[The Weekend Bulletin] #162: Shortcoming of Investment Maxims, What Influences Our Spending, Why Moats Erode, ...

...Surviving Downfalls, Using Middle Class Income to Create Fortune, Growth Mindset, and more.

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

Investing Wisdom

• 'Investing is simple, but not easy'. It's not easy, because simplicity requires an incredible amount of hard work to accomplish and the knowledge to appreciate it. Take the usual investing advice of 'buy and hold'. While a very simple tenet at first glance, there is a lot of complexity underneath - what to buy, how much to buy, how long to hold for, what kind of developments to be ignored etc. This article argues that because these investment maxims are simple, the nuance is often overlooked. Not only are they misunderstood but they are also mistaken to be a one-size-fits-all solution to the stock market. What might be perfectly good advice to one, is not applicable to another.

• Extending the argument against 'buy and hold', one of the other issues with this maxim is that very few companies (~4%) are able to hold on to their moats over extended time horizons. What you buy today may have a strong competitive advantage, but it may diminish over time. While competition is one reason why moats erode, it is not the only. There are many factors intrinsic to an organisation due to which it's competitive advantage may die, as this post explains.

• I really enjoy reading stories about people who without any background in investing manage to amass wealth through a simple system over many years. Here is one such short story of a musician (Clarinetist) who used a middle class income to build a fortune in the stock market. Stories like these are a personification of the first half of the earlier referred quote: 'Investing is Simple, But Not Easy'. [for a few more, read #8]

• What makes great investors great - apart from their investing skills - is their ability to survive downfalls. All investing is fraught with mistakes, no matter how great you are. How you deal with the mistake determines not only how you come out on the other side, but your long term success. This article (part paid) explains.

Mental Models & Behavioral Biases

• Most of behavioural finance concerns with how we behave as investors. But, how we spend our money is also telling - it reveals things about people’s character and values. There is a science to spending money – how to find a bargain, how to make a budget, things like that. But there’s also an art to spending. A part that can’t be quantified and varies person to person. And this art side of spending can reveal an existential struggle of what you find valuable in life, who you want to spend time with, why you chose your career, and the kind of attention you want from other people. This posts lists a few factors that influence our spending behaviour.

Personal Development

• Stanford psychologist and author Carol Dweck popularised the concept of fixed vs growth mindset. In a nutshell, a growth mindset thrives on challenges and sees failure not as evidence of unintelligence but as a heartening springboard for growth and for stretching our existing abilities. This short clip of a player's response to the question of whether he saw this season as a failure or not is a brilliant personification of this mindset.

• A better understanding of the growth mindset can be achieved by understanding what it is not. The author explains this 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 #87:

• Sometimes the opposite of truth is also a truth - like markets always go up in the long run. Buy and hold is a wonderful strategy, but it has its own pitfalls, as this thread reminds us. Data like this is what makes investing Simple, But Not Easy.

  [P.S. before you pull out your swords against the buy and hold guys, remember that the thread is very selective in the data that it looks at. If you were to change the start date by few months, the results could be entirely different. Which brings us to another important point - your start date matters in the returns that you earn. The thread also ignores the potential purchases that could have been made during market falls - no body invests just once in their lifetime.]

• A portfolio managers opens up about his portfolio construction process. In a short podcast (transcript available), he defines a 7-step checklist that his firm uses to build global portfolios. This is a very interesting and thoughtful way of approaching portfolio construction.

• One important attribute that long term investing demands from investors is that of Optimism. Without a belief in a bright future, it is nearly impossible to invest in it. Despite its importance, optimism is not easy to hold on to - especially in the face of crisis. On the other hand, being a skeptic is easy (and for some, fashionable). This article provides some good fodder for optimism - at any time in general, and in the 21st century in particular. Till date, it's one of the finest pieces on the subject that I have read.

• Inspired by Annie Dukes 'Thinking in Bets', this memo by Howard Marks is a mini masterclass in decision making, games (understanding skill vs luck), and betting on odds. It talks about the various aspects of decision making, compares investing to betting, and also talks about different types of games and how they relate to investing. Most importantly, using probabilities, it explains why the best business may not be the best investment. Andrew, Howard's son, also pends a part of this one. Highly Recommended.

  "Investing is a game of skill – meaning inferior players can't expect to be above average winners in the long run. But it also includes elements of chance – meaning skill won't win out every time. In the long run, superior skill will overcome the impact of bad luck. But in the short run, luck can overwhelm skill, and the two can be indistinguishable."

  "Everyone will have both winners and losers. Various factors will determine the ratio. But the ability to assess propositions can enable you to win more on your winners than you lose on your losers. The size of your bet should take into account both the probability you are correct about who's going to win and the asymmetry of the potential payout. “Getting your money in” when you have a great hand is one of the most important keys to winning at poker. You don't get many great hands, so when you do, you have to be sure to take maximum advantage."

  "It's important to have discipline when risking your capital, so that you can survive unfavorable periods and still be around when the winners show up. You have to avoid the risk of ruin, and this requires solid discipline (you must “never forget the six-foot-tall man who drowned crossing the river that was five feet deep on average”). To that end, good play isn't just a function of relying on the expected value of your holdings and pure math, but also of thinking broadly about risk. Would you bet all your money on an 80/20 favorite?"

  "You need the discipline to follow a process and the wisdom to accept that no process is sure to produce good results."

Readworthy Passage

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

Around the time of the Warner acquisition, Ross had started a tireless litany, exhorting his executives to "dream." He had begun telling a story about something that his father had said - a story which many who knew Ross in the early years did not recall having heard at that time, and which is probably apocryphal, but which he did in any event incorporate to such a degree that he would repeatedly proffer it, in private exchanges with his people and in public speeches, over the coming decades.

"When I was a teenager, my father was dying he knew he was dying, I knew he was dying and he gave me the best advice possible. He said, there are three categories of people in this world. The first is the individ- ual who wakes up in the morning and goes into the office and proceeds to dream. The second category is the individual who gets up in the morning, goes into the office, and proceeds to work sixteen hours a day. The third is the individual who comes into the office, dreams for about an hour, and then proceeds to do something about his dreams.

"He said, 'Go into the third category for only one reason: there's no competition.' "

- From Master Of The Game by Connie Bruck

Quotable Quotes

"The truly valuable skill here isn't the capacity to push yourself harder, but to stop and recuperate despite the discomfort of knowing that work remains unfinished, emails unanswered, other people's demands unfulfilled."

- Oliver Burkeman

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That's it for this weekend folks.

Have a wonderful week ahead!!

- Tejas Gutka

[Jun 17, 2023]