A digest of some interesting reading material from around the world-wide-web. Your weekly dose of multi-disciplinary reading.
Investing Wisdom
I thoroughly enjoyed thisinterview of Chris Begg from East Coast Asset Management by William Green (Author: Richer, Wiser, Happier). This conversation dips into Chris's investment style of looking for storm clouds masking great businesses, his mental framework of how reducing entropy creates value (which is also one of the eight moats he looks for in a business), his strategy of building depth and breadth of knowledge, his exercises for the mind, body, and soul, and a few other things. A lot to take away from this conversation, like from his other interviews and writing.
Long time readers may recount having encountered a very detailed interview if Chris in #36:
Chris Begg of East Coast Asset Management is a great thinker and writer. I used to really enjoy reading his investor letters, until they stopped coming after 2015. And like his letters, this one was so really worth the time spent (and worth re-reading once in a while). In this interview, Chris outlines his investment philosophy, provides a glimpse into his investment process, along with some checks that he has built to overcome behavioural biases, and how he tackles reading for himself and his team. He ends the interview with how reading philosophy has made him a better investor - not something you hear often. Lots of wisdom in this one.
This article contrasts the investment style of Peter Lynch with most great investors. It also describes the framework that Peter used to find 10-baggers.
Neeraj Marathe had recently shared a list of articles looking at the idea of holding cash from various perspectives. I particularly liked the following two articles that take the opposite side of the argument:
I happened to re-read this old interview of Peter Bernstein by Jason Zweig which is do dense with investment wisdom. Peter discusses common mistakes made by investors, the importance of risk management, and how to avoid being shocked by surprises that may occur in the market. What I like most was his emphasis on diversification as an aggressive strategy, and his thoughts on how consequences matter more than probabilities.
“I view diversification not only as a survival strategy but as an aggressive strategy, because the next windfall might come from a surprising place. I want to make sure I'm exposed to it. Somebody once said that if you're comfortable with everything you own, you're not diversified.”
Mental Models & Behavioral Biases
This article looks at the stats of a living sports legend to drive the point that losing is a part of winning. It reflects on the idea of losing or making mistakes in various aspects of life, including sports, investing, and decision-making.
Personal Development
We pick up from where we left off on the growth vs fixed mindset discussion in this section of our previous issue. Interestingly, the mindset that you subscribe to also impacts how you deal with mistakes and bounce back. This short article looks at the neuroscience behind this and explains further.
Here is a different but interesting podcast. It looks at the journey of two wildly successful creators - Pablo Picasso and Walt Disney - and contrasts the value systems of the two. While each was gifted in his own way, its interesting how different their attitudes were to the external world. This is an important lesson that we often miss - people with a few great qualities are not necessarily great role models. We should be extremely careful in choosing our heroes. A lot of geniuses were extremely gifted with one ability or quality, and terribly deficient in some other. The following quote summarises this well:
“Recognize what you like about somebody. Admire it as a quality separate from that particular person, rather than confusing it with him or her. What you admire about them are qualities that exist separately from the particular (and therefore flawed) example that they constitute.” – Darren Brown
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 #88:
Peter Kaufman (Author of Poor Charlie's Almanack, whom we met in Issue 33, and whose talks are usually not available easily) made a very interesting presentation titled 'An Unsung Hero'. This is an extra-ordinary story of man whose work touches our lives even today, more than a century later. This is also a story of an extra-ordinary gift of vision and diligence (macro and micro). Given the scale of his work, it's unfortunate how little we know about him. You can either watch the talk below, or read it as an essay here.
This article lists three strategies that can help reduce judgemental errors while making decisions. Drawn from the book Noise by Daniel Kahneman, this is nifty list to hang on to.
Readworthy Passage
Let's read together a random, but read-worthy, passage from a randomly picked book.
The value proposition is the element of strategy that looks outward at customers, at the demand side of the business. A value proposition reflects choices about the particular kind of value the company will offer, whether those choices have been made consciously or not. Porter defines the value proposition as the answer to three fundamental questions (see figure 4-1):
Which customers are you going to serve?
Which needs are you going to meet?
What relative price will provide acceptable value for customers and acceptable profitability for the company?
FIGURE 4-1
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Which Customers?
Within an industry, there are usually distinct groups of customers, or customer segments. A value proposition can be aimed specifically at serving one or more of these segments. For some value propositions, choosing the customer comes first. That choice then leads directly to the other two legs of the triangle: needs and relative price.
Customer segmentation is typically part of any good industry analysis, and choosing the customer(s) you will serve can be an important anchor in your positioning vis-à-vis the five forces. In the examples that follow, note how each reflects a different basis for segmentation: Walmart’s segmentation was based on geography, Progressive’s on demographics, and Edward Jones’s on psychographics.
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Which Needs?
In many cases, choosing the need the company will serve is the primary decision that leads to the other two legs of the triangle. Here, strategy is built on a unique ability to meet a particular need or a subset of needs. Often that ability arises from the specific features of a product or service. Typically, value propositions based on needs appeal to a mix of customers who might defy traditional segmentation. Instead of belonging to a clear demographic category, the company’s customers will be defined by the common need or set of needs they share at a given time.
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What Relative Price?
For some value propositions, relative price is a primary leg of the triangle. Some value propositions target customers who are overserved (and hence overpriced) by other offerings in the industry. A company can win these customers by eliminating unnecessary costs and meeting “just enough” of their needs. At the product level, think about the difference between a bare-bones cell phone and a more expensive, feature-laden smartphone. Where customers are overserved, the lower relative price is often the dominant leg of the triangle.
Conversely, some value propositions target customers who are underserved (and hence underpriced) by other offerings in the industry. Customers who choose NetJets instead of flying first class on a commercial airline, for example, want an enhanced service and are willing to pay a steep premium for it. Similarly, Denmark’s Bang & Olufsen (B&O) gives its customers something more than the spectacular sound quality offered by other high-end audio equipment makers. B&O’s customers want products that look as good as they sound, and they are willing to pay more for beautiful design. In value propositions like B&O’s, the unmet need is typically the dominant leg of the triangle, while the higher relative price supports the extra costs the company has to incur to meet it.
- From Understanding Michael Porter by Joan Magretta.
Quotable Quotes
“Invention is not so much bred by old Mother Necessity as by a growing reservoir of knowledge of various arts and industries.”
- Matthew Josephson
"All businesses ultimately will regress towards the mean and all businesses over time would have a certain fade rate. And it's very much your assumption of the fade rates vs. the market's assumption of the fade rates that would determine the investment result. That would, to a large extent, be dependent on your own subjective feeling, your experience."
