[The Weekend Bulletin] #174: Why - Investors Should Be Like Athletes / Luck Isn't Real / Learn A Foreign Language,...

...Understanding and Trading the Corporate Life-Cycle, How Note Taking Can Help You Become An Expert, Two Investment Philosophies, and more.

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

Investing Wisdom

• With the help of James Montier, Seth Klarman explains why investors should be more like athletes in this short article.

• This podcast draws insights from the book 'Working Backwards: Insights, Stories, and Secrets from Inside Amazon". It provides a peek into the mind of Jeff Bezos as he was building Amazon, and how products like the Kindle, AWS etc came into being. Jeff's thought processes as well as his focus on solving only customer problems is extraordinarily reflected in this narration. Highly recommended.

• The latest paper from Michael Mauboussin and Dan Callahan covers a very important and interesting topic - Corporate Life Cycle. Traditional theory has used the age of the business and its growth rates to categorise a business in to different life-cycle stages like Growth, Maturity, Decline etc. However, the authors of this article (quoting work from other researchers) argue that a better way to do this is to look at ROIC and cash flows rather than sales growth or profitability alone. The paper goes on to explain why so, backs it up with data, and then presents data on the how the companies transition between various stages, and the historical shareholder returns that have been generated through such transitions (or avoiding them). They also present a list of relevant considerations for the various stages. This makes for a very good read.

• The following two articles lay down the investment philosophies of two investors:

  • Barry Ritholtz recounts and explains ten quotes that have shaped his investment philosophy in this artilce.

  • Drawing heavily from the book Margin of Safety, and scraping through some rarely available other material, the author of this article draws the core investment strategy of Seth Klarman.

Mental Models & Behavioral Biases

• This article makes an interesting proposition: force yourself to believe that luck isn't real. The author claims that doing so will make you more responsible and open to learning from mistakes.

• This article discusses the phenomena of 'foreign language effect'. Psychologists believe that switching between languages can influence many things, from the our financial decision-making, to how we perceive loss, to being more rational and open-minded.

Personal Development

• This long-from article discusses Cognitive Flexibility Theory (CFT), a learning theory that explains how expertise works in ill-structured domains. 'An ill-structured domain is a domain where there are concepts, but the way those concepts are instantiated in the real world are hugely variable, and messy as hell...you can’t easily reduce cases [instances] in ill-structured domains into generalisable principles. You often have to treat the case as its whole thing.'. While this technical language is used to describe the field of medicine, it applies to many other fields, including investing, business operations, managing people etc. The article goes into the details of CFT, its main principles, and then explains how we can use note-taking to overcome the challenges of CFT. The author also details how to create and use an effective note-taking system. Don't let the length of the article or the slightly technical first half of it dissuade you from reading the whole article - it will be well worth the effort of getting to the end and adopting some of the advice.

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 #97:

• Here is an interesting exercise: Imagine we have a stock that is extremely volatile. Each day, the stock either *doubles* or *halves* in value. There's a 50/50 chance of either outcome, and there's no way to predict it in advance. Like a series of independent coin tosses -- one per day. The question is: Is there a way to consistently make money from this "double or halve each day" stock over the long term? That is, can we turn the stock's *random walk* into a compounding machine that works in our favor? Arithmetically, the expected return would be 25% ((-50%+100%)/2). However, that is not the actual return that you will realise. This is called the "Shannon's Demon" problem; this thread explains it and also provides the right investment strategy in this case (which might be a very practical approach for investors seeking lower downside volatility).

• Chasing a trend / investing in momentum works, until it stops working suddenly. The other side isn't prettier either. Betting against a trend, i.e. being a contrarian, is fashionable, but not always profitable. This articleexplains.

• There is a certain advantage that experience accords - the ability to identify patterns. This ability to connect dots, to group things, makes the task of selection easier. Here are 15 patterns that will help you identify profitable investments - this one is worth bookmarking.

Readworthy Passage

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

How fascinating it is that we can live with ourselves every day, be with our-selves every moment, and yet still not fully know who we are. There’s a profound truth to embrace here: You haven’t met all of you yet.

Within you lie uncharted territories, untrodden paths, and hidden dimensions of self waiting to be explored. You are a labyrinth of thoughts, emotions, beliefs, and potential that has no end. This is not something to fear or shy away from. It’s somethign to embrace with curiosity and excitement.

Imagine adopting a mindset where each new day o ers a chance to meet a more profound, more courageous, and more authentic version of yourself.

It’s not about changing who you are, but uncovering who you truly are. It’s a continuous process of self-discovery and self-realisation, of peeling back layers to reveal the essence of your being. You’ll realise that you are never stuck, never stagnant, and

never confined to being one thing. You are quid, evolving, and ever-growing.

So take a moment today to meet yourself anew. Ask yourself questions that provoke thought and inspire reaection. Engage in activities that challenge and stretch you. Be willing to stand before the mirror and look beyond the surface, deep into your own eyes, recognizing the vast unknown that lies within.

Remember, you haven’t met all of you yet. What a beautiful adventure awaits in getting to know yourself a little more.

- Another page from my friend Sean DeLaney's new book: Masterpiece in Progress. If you like what you read above, please consider purchasing the book and leaving a positive review on Amazon.

Quotable Quotes

"Conventional academic researcher argues that equity investors earn a "risk premium" and claims that the volatility of an investment is the best measure of risk. They argue that stocks are riskier than bonds due to their higher volatility, and thus investors demand to be paid a premium to take on this risk. But we can see clearly that the risk of equities only exists over short time frames, which are more consistent with speculation. Over the longer term time frames consistent with investing, there is no record of risk that stocks will deliver lower returns than theoretically "lower risk" bonds.

But what does exist over both short and long term time frames is the requirement that equity investors manage their anxiety. It is anxiety management for which equity investors get paid."

- Sean Stannard-Stockton

"Time is the currency of life, and attention is how we choose to allocate this currency."

- Vitaliy Katsenelson

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That's it for this weekend folks.

Have a wonderful week ahead!!

- Tejas Gutka

[Oct 07, 2023]