[The Weekend Bulletin] #176: Superlinear Returns, Deterministic thinking in a probabilistic world, The trio that make / break investment success, ...
...Risk is what you don't see coming, 11 lessons on investing from the greats, and more.
A digest of some interesting reading material from around the world-wide-web. Your weekly dose of multi-disciplinary reading.
Investing Wisdom
A lot of good quality investing boils down to three broad factors - quality of the business (moat), capital allocation skills (management), and market perception of the business (valuation). This article highlights and explains the three types of traps that investors typically fall in to when they do not balance all the three factors well. The author also argues that one of the three matters more than the other two, and therefore should not be compromised on at any cost. Lastly, the author also provides a few checks that can help us avoid these pitfalls.
The author of this article distills his learnings from a number of great investors into 11 essential lessons that will help you become a better investor.
In this very well worded article, the author argues that risk is what you don't see coming. It manifests as small mis-steps first which usually domino into something larger. Therefore, investing success comes not from focusing on the upside, but realising the downside potential as early as possible.
Mental Models & Behavioral Biases
'Deterministic thinking in a probabilistic world' - that's the pitfall that this article highlights. The author argues that while we are attracted to linear relationships like waking up early leads to success or high valuations lead to market corrections, when you dig in to the underlying data, you realise that reality isn't that simple. The author asks investors to look at the base rates of each deterministic claim and not confuse correlation with causation.
Personal Development
Paul Graham pens yet another thoughtful article. This one, titled Superlinear Returns, argues that the general wisdom of 'you get out what you put in' is incorrect. In many facets of life, especially in business and investing, returns are superlinear. He goes on to outline the two main sources of such returns, some general rules for finding situations with superlinear returns, and why the current era of technology development is one of the best times to be chasing such returns. He also links this to his previous piece - How to do great work - which was equally thoughtful (we looked at it in #164 and #167).
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 #99:
A very interesting thread on 'What they don't tell you about microcap/smallcap investing' - Smallcap investing is alluring, however, few think about the risks involved (other than volatility, and sharp drawndowns). This thoughtful thread lists some of the things that investors should bear in mind while investing in smallcaps (not meant to scare you away from smallcaps but rather to provide a checklist for you to keep handy).
Most people start on the investment journey with honest intentions. However, somewhere along the way, as incomes grow and savings reach a comfortable level, a particular problem starts to creep in - the blurring of the lines between want and need. This is probably one of the main reasons for losing the way mid-way through a wealth creation journey. This short read lists a few way in which you can avoid falling for this trap. Don't ignore the problem for its simplicity - sometimes the biggest problems arise out of this.
This investor interview is refreshingly different in that it doesn't only discuss investment philosophy and idea, but also discusses the background that influenced the investor's style, his habits and routines, and other such tidbits that we call not only learn from but also aspire to adopt.
Albert Einstein in the early 1900s. Aretha Franklin in the 1960s. Steve Jobs in the 2000s. There are certain spans of time when scientists, artists, and inventors have phenomenal periods of productivity. This is also true of most people - at least on a smaller scale. Aren’t there periods when you feel like you’re effortlessly flourishing at work, while other times you feel incompetent and uninspired? You might recognize these periods of concentrated success among your friends, peers, and competitors too.
The Northwestern University economist Dashun Wang has peeled back the mystery of why these special creativity clusters happen and how individuals and companies can multiply and extend them. Read this article to see how three words can enhance your career.
Readworthy Passage
Let's read together a random, but read-worthy, passage from a randomly picked book.
Why, then, asks Watson, should Holmes continue to investigate? He has solved Mrs. Warren’s case—and the landlady herself would like nothing more than to force the lodger out of the boardinghouse. Why involve himself further, especially if the case is as risky as it sounds? It would be easy enough to leave and let events take their course. “What have you to gain from it?” he asks the detective.
Holmes has a ready answer:
“What, indeed? It is art for art’s sake. Watson, I suppose when you doctored you found yourself studying cases without a thought of a fee?”
“For my education, Holmes.”
“Education never ends, Watson. It is a series of lessons with the greatest for the last. This is an instructive case. There is neither money nor credit in it, and yet one would wish to tidy it up. When dusk comes we should find ourselves one stage advanced in our investigation.”
It doesn’t matter to Holmes that the initial goal has been attained. It doesn’t matter that the further pursuit of the matter is dangerous in the extreme. You don’t just abandon something when your original goal is complete, if that something has proven itself more complex than it may have seemed at first. The case is instructive. If nothing else, there is still more to learn. When Holmes says that education never ends, his message to us isn’t as one-dimensional as it may seem. Of course it’s good to keep learning: it keeps our minds sharp and alert and prevents us from settling in our ways. But for Holmes, education means something more. Education in the Holmesian sense is a way to keep challenging yourself and questioning your habits, of never allowing System Watson to take over altogether—even though he may have learned a great deal from System Holmes along the way. It’s a way of constantly shaking up our habitual behaviors, and of never forgetting that, no matter how expert we think we are at something, we must remain mindful and motivated in everything we do.
- From Mastermind - How to Think Like Sherlock Holmes by Maria Konnikova
Quotable Quotes
"Doctors won’t make you healthy.
Nutritionists won’t make you slim. Teachers won’t make you smart.
Gurus won’t make you calm.
Mentors won’t make you rich.
Trainers won’t make you fit.
Ultimately, you have to take responsibility.
Save yourself."
-Naval Ravikant
"Fall in love with some activity, and do it! Nobody ever figures out what life is all about, and it doesn't matter. Explore the world. Nearly everything is really interesting if you go into it deeply enough. Work as hard and as much as you want to on the things you like to do the best. Don't think about what you want to be, but what you want to do. Keep up some kind of a minimum with other things so that society doesn't stop you from doing anything at all."
- Richard Feynman
"If you are doing something you would do for nothing, then you are on your way to salvation. And if you could drop it in a minute and forget the outcome, you are even further along. And if, while you are doing it, you are transported into another existence, there is no need for you to worry about the future."
- Dr. George Sheehan
(h/t to Sean DeLaney for sharing this)
* * *
That's it for this weekend folks.
Have a wonderful week ahead!!
- Tejas Gutka
[Oct 29, 2023]