[The Weekend Bulletin] #157: Boring Business - Great Returns, Battle Scars, Residual Claimants,...
...Rich vs Wealthy, Intelligence Superabundance - Induced Demand/Jevon's Paradox/Parkinson's Law, Neuro-productivity, and more.
A digest of some interesting reading material from around the world-wide-web. Your weekly dose of multi-disciplinary reading.
Investing Wisdom
We've all heard of how seemingly ‘boring’ businesses often deliver the best returns. Here is one such: a uniform rental business that 'delivered sales growth of 23% a year for 35 years while profits grew at a staggering 30% per annum. In fact, a $100 investment in Cintas Corporation back in 1984 would be worth nearly $60,000 today, a return that dwarfs the $4,200 return from the S&P500 and even surpasses the $16,800 return from Warren Buffett's Berkshire Hathaway.' This article captures the key factors behind the success of this business from a book written by the man at it's helm for over 50 years.
The author of this article recounts the many scars that one suffers on the metaphorical battle-ground of investing. These battle scars often self-inflected and hence inescapable. While you cannot avoid them, the author suggests a few remedies that can help you overcome these scars.
Warren Buffet espoused two rules of investing: 'Never lose money; Never forget rule no.1'. Similarly, this article talks about two axioms of investing, one pertaining to upside for shareholders and the other pertaining to the downside. Pointing at a recent business failure, the author argues that for certain businesses, the second axiom takes precedence over the first.
Mental Models & Behavioral Biases
When presented between a choice of purchasing two businesses - one with a very high profit margins but negligible cash flow generation, and the other with a very low profit margin but very high cash generation - most investors would prefer the latter. After all, it is cash flows and not profit margins that generate value in a business. A similar thought process applies to personal finance. While most people think that high income is the surest path to financial freedom, it may not always be true. A high income can make you rich, but not wealthy. This difference between rich and wealthy is one of my favourite personal finance frameworks. This article explains the difference.
Induced Demand, Jevon's paradox, and Parkinson's Law - Three mental models explained in this article that together allay a recurring fear: Starting with the industrial revolution: will machines replace humans; progressing to the technological revolution: will computers replace humans; and now reaching to the software revolution: will artificial intelligence replace humans. It's intriguing how much the answer has remained the same, and how ignorant we are to the lessons from history.
Personal Development
This articles talks about three neurochemicals that impact our productivity, both, positively and negatively. To make it easy to understand, the author simplifies how each of these relates to one of fun, fear, and focus, and how combining the three in the right amount can lead to increased productivity.
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 #82:
In a presentation titled 'Disruption and Capital Markets', famed investor Manish Chokhani explains how disruptions impact valuation multiples and explores some interesting disruptions underway currently. Loved the part where he demonstrates how valuations multiple change as businesses face the threat of disruption.
One of the reasons we fail at building habits is that we do not like to go through the grind. Who wouldn't love to be in great shape? But who wants to suffer from eating healthy and exercising daily? Who wouldn't love to wiser? But who wants to spend time reading when you can simple Netflix? While we all understand that there is no gain without pain, we fail to appreciate it. Therefore, instead of thinking about what you want from life, relationships, work, etc, it would be better to consider the question 'what pain do you want in life?'. This article explains further.
Readworthy Passage
Let's read together a random, but read-worthy, passage from a randomly picked book.
It’s a fundamental premise of the efficient market hypothesis—and it makes perfect sense—that if you buy something for its fair value, you can expect a return that is fair given the risk. But active investors aren’t in it for fair risk- adjusted returns; they want superior returns. (If you’ll be satisfied with fair returns, why not invest passively in an index fund and save a lot of trouble?) So buying something at its intrinsic value is no great shakes. And paying more than something’s worth is clearly a mistake; it takes a lot of hard work or a lot of luck to turn something bought at a too-high price into a successful investment.
Remember the Nifty Fifty investing I described in the last chapter? At their highs, many of those stalwart companies sported price/earnings ratios (the ratio of the stock’s price to the earnings behind each share) between 80 and 90. (For comparison, the postwar average price/earnings ratio for stocks in general has been in the midteens.) None of their parti- sans appeared to be worried about those elevated valuations.
Then, in just a few years, everything changed. In the early 1970s, the stock market cooled off, exogenous factors like the oil embargo and rising inflation clouded the picture and the Nifty Fifty stocks collapsed. Within a few years, those price/earnings ratios of 80 or 90 had fallen to 8 or 9, meaning investors in America’s best companies had lost 90 percent of their money. People may have bought into great companies, but they paid the wrong price.
At Oaktree we say, “Well bought is half sold.” By this we mean we don’t spend a lot of time thinking about what price we’re going to be able to sell a holding for, or when, or to whom, or through what mechanism. If you’ve bought it cheap, eventually those questions will answer themselves.
If your estimate of intrinsic value is correct, over time an asset’s price should converge with its value.
"What are the companies worth? Eventually, this is what it comes down to. It’s not enough to buy a share in a good idea, or even a good business. You must buy it at a reasonable (or, hopefully, a bargain) price." - “bubble.com,” January 3, 2000
- From The Most Important Thing by Howard Marks.
Quotable Quotes
"Happiness is simply the absence of desire... [It] is not about the achievement of pleasure, but about the lack of desire. It arrives when you have no urge to feel differently. Happiness is the state you enter when you no longer want to change your state."
"Water never complains, but always pushes back. Always.
Drop a boulder in front of a stream and the water will simply flow around it, taking whatever opening the landscape will give or—when nothing is offered—patiently building up its resources until ...it rises to a height where a new gap is found.
Flow like water. Never complain, but always push back."
- James Clear
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That's it for this weekend folks.
Have a wonderful week ahead!!
- Tejas Gutka
[May 06, 2023]