[The Weekend Bulletin] #175: Investing in Inflections / During Wartimes, Bear Market Buying Power, Multi-bagger Laboratory,...
...Reducing Overchoice, The Investor's Last Remaining Edge, Habits / Routines / Rituals, and more.
A digest of some interesting reading material from around the world-wide-web. Your weekly dose of multi-disciplinary reading.
Investing Wisdom
This article makes an interesting observation: a consistent way to make small amounts of money is to bet on everything returning to their “base rate”, but often the path to real alpha is to identify an “inflection” where something has changed and the base rates no longer apply. The author gives examples from the auto and cable industries, where changes in technology and market conditions led to significant inflections. The article also highlights Warren Buffett's successful investments in railroads and airlines, which were similarly based on recognizing inflections in those industries.
Two private investor interviews that trace their journey in to investing, the development of their investment philosophy, and outline some of their mistakes and learnings:
This article looks at historical asset class behaviour to answer the question: How to Invest During Wartime. The article tries to answer the question for both: an outside observer of the war and someone experiencing war first hand.
Mental Models & Behavioral Biases
We are constantly faced with choices in the age of abundance, which can be overwhelming. Trivial decisions, such as what to eat for dinner, consume a large amount of our daily time. Most of these everyday choices are between similar things, yet we spend the most time on the decisions that matter least. To manage the myriad decisions of the modern age, the author of this article recommends employing "philosophical razors," which shave away options and simplify choices. The article provides five heuristics to help people make quicker decisions.
This article discusses one of the last remaining edges of investors today. The author presents data on how majority of people would rather hurt themselves than sit alone with their thoughts. The author claims that investors who can do the opposite - sit still and do nothing - have an advantage. He also lists three things that the best investors do to avoid the boredom of doing nothing.
Personal Development
This article explains the difference between habits, routines, and rituals. The author discusses the Intentionality Curve in the context of the three activities, and the level of consciousness required for each. Understanding these difference can help us design better lives, claims the article.
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 #98:
This decade old interview of Bruce Greenwald makes for an interesting read for three reasons:
it covers some basics of investing;
"Always start with the assets. Then look at the earnings power and see if it's protected by the assets. And only then, and this is what Buffett taught people to do, look to pay something for growth, because growth is only valuable if the investment in growth earns more than the cost of capital. And if it doesn't, growth can destroy value. Growth is not a valuable thing as a rule. So, and if you're going to buy that, you better be very sure of the franchise."
it makes an interesting point that the absence if risk is not no risk;
"People are predisposed to do stupid things. That when they think markets are going well, they're sure, like long-term capital management was, that risk has gone away. It's not just, by the way, in housing markets. If you look at credit default swaps on sovereign debt in 2007, Dubai sovereign debt was trading at four basis points.
That is, you could buy insurance against a default on Dubai sovereign debt for four one-hundredths of a percent. That means you were betting that there was less than a chance, if you wrote that insurance, in 2,500 years that a country like Dubai, in the most unstable region of the Earth, based on the most unstable commodity at a peak price, had a less, had a one chance in 2,500 years of defaulting."
and most importantly, it demonstrates that even the best investors can go drastically wrong for an extended period;
"I'll do the one that I've been wrong on for years. I've always thought Amazon is a bubble. They have no customer captivity. They don't have enough scale that it's hard to replicate. They occupy a really big market. They're not specialized at all.
....I've been semi-wrong about Apple, which I think is a bubble, because we have a lot of experience with consumer electronics companies."
(These statements were made in 2010!)
This interview of Bill Martin of Raging Capital Ventures explores the key ingredients of a winning investment, the early steps of a research process, the need to see beyond numbers in smallcaps and much more.
The beauty of investing is that there is room for all kind of styles and philosophies. These can range from extremely complex computational models that trade within the fraction of a second to a simple and inactive an approach as below:
He explained his technique, which was ultimate in simplicity. When during a bear market he would read in the papers that the market was down to new lows, and the experts were predicting that it was sure to drop another 200 points in the Dow, the farmer would look through a Standard & Poor’s Stock Guide and select around 30 stocks that had fallen in price below $10 – solid, profit-making, unheard-of, little companies (pecan growers, home furnishings, etc) and paid dividends. He would come to Houston and buy a $25,000 package of them.
And then, one, two, three or four years later, when the stock market was bubbling and the prophets were talking about the Dow hitting 1500, he would come to town and sell his whole package. It was as simple as that. During the subsequent years as I cultivated Mr. Womack (and hunted ducks on his rice fields) until his death, I learned much of his investing philosophy.
He equated buying stocks with buying a truckload of pigs. The lower he could buy the pigs, when the pork market was depressed, the more profit he would make when the next seller’s market would come along. He claimed that he would rather buy stocks under such conditions than pigs because pigs did not pay a dividend. You must feed pigs.
He took a “farming” approach to the stock market in general. In rice farming, there is a planting season and a harvest season; in his stock purchases and sales he strictly observed the seasons. Mr. Womack never seemed to buy a stock at its bottom or sell it at its top. He seemed happy to buy or sell in the bottom or top range of its fluctuations. He had no regard whatsoever for the old cliché – Never Send Good Money After Bad – when he was buying. For example, when the bottom fell out of the bottom in the market of 1970, he added another $25,000 to his previous bargain-price positions and made a vitual killing on the whole package.
In a nutshell: Buy when there is blood on the street, sell when there is Euphoria, and do nothing in between!! (The above excerpt is from this article)
This is probably one of the best resources that I have read so far on how the modern day knowledge worker can work around to having a meaningful working life. Titled “Managing Oneself” this article by Peter Drucker acts as a guide that anyone with modest talents can use to transform into an out-standing performer.
Readworthy Passage
Let's read together a random, but read-worthy, passage from a randomly picked book.
For twenty years, my research has shown that the view you adopt for yourself profoundly affects the way you lead your life. It can determine whether you become the person you want to be and whether you accomplish the things you value. How does this happen? How can a simple belief have the power to transform your psychology and, as a result, your life?
Believing that your qualities are carved in stone—the fixed mindset—creates an urgency to prove yourself over and over. If you have only a certain amount of intelligence, a certain personality, and a certain moral character—well, then you’d better prove that you have a healthy dose of them. It simply wouldn’t do to look or feel deficient in these most basic characteristics.
Some of us are trained in this mindset from an early age. Even as a child, I was focused on being smart, but the fixed mindset was really stamped in by Mrs. Wilson, my sixth-grade teacher. Unlike Alfred Binet, she believed that people’s IQ scores told the whole story of who they were. We were seated around the room in IQ order, and only the highest-IQ students could be trusted to carry the flag, clap the erasers, or take a note to the principal. Aside from the daily stomachaches she provoked with her judgmental stance, she was creating a mindset in which everyone in the class had one consuming goal—look smart, don’t look dumb. Who cared about or enjoyed learning when our whole being was at stake every time she gave us a test or called on us in class?
I’ve seen so many people with this one consuming goal of proving themselves—in the classroom, in their careers, and in their relationships. Every situation calls for a confirmation of their intelligence, personality, or character. Every situation is evaluated: Will I succeed or fail? Will I look smart or dumb? Will I be accepted or rejected? Will I feel like a winner or a loser?
But doesn’t our society value intelligence, personality, and character? Isn’t it normal to want these traits? Yes, but . . .
There’s another mindset in which these traits are not simply a hand you’re dealt and have to live with, always trying to convince yourself and others that you have a royal flush when you’re secretly worried it’s a pair of tens. In this mindset, the hand you’re dealt is just the starting point for development. This growth mindset is based on the belief that your basic qualities are things you can cultivate through your efforts. Although people may differ in every which way—in their initial talents and aptitudes, interests, or temperaments—everyone can change and grow through application and experience.
Do people with this mindset believe that anyone can be anything, that anyone with proper motivation or education can become Einstein or Beethoven? No, but they believe that a person’s true potential is unknown (and unknowable); that it’s impossible to foresee what can be accomplished with years of passion, toil, and training.
Did you know that Darwin and Tolstoy were considered ordinary children? That Ben Hogan, one of the greatest golfers of all time, was completely uncoordinated and graceless as a child? That the photographer Cindy Sherman, who has been on virtually every list of the most important artists of the twentieth century, failed her first photography course? That Geraldine Page, one of our greatest actresses, was advised to give it up for lack of talent?
- From Mindset - The New Psychology of Success by Carol S Dweck.
Quotable Quotes
"A man who procrastinates in his choosing will inevitably have his choice made for him by circumstance."
- Hunter S. Thompson
"Humans are reasonably adept at examining and judging what is in front of them. We are excellent at comparing alternatives yet terrible at considering what’s missing. Presented with a choice between A, B, C and D, we get very busy on the relative merits of each rather than suggesting a context-appropriate E. Out of sight, out of mind."
- Laurence Endersen (Pebbles of Perception)
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That's it for this weekend folks.
Have a wonderful week ahead!!
- Tejas Gutka
[Oct 22, 2023]
Must read at this market turmoil.