[The Weekend Bulletin] #150: Investment Horizon, Doubling Money, John Neff, Tulip Mania,...
...Regret Minimisation, Learning Gears, and more.
A digest of some interesting reading material from around the world-wide-web. Your weekly dose of multi-disciplinary reading.
Investing Wisdom
How long does it take to double your money - that is the question that this article solves for. Most of us are familiar with the rule of 72, and therefore may find this question too simplistic. However, the problem with the rule of 72 is that it talks about only doubling of the initial amount whereas most of us invest on a ongoing basis. The article addresses this shortcoming of the rule of 72 and leaves us an important conclusion about our savings rate, time horizon, and return expectation.
On similar lines as above, this article contrasts famed investor Peter Lynch with an Indian entrepreneur to showcase the importance of time horizon over rate of return. This is often misunderstood by most investors:
what matters most in the end is not have fast you can drive but how far you can go.
One of the best known, and longest surviving, book chronicling the human tendency to lose rationality in herds is 'Extraordinary Popular Delusions and the Madness of Crowds'. The book, written by Charles Mackay, talks about the Dutch Tulip mania. This article claims that the Tulip mania was never as big as the book makes it sound, and more importantly, the author's claim the bubbles are easy to identify is false as he himself got drawn into one.
Here is a nice summary of an investing legend's biography: John Neff on Investing. Neff was a modern value investor, in that he combined valuation with business quality and didn't compromise on either. For his outstanding track record, he is not as widely known though. This article is a good starting point to get to know about him.
Pair the above with this article for a sneak-peak in to some of his investing principles.
[h/t to Neeraj Marathe for sharing these articles]
Mental Models & Behavioral Biases
Two interesting write ups on the regret minimisation framework:
Personal Development
When you start a new activity, or do it for a long enough time, you often operate without any framework in mind. Take reading books for example. When you start, you have no idea what to read or how to read. For most (not all) who have been reading for a very long time, the process is so sub-conscious that they forget the essentials like arranging and maintaining their notes and highlights. For those of you who agree, here is a three-gear framework for learning that you can adopt for most activities in life.
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 #75:
In a conversation with MoI Global, Bryan Lawrence lays down the investment philosophy as well as the investment framework of Oakcliff Capital - an investment management outfit that started as his family office. Here's an an interesting snippet from the conversation:
At VALUEx in 2019, one of the presenters estimated that of the $80 trillion of assets out there – equity assets across the stock markets of the world – maybe 1% would fit the category of actively-managed, concentrated value investing. He defined actively managed, concentrated value investing as having even a single 5% position and annual turnover less than 30%. So, of the $80 trillion, maybe $800 billion was managed in this way. More than one-third of that was Berkshire Hathaway. It remains puzzling to me after sixteen years of doing this that you can have these results that are much better than the market if you do this type of work and yet, the number of people doing the work is small and appears to be shrinking.
This article is a great collection of the idea generation process of a large number of investors. What struck me the most while sifting through the list was the fact that how little was quantitative screening/filtering mentioned by these investors.
For long, we've all looked at our own lives through the lens of goals (health, personal finance, career, etc) and new year resolutions. However, when it comes to organisations, we take a different approach, starting from a higher altitude. This article argues that adopting a similar approach in our own lives as we do with corporations would be more beneficial. It also provides five reasons for why it would be more beneficial.
Here is a good lesson in humility. We are all gifted with some talent that makes us better than average. Over time, we take these gifts for granted, showing them off at every possible occasion. In a talk delivered in 2010, Jeff Bezos reminisces a lesson that his grandfather taught him: "It's hard to be kind than clever." Remember that you didn't choose your gifts, they chose you. However, you can chose your actions and let them define who you are.
Readworthy Passage
Let's read together a random, but read-worthy, passage from a randomly picked book.
In the early 1900s a Serbian scientist named Milutin Milanković studied the Earth’s position relative to other planets and came up with the theory of ice ages that we now know is accurate: The gravitational pull of the sun and moon gently affect the Earth’s motion and tilt toward the sun. During parts of this cycle—which can last tens of thousands of years—each of the Earth’s hemispheres gets a little more, or a little less, solar radiation than they’re used to.
And that is where the fun begins.
Milanković’s theory initially assumed that a tilt of the Earth’s hemispheres caused ravenous winters cold enough to turn the planet into ice. But a Russian meteorologist named Wladimir Köppen dug deeper into Milanković’s work and discovered a fascinating nuance.
Moderately cool summers, not cold winters, were the icy culprit.
It begins when a summer never gets warm enough to melt the previous winter’s snow. The leftover ice base makes it easier for snow to accumulate the following winter, which increases the odds of snow sticking around in the following summer, which attracts even more accumulation the following winter. Perpetual snow reflects more of the sun’s rays, which exacerbates cooling, which brings more snowfall, and on and on. Within a few hundred years a seasonal snowpack grows into a continental ice sheet, and you’re off to the races.
The same thing happens in reverse. An orbital tilt letting more sunlight in melts more of the winter snowpack, which reflects less light the following years, which increases temperatures, which prevents more snow the next year, and so on. That’s the cycle.
The amazing thing here is how big something can grow from a relatively small change in conditions. You start with a thin layer of snow left over from a cool summer that no one would think anything of and then, in a geological blink of an eye, the entire Earth is covered in miles-thick ice. As glaciologist Gwen Schultz put it: “It is not necessarily the amount of snow that causes ice sheets but the fact that snow, however little, lasts.”
The big takeaway from ice ages is that you don’t need tremendous force to create tremendous results.
If something compounds—if a little growth serves as the fuel for future growth—a small starting base can lead to results so extraordinary they seem to defy logic. It can be so logic-defying that you underestimate what’s possible, where growth comes from, and what it can lead to.
And so it is with money.
- From THE PSYCHOLOGY OF MONEY by Morgan Housel
Quotable Quotes
“Most companies don't die because they are wrong; most die because they don't commit themselves. They fritter away their momentum and their valuable resources while attempting to make a decision. The greatest danger is in standing still.”
“People are always asking me where the outlook is good, but that’s the wrong question. The right question is: Where is the outlook most miserable?”
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That's it for this weekend folks.
Have a wonderful week ahead!!
- Tejas Gutka
[Mar 04, 2022]