[The Weekend Bulletin] #172: What Moves Banks, Why Selling Is Hard, 8 Different Friends You Need,...

...80% of all Investing Wisdom, Journalling, Signal vs Noise, and more.

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

Investing Wisdom

• Banking is an interesting sector. While it sits at the centre of all economic activities, the high leverage with which banks operate has kept many long-term investors away from the sector. Additionally, the sector has been a severe under-performer in the US over the last 10-15 years, leading to below par long term returns as well. In that context, this short note seeks to identify the factors that winners within the sector exhibited. While it does find a combination of factors that help find long term winners in the sector, the note also reflects the complex nature of banking operations, showing that the same factors may not work all the time.

• This essay tackles a less spoken and difficult topic in investing - selling. It explains why selling is such a hard activity to undertake. The essay dissects the three most common reasons for selling quoted by most investors to explain the impediments in implementing them. It also provides some ways to avoid the behavioural pitfalls that come in the way of implementing the reasons to sell.

• This article summarises the key lessons from 3 chapters that according to Warren Buffett make up most of the investing wisdom one needs.

• Following up on last week's article on six good reading filters, here is another article that looks at the subject. This one talks about two filters that can help you focus only on the information which matters.

Mental Models & Behavioral Biases

• One activity that I had struggled to get a hang of for years, something that I finally figured a couple of years back, and something that I see immense benefit from, is journalling. While its difficult for most people to get started on it, once you start you begin to realise why it's such a powerful activity. The following two articles provide some backdrop:

  • This article sets the backdrop for the need for writing,

  • while this article talks about 5 different ways in which you can use writing as a thinking tool

Personal Development

• Research shows that there are eight different types of friends you need to feel fulfilled. Each of these eight individually cover different psychological needs like the need for mentor, an adventurer, a party animal, a preacher etc. This article lists the eight different types and explains why and how to find these friends.

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 #96:

• There are a multitude of investment strategies, and most of them work. In other words, investing is a game that has many games within it. Your success, or lack of it, then depends on the game that you choose. In this talk, Yen Liow of Aravat Global (whom we’ve met in multiple issues starting with #43) talks about a game that his firm has chosen. In doing so, he explains a nifty little framework to marry the volatility in share price with the volatility in intrinsic value to find investment winners.

• Compliment the above talk with this very fine article about finding a game you can win in investing.

• It very well known that our experiences shape our perceptions. In fact, experiences make up a lot of our mental framework. But did you know that your experiences also influence how you think about money? And if that is true (which it is), then it is pertinent to understand that personal finance is truly personal. You cannot borrow your portfolio from someone else.

• Two articles on Second Order Thinking:

  • Shane Parish of Farnam Street explains the concept of Second Order Thinking and provides four ways in which you can practise it.

  • Vishal Khandelwal of The Safal Niveshak narrates an interesting incident from China to help us understand the importance of asking 'and then what?', and also highlights the importance of second order thinking in the current market conditions. Interesting and Educative.

• The following is a very short but powerful message: Beware of chasing prestige. This is akin to being beware of blindly chasing the crowd in investing (which is the central theme of few of the articles above).

  

Readworthy Passage

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

No one would doubt that it is possible to have too much randomness, inefficiency and irrationality in life. But the corresponding question, which is never asked, is can you have too little? Is logic overrated? I didn’t set out in this book to attack economic thinking because it is wrong – I think we should absolutely consider what economic models might reveal. However, it’s clear to me that we need to acknowledge that such models can be hopelessly creatively limiting. To put it another way, the problem with logic is that it kills off magic. Or, as Niels Bohrfn1 apparently once told Einstein, ‘You are not thinking; you are merely being logical.’

A strictly logical approach to problem-solving gives the reassuring impression that you are solving a problem, even when no such process is possible; consequently the only potential solutions considered are those which have been reached through ‘approved’ conventional reasoning – often at the expense of better (and cheaper) solutions that involve a greater amount of instinct, imagination or luck.

Remember, if you never do anything differently, you’ll reduce your chances of enjoying lucky accidents.

This pseudo-rational approach, with its obsession with following an approved process, excludes counter-intuitive possible solutions and restricts solution-seeking to a small and homogeneous group of people. After all, not even accountants or economists use logic to solve everyday domestic dilemmas, so why do they instinctively reach for calculators and spreadsheets the moment they enter an office? The conventional answer is that we deploy more rigour and structure to our decision-making in business because so much is at stake; but another, less optimistic, explanation is that the limitations of this approach are in fact what makes it appealing – the last thing people want when faced with a problem is a range of creative solutions, with no means of choosing between them other than their subjective judgement. It seems safer to create an artificial model that allows one logical solution and to claim that the decision was driven by ‘facts’ rather than opinion: remember that what often matters most to those making a decision in business or government is not a successful outcome, but their ability to defend their decision, whatever the outcome may be.

- From Alchemy by Rory Sutherland

Quotable Quotes

"If you feel safe in the area that you’re working in, you’re not working in the right area. Always go a little further into the water than you feel you’re capable of being in. Go a little bit out of your depth, and when you don’t feel that your feet are quite touching the bottom, you’re just about in the right place to do something exciting."

- David Bowie

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That's it for this weekend folks.

Have a wonderful week ahead!!

- Tejas Gutka

[Sep 23, 2023]