[The Weekend Bulletin] #165: Seth Klarman, Warren Buffet + Jay Z, Wisdom of the Inner Crowd,...
... Understanding your Investing Personality, Paying Attention, 12 Favourite Problems, and more.
A digest of some interesting reading material from around the world-wide-web. Your weekly dose of multi-disciplinary reading.
Investing Wisdom
Legendary value investor and author of 'Margin of Safety', Seth Klarman, has been elusive from the public eye. Like his out of print book, his investor letters are highly sought, but difficult to get a hand on. Recently, he made a public appearance on the Capital Allocators podcast to discuss the recently released 7th edition of Graham and Dodd’s value investing classic, Security Analysis. The conversation also covers the origins of Baupost, the investing principles that it follows, how these principles have changed or stayed the same over time, portfolio construction, risk management, research process, illiquidity and more.
Two creatives - a legendary investor and a Hall-of-Fame rapper, producer, and businessman - discuss their craft in this dated interview. A lot of similarities can be drawn between their approaches, although they come from distinct backgrounds.
Our investing personalities are shaped by a combination of our perspective and our mindset, claims this article. The author broadly categorises them in to four sub-sets, and presents the combinations as 16 different investing personality types. Understanding one's own investing personality and the personalities of other investors can help bridge gaps and better relate to others with different investing perspectives.
Mental Models & Behavioral Biases
When people's guesses are sufficiently diverse and independent, averaging their judgments increases accuracy by canceling out errors across individuals, resulting in the "wisdom of crowds." The same principles apply when multiple estimates from a single person are averaged, known as the "wisdom of the inner crowd", claims this article. It also defines the conditions under which this works, mindsets that can be used to improve the results, and situations in which it doesn't work.
Paying attention is a negative skill about what one willfully ignores, more than what one actively seeks, as per this article. Choosing what to pay attention to is hard, but the best strategy is the idea of a wide funnel and tight filter. Determine what information is permanent and valuable for long-term thinking. Read on to find out more.
Personal Development
This article describes how Richard Feynman, a brilliant scientist, used a method called "favorite problems" to achieve his impressive reputation. Feynman kept a list of a dozen open questions that fascinated him and returned to them frequently in his research. Whenever he learned something new, he would test it against his favorite problems to see if it could help him make progress. The author encourages readers to create their own lists of favorite problems to change their mindset and see endless problems as opportunities for growth.
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 #90:
Valuations attract a lot of attention. Investors are constantly debating whether a given valuation is cheap or expensive. The media likes to talk about market valuations. A lot of investing decisions are driven by valuations, to the extent of being invested in the market or staying away. However, as this dated article highlights, the right valuation will only be known in hindsight. Seemingly cheap businesses turn out to be expensive, while seemingly expensive businesses may not be so. The lesson for investors: Valuations tell you nothing about future returns. What matters is the direction of the business over time.
The landscape of small-cap companies is very interesting. Finding and partnering with someone that is building a high quality business that remains hidden from most of the investors is a very rewarding endeavour. Ian Cassel has been a long time proponent of investing in small businesses (microcaps as he calls them, and names his website after). In this essay, Ian reflects on his 20 years investing in microcaps, talks about his research process and averaging up, discusses why holding onto winners is painful, and much more. I really enjoyed this article, and hope you will too. Below are some quotes from the article:
When you find a winner, people will say you are wrong. When you hold a winner, people will say you are stupid. When you get rich from a winner, people will say you got lucky. You tell them you love being wrong, stupid, and lucky.
Alpha is generated by being just a little bit different in a disciplined and thoughtful way.
Perfection is not the goal. If you aren’t taking some small losses from time to time you aren’t taking enough risk.
The two most important frameworks or mental models I try to apply is combining tailwinds (top-down) and scarcity (bottom-up). When these two are combined they become powerful drivers of returns.
Nothing screws with your head more than watching something you used to own outperform the things you own. Losers aren’t as painful because you can only lose what you invested. When you sell winners too soon you can miss out on making multiples of your invested capital.
It is easy to think of the Roblox example and think winners are these long linear stairways to heaven. But as many of us know, the biggest winners also have the biggest drawdowns.
….
"When the facts change, I change my mind. What do you do sir?"
This is a rather famous quote in the investing circles highlighting the importance of letting facts drive our decisions rather than our biases. However, we all know that it is not that easy to acknowledge a change of facts. This article tells us why this happens, what is it that changes our opinions faster than facts can, and why we should be kinder first and right later. Going back to opposing ideas:
“Faced with a choice between changing one’s mind and proving there is no need to do so, almost everyone gets busy with the proof.”
Let’s take a simple example: say you played the lottery and in one scenario, you picked the numbers and the second you let a random number generator pick them for you. Let’s assume you won in both scenarios– which one would you be happier/prouder about? Most people would be happier in the first scenario, even though the odds in both the scenarios were the same. This happens due to a bias called The Illusion of Control. This short and pointed article explains what this is, and why we should neither be too proud of success, nor too dejected by failure.
Readworthy Passage
Let's read together a random, but read-worthy, passage from a randomly picked book.
The outsider CEOs always started by asking what the return was. Every investment project generates a return, and the math is really just fifth-grade arithmetic, but these CEOs did it consistently, used conservative assumptions, and only went forward with projects that offered compelling returns. They focused on the key assumptions, did not believe in overly detailed spreadsheets, and performed the analysis themselves, not relying on subordinates or advisers. The outsider CEOs believed that the value of financial projections was determined by the quality of the assumptions, not by the number of pages in the presentation, and many developed succinct, single-page analytical templates that focused employees on key variables.
In Daniel Kahneman’s excellent recent book, Thinking, Fast and Slow, he lays out a model for human decision making that evolved from his thirty years of Nobel Prize–winning research.1 Kahneman’s paradigm features two distinct systems. System 1 is the purely instinctive pattern recognition mode that is instantly engaged in any situation and arrives at decisions very quickly using rules of thumb. System 2 is the slower, more reflective track that employs more complex analysis. System 2 can override system 1. The problem is that it takes more time and effort to engage system 2, and for that reason, it is underutilized in many of us.
According to Kahneman, the key to using system 2 is often a catalyst or trigger, and for the outsider CEOs, these deceptively simple, “one-pager” analyses often served that function. They ensured a focus on empirical data and prevented blind crowd following. As such, they were inoculations against conventional wisdom, and they spread widely throughout the outsider companies.
- From The Outsiders by William Thorndike
Quotable Quotes
"Often, our most intense discomfort is what precedes and necessitates thinking in a way we have never conceived of before. That new awareness creates possibilities that would never exist had we not been forced to learn something new."
- Brianna Wiest
"Superior investment results come from exploiting the differences between how things are supposed to work and how they actually do work in the real world. To do that, the essential inputs aren’t economic data or financial statement analysis. The key lies in understanding prevailing investor psychology."
- Howard Marks
(Taking the Temperature)
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That's it for this weekend folks.
Have a wonderful week ahead!!
- Tejas Gutka
[Jul 23, 2023]
Superb