[The Weekend Bulletin] #164: Why Contrarians Are Usually Wrong, Taking Market Temperature,...
...Value vs Quality, Doing Great Work, and more.
A digest of some interesting reading material from around the world-wide-web. Your weekly dose of multi-disciplinary reading.
Investing Wisdom
In his latest memo, Howard Marks looks at the five market calls that he has made over the past 20 years and draws some lessons for readers. He posits that his calls worked because he made so few of them, and also because they were not based on macro forecasts. He argues that investors seeking to know the market’s likely direction should focus on taking its psychological temperatureand understanding the nature of cycles. He reiterates his long held views of understanding investor psychology and market cycles, being a contrarian at the extremes, using second order thinking, and avoiding macro forecasts.
This short note looks at some past studies contrasting value and quality investing, and finds a number of similarities between the two strategies. It also highlights how the two differ, and why it makes sense to have an exposure to both in an investment portfolio.
Mental Models & Behavioral Biases
The author of this article argues that contrarians are usually wrong. He claims that the book/movie The Big Short has lost investors more money than the last three bear markets combined. It reminded of a Peter Lynch quote:
“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”
However, if you still insist on being a contrarian investors, and find the current rally in risk assets unsustainable, then this post might interest you. It looks at the behaviour of markets before the bursting of past bubbles, and finds a sharp divergence in their behaviour and economic fundamentals.
Personal Development
Here is a deep meditation in to the subject of doing great work by one of the finest modern thinkers and writers, Paul Graham. He posits that there are four steps involved in identifying and doing great work, and then peels the layers off of each step. Not only is this one a long read, but also very dense. You'll probably have to go over a few times to completely grasp all the ideas.
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 #89:
Seven Sins of Fund Management: This paper discusses seven commonly observed behavioural biases amongst investors. James Montier provides research backed as well as anecdotal data to help us avoid making these mistakes. If you haven't read his 'Little Book of Behavioural Biases' then this paper (100 pages - a mini book in itself) is definitely a must read. For others, the first 5 pages will serve as a good reminder. Either ways, a good resource to have in your library.
Traditionally, well known consumer brands are considered to be a moat. Such moats are thought to be everlasting. However, what is a cool brand for one generation, may not be so for the next one - Rasna vs Tang if you've been around in India for over 30 years. Putting the above in context, this article asks if your company is demographically advantaged, or demographically challenged? An interesting perspective.
When it comes to corporate success, strategy gets more attention than culture. In reality however, culture trumps strategy (or to quote Peter Drucker, Culture Eats Strategy for Lunch). More often than not, the difference between the number one and number two in most industries is defined by culture. Strategy can be replicated, but culture is unique. Taking this thought forward, Peter Kaufman (whom we met last weekend and in issue #33) talks about the fourteen critical aspects (mental models) behind the culture at his firm Glenair (which Charlie Munger considers as one of three best operating companies) in this presentation.
Readworthy Passage
Let's read together a random, but read-worthy, passage from a randomly picked book.
If I ask you, “What do you want out of life?” and you say something like, “I want to be happy and have a great family and a job I like,” your response is so common and expected that it doesn’t really mean anything.
Everybody enjoys what feels good. Everyone wants to live a carefree, happy, and easy life, to fall in love and have amazing sex and relationships, to look perfect and make money and be popular and well-respected and admired and a total baller to the point that people part like the Red Sea when they walk into the room.
Everybody wants that. It’s easy to want that.
A more interesting question, a question that most people never consider, is, “What pain do you want in your life? What are you willing to struggle for?” Because that seems to be a greater determinant of how our lives turn out.
For example, most people want to get the corner office and make a boatload of money—but not many people want to suffer through sixty-hour workweeks, long commutes, obnoxious paperwork, and arbitrary corporate hierarchies to escape the confines of an infinite cubicle hell.
Most people want to have great sex and an awesome relationship, but not everyone is willing to go through the tough conversations, the awkward silences, the hurt feelings, and the emotional psychodrama to get there. And so they settle. They settle and wonder, “What if?” for years and years, until the question morphs from “What if?” into “What else?” And when the lawyers go home and the alimony check is in the mail, they say, “What for?” If not for their lowered standards and expectations twenty years prior, then what for?
Because happiness requires struggle. It grows from problems. Joy doesn’t just sprout out of the ground like daisies and rainbows. Real, serious, lifelong fulfillment and meaning have to be earned through the choosing and managing of our struggles. Whether you suffer from anxiety or loneliness or obsessive-compulsive disorder or a dickhead boss who ruins half of your waking hours every day, the solution lies in the acceptance and active engagement of that negative experience—not the avoidance of it, not the salvation from it.
People want an amazing physique. But you don’t end up with one unless you legitimately appreciate the pain and physical stress that come with living inside a gym for hour upon hour, unless you love calculating and calibrating the food you eat, planning your life out in tiny plate–sized portions.
People want to start their own business. But you don’t end up a successful entrepreneur unless you find a way to appreciate the risk, the uncertainty, the repeated failures, the insane hours devoted to something that may earn absolutely nothing.
People want a partner, a spouse. But you don’t end up attracting someone amazing without appreciating the emotional turbulence that comes with weathering rejections, building the sexual tension that never gets released, and staring blankly at a phone that never rings. It’s part of the game of love. You can’t win if you don’t play.
What determines your success isn’t, “What do you want to enjoy?” The relevant question is, “What pain do you want to sustain?” The path to happiness is a path full of shitheaps and shame.
You have to choose something. You can’t have a pain-free life. It can’t all be roses and unicorns all the time. Pleasure is the easy question. And pretty much all of us have a similar answer.
The more interesting question is the pain. What is the pain that you want to sustain? That’s the hard question that matters, the question that will actually get you somewhere. It’s the question that can change a perspective, a life. It’s what makes me, me, and you, you. It’s what defines us and separates us and ultimately brings us together.
- From The Subtle Art of Not Giving A F*CK by Mark Manson
Quotable Quotes
"Destiny is not created by the shoes we wear but by the steps we take"
- Mahabharata
"Isn't it true that in the modern world today changing your DP can be more important than changing yourself. Change your DPs, no problem. But do not forget to change yourself, because a good life is about a changed you."
- Gaur Gopal Das
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That's it for this weekend folks.
Have a wonderful week ahead!!
- Tejas Gutka
[Jul 15, 2023]