[The Weekend Bulletin] #154: Two Investor Journeys, Seven Virtues, Seven Immutable Laws,...
...Best Investment Strategy, Lindy Effect, Diminishing Happiness, Seven Lessons in Innovation, and more.
A digest of some interesting reading material from around the world-wide-web. Your weekly dose of multi-disciplinary reading.
Investing Wisdom
Two Indian investors discuss their journeys and the lessons that they picked up along the way:
The Art Of Investing by Rajashekhar Iyer
(Interesting that most long term investors will espouse the benefits of buy-and-hold, but this investor talks about the importance of selling, as well as taking cash calls. A very interesting talk indeed.)
Growth of one of the most celebrated fundamental attributes. Everything else being the same, higher growth is always rewarded by investors with higher multiples. However, there is one industry where high growth is not necessarily a good thing, claims this article. The authors go on to show empirical evidence of how high growth has destroyed value eventually in this sector. This is a highly under-appreciated nuance.
Here is a nice compilation of the seven virtues that define great investors. The article lists the virtues and provides links for further reading on each virtue.
The above article reminded me of this old note from James Montier of GMO that has served as a very good re-read over the years: The Seven Immutable Laws of Investing.
This article draws parallels between investing and dieting to explain that there is only one best investment strategy, like the best diet plan. Read on to find out which one.
Mental Models & Behavioral Biases
Nassim Taleb popularised the idea of the Lindy Effect - the longer a period something has survived to exist or be used in the present, the longer its remaining life expectancy. This article draws on to this thread and suggest we read old books, and then lists some ideas that have stood the test of time from a number of great investors.
Personal Development
Happiness is short lived, and follows the law of diminishing marginal utility. It is usually at its peak when we transition between two contrasting states (like have and have not), while it starts to wane as the change becomes more incremental (like having a little more). This article explains how and why, and suggests an antidote.
It is said that necessity is the mother of all inventions. While that may be an over-simplification, it is not far fetched. We often perceive failure as roadblocks, giving up on valuable pursuits. However, as this article shows, persisting with failure (along with the blessings of good luck), is how innovation happens. It lists seven practical and insightful lessons about innovation, drawing from the life of someone who changed the sport of high jump forever.
This story was earlier recounted to draw some investing lessons here.
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 #79:
This is probably the shortest note that I have read from GMO from as far as my memory serves. With just charts and half a page of text, it serves a very pertinent reminder: 'There are no bad assets, just bad prices'.
Based on your reading of the above article, what investment strategy would you adopt if you were to receive a large sum of a money (lets say a multiple of your current networth) today? Would you go all in, wait on the sidelines, or go in with instalments? Which of these strategies do you think will provide the highest returns over a 20-25year period? Pick your strategy and reasons before you read this article (long term readers would be reminded of a similar article that we read in Issue 16).
Given a choice between the following, which one will you choose to display outside a hospital:
Yesterday, 90% of the patients were cured successfully OR
Yesterday, 10% of the patients could not be cured; their families mourn the loss.
Both the sentences mean the same. However, they each solicit a different feeling. This difference is considered to be one of the most powerful biases that influences decision making. So powerful that marketers and researchers swear by it. Called 'Framing Effect', this is a cognitive bias where people decide on options based on how they are presented. This article explains further, and also provides some strategies to manage this bias.
Readworthy Passage
Let's read together a random, but read-worthy, passage from a randomly picked book.
When I say that our present position (unlike the future) is knowable, I don’t mean to imply that understanding comes automatically. Like most things about investing, it takes work. But it can be done. Here are a few concepts I consider essential in that effort.
First, we must be alert to what’s going on. The philosopher Santayana said, “Those who cannot remember the past are condemned to repeat it.” In very much the same way, I believe those who are unaware of what’s going on around them are destined to be buffeted by it.
As difficult as it is know the future, it’s really not that hard to under- stand the present. What we need to do is “take the market’s temperature.” If we are alert and perceptive, we can gauge the behavior of those around us and from that judge what we should do.
The essential ingredient here is inference, one of my favorite words. Everyone sees what happens each day, as reported in the media. But how many people make an effort to understand what those everyday events say about the psyches of market participants, the investment climate, and thus what we should do in response?
Simply put, we must strive to understand the implications of what’s going on around us. When others are recklessly confident and buying aggressively, we should be highly cautious; when others are frightened into inaction or panic selling, we should become aggressive.
So look around, and ask yourself: Are investors optimistic or pessimistic? Do the media talking heads say the markets should be piled into or avoided? Are novel investment schemes readily accepted or dismissed out of hand? Are securities offerings and fund openings being treated as opportunities to get rich or possible pitfalls? Has the credit cycle rendered capital readily available or impossible to obtain? Are price/earnings ratios high or low in the context of history, and are yield spreads tight or generous? All of these things are important, and yet none of them entails forecasting. We can make excellent investment decisions on the basis of present observations, with no need to make guesses about the future.
The key is to take note of things like these and let them tell you what to do. While the markets don’t cry out for action along these lines everyday, they do at the extremes, when their pronouncements are highly important.
- From THE MOST IMPORTANT THING by HOWARD MARKS
Quotable Quotes
"The world of finance hails the invention of the wheel over and over again, often in a slightly more unstable version"
"We all have the capacity to do noble or terrible things. The side of the equation we end up on depends on our decisions, not on the condition in which we find ourselves."
"Without thinking, you give yourself a split second to save something from the flames before you scramble to safety. What do you save? If you are like many people, photographs or personal diaries are often the instinctive choice. Why is it that when faced with the choice of saving one thing we don’t save the most expensive thing? In fact, a photograph is more than just a physical object, it is a representation of a memory, a past experience. A marking of time, once there, now gone. You see, the best things in life are not things. They are experiences. What we truly treasure springs from experiences."
- From the book Pebbles of Perception.
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That's it for this weekend folks.
Have a wonderful week ahead!!
- Tejas Gutka
[Apr 15, 2023]