This article has pulled some broader lessons from the meeting.
Mental Models & Behavioral Biases
It is a natural human tendency to seek out patterns and meaning in our environment. This ability has played a big part in our evolution, helping us make many a scientific discoveries. However, a downside of this is that we often draw patterns where none exist, a phenomenon known as Apophenia that is the basis for many superstitions and conspiracy theories. This has implications for how we behave in the markets as well. This article
explains.
Personal Development
Here's an interesting fact: According to research by Unicef, among 41 developed countries, there is only one country where fewer than one in five children are overweight: Japan. This article explores why this is the case, and leaves us with an a very important message: consistency trumps intensity. It reminded me of this passage from the book Ikigai:
Studies from the Blue Zones suggest that the people who live longest are not the ones who do the most exercise but rather the ones who move the most.
When we visited Ogimi, the Village of Longevity, we discovered that even people over eighty and ninety years old are still highly active. They don’t stay at home looking out the window or reading the newspaper. Ogimi’s residents walk a lot, do karaoke with their neighbors, get up early in the morning, and, as soon as they’ve had breakfast—or even before—head outside to weed their gardens. They don’t go to the gym or exercise intensely, but they almost never stop moving in the course of their daily routines.
...
You don’t need to go to the gym for an hour every day or run marathons. As Japanese centenarians show us, all you need is to add movement to your day.
This article explains how self-reflection can be a double-edged sword. It can be beneficial to reflect on our thoughts and actions, but it can also lead to over-analysis and rumination. Too much of a good thing is a bad thing. The article suggests some ways in which we can not fall in the introspection trap.
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 #74:
Consider this:
He averaged 23% a year at Contrafund, vs. 12% for the S&P 500. He stormed ahead of the index again as manager of the Growth & Income Fund. He was chosen as a worthy successor of famed invested Peter Lynch at Fidelity. He'd beaten the S&P 500 consistently for nearly eight years.
Later, his hedge fund made 95% in 1997, 59% in 1998 and 38% in the first nine months of 1999 - trouncing the S&P 500, as well as hedge fund giants like Julian Robertson and George Soros.
You’d think that such track-record would have made this fund manager a celebrity. You’d be disheartened to know that his reputation was tarnished while at Fidelity, leading to him resigning. He later started his hedge fund that he managed privately, and delivered returns that not only helped him regain his reputation, but made him a star.
This is an incredible story of Jeff Vinik, successor of Peter Lynch with an almost contrary investment style.
Three take-aways from this story:
There are more than one ways to make money - pick an investment style that suits your temperament.
Your investment vehicle should match your investment style (or vice verse) - A Fund Manager’s Time Horizon is the Shortest Common Denominator ( Refer to last link in this section of Issue 47)
No matter how good someone is, achievements don’t come by easily. Success is seldom linear. Build a capacity to endure.
The shortcomings of various valuation methodologies are well known and widely discussed. However, there is one short-coming that, to my mind, is usually under-discussed.
This is just one of many 'upsides' that valuations cannot capture. More broadly, these 'upsides' can be termed as 'Optionality' and can be grouped into a few different categories. This memo from Shawspring Partners provides the details with examples. The following is an additional demonstration of the power of Optionality:
The iPad, which is the smallest of Apple’s five segments, made more revenue last quarter than Netflix or McDonald’s. It did more than the combined revenue of Spotify, Twitter, Shopify, and Zoom!! - Talk about OPTIONALITY!!
We've all -at some point - worked for/with someone that worships busy-ness, and mistakes it for efficiency. These people think that anyone not working all the time, is wasting some time. This thinking, however, is flawed. 'Efficiency is the Enemy', claims this article. Loved this quote from the article:
...imagine one of those puzzle games consisting of eight numbered tiles in a box, with one empty space so you can slide them around one at a time. The objective is to shuffle the tiles into numerical order. That empty space is the equivalent of slack. If you remove it, the game is technically more efficient, but “something else is lost. Without the open space, there is no further possibility of moving tiles at all. The layout is optimal as it is, but if time proves otherwise, there is no way to change it.”
Readworthy Passage
Let's read together a random, but read-worthy, passage from a randomly picked book.
ON THE FIRST day of class, Jerry Uelsmann, a professor at the University of Florida, divided his film photography students into two groups.
Everyone on the left side of the classroom, he explained, would be in the “quantity” group. They would be graded solely on the amount of work they produced. On the final day of class, he would tally the number of photos submitted by each student. One hundred photos would rate an A, ninety photos a B, eighty photos a C, and so on.
Meanwhile, everyone on the right side of the room would be in the “quality” group. They would be graded only on the excellence of their work. They would only need to produce one photo during the semester, but to get an A, it had to be a nearly perfect image.
At the end of the term, he was surprised to find that all the best photos were produced by the quantity group. During the semester, these students were busy taking photos, experimenting with composition and lighting, testing out various methods in the darkroom, and learning from their mistakes. In the process of creating hundreds of photos, they honed their skills. Meanwhile, the quality group sat around speculating about perfection. In the end, they had little to show for their efforts other than unverified theories and one mediocre photo.
It is easy to get bogged down trying to find the optimal plan for change: the fastest way to lose weight, the best program to build muscle, the perfect idea for a side hustle. We are so focused on figuring out the best approach that we never get around to taking action. As Voltaire once wrote, “The best is the enemy of the good.”
- From ATOMIC HABITS by James Clear
Quotable Quotes
“The greatest thing you can do for your competition is hire poorly.”
"I never specialized in any single type of enterprise or sector. I found opportunity in small and large companies, domestic and foreign, fast and slower growers, prosperous and troubled companies. Some of my most rewarding investments came from slow-growth industries where expectations were low and profits lackluster. By looking for the most inspired competitors in uninspiring lines of work, I often found great growth enterprises priced for mediocrity."
@SoumilZaveri @permanentcap DCFs cannot capture the ability of a management to redeploy cash flows into ROIC accretive lines of business that are adjacent to the current business.