[The Weekend Bulletin] #178: Pricing Power, Management Quality, Discipline, Brainstorming,...

...A Rare Public Interview of a Private Investor, and more.

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

Investing Wisdom

• Pricing power has been called the single most important business attribute by many great investors including Warren Buffet and Charlie Munger. This article is a deep dive on this subject. The author argues that pricing is as much about psychology as about competitive dynamics - one of the reasons that companies operating in competitive markets such as yoga pants or plastic shoes for children are able to raise prices. The author further lists multiple stratgies that companies can use to raise prices without much pushback from customers.

• Assessing management quality is an important part of the research process. The strength of a good management may be reflected in a number of independent factors. On the other hand, the weakness of a bad management may be reflected in a few, easily identifiable factors, according to this article. Therefore, management quality is better assessed as a process of elimination - list the negative attributes and confirm their absence. To make this task easier, the author lists a number of common signs of a bad management that have historically been observed in business that eventually went down.

• In a rare (first) public appearance, private investor Reece Duca (partner and founder of the Investment Group of Santa Barbara - IGSB) shares his journey of becoming a private investor and his investment philosophy. In this interview, Reece explains why he never managed public money, why he has no analysts in his team, why he does not differentiate between public and private markets, why he believes that very high concentration reduces risk rather than increases it, and more. This is a good listen that will leave you wanting for more.

Mental Models & Behavioral Biases

• One of the more important determinants of long term success in any endeavour - investing included - is discipline. You could be extremely talented - but talent will only get you started; without discipline the advantage of talent will fade over time. In investing parlance, you could have figured the best investment strategy but that is of no use if you can't stick to it - especially when it is not working. While this importance of discipline is perhaps known today, what is under-appreciated is how disciplined you have to be with discipline. An anecdote from Warren Buffet in this article explains further.

Personal Development

• Taking the above discussion on talent forward - creativity is a form of talent. And while many are born creatives, it is not that creativity cannot be learnt. The author of this article argues that creativity can indeed by developed over time, mainly through a combination of reps and routines. The author further describes three types of creativity that one can choose from, and then goes on to describe an effective brainstorming process to get the creative juices flowing.

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 #101:

• Consider this: you have the choice of investing between a market portfolio (index fund) and that designed by an active investor. You know that over 1 year periods, there is an equal chance of either portfolio doing better than the other. You also know that over 3 year periods, the active investor's portfolio does slightly better than the market (say 60%). Which portfolio will you choose to invest in, if you had to lock in your money for over 10 years? This article will tell you which one does better over 10 years and also give you some important lessons on luck, skill, and time horizon.

• We all know that time is valuable, but can't really figure an exact value of time. If time is money, how much is it really worth? For instance, how much would you pay to save an hour - 10/100/1000/10000? This article will help you put a tangible value on your time (free excel sheet included).

Readworthy Passage

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

...we live simultaneously in two different worlds—one where social norms prevail, and the other where market norms make the rules. The social norms include the friendly requests that people make of one another. Could you help me move this couch? Could you help me change this tire? ...

The second world, the one governed by market norms, is very different. There’s nothing warm and fuzzy about it. The exchanges are sharp-edged: wages, prices, rents, interest, and costs-and-benefits. ...

...In this experiment, a circle was presented on the left side of a computer screen and a box was presented on the right. The task was to drag the circle, using the computer mouse, onto the square. Once the circle was successfully dragged to the square, it disappeared from the screen and a new circle appeared at the starting point. We asked the participants to drag as many circles as they could, and we measured how many circles they dragged within five minutes. This was our measure of their labor output—the effort that they would put into this task.

How could this setup shed light on social and market exchanges? Some of the participants received five dollars for participating in the short experiment. They were given the money as they walked into the lab; and they were told that at the end of the five minutes, the computer would alert them that the task was done, at which point they were to leave the lab. Because we paid them for their efforts, we expected them to apply market norms to this situation and act accordingly.

Participants in a second group were presented with the same basic instructions and task; but for them the reward was much lower (50 cents in one experiment and 10 cents in the other). Again we expected the participants to apply market norms to this situation and act accordingly.

Finally, we had a third group, to whom we introduced the tasks as a social request. We didn’t offer the participants in this group anything concrete in return for their effort; nor did we mention money. It was merely a favor that we asked of them. We expected these participants to apply social norms to the situation and act accordingly.

How hard did the different groups work? In line with the ethos of market norms, those who received five dollars dragged on average 159 circles, and those who received 50 cents dragged on average 101 circles. As expected, more money caused our participants to be more motivated and work harder (by about 50 percent).

What about the condition with no money? Did these participants work less than the ones who got the low monetary payment—or, in the absence of money, did they apply social norms to the situation and work harder? The results showed that on average they dragged 168 circles, much more than those who were paid 50 cents, and just slightly more than those who were paid five dollars. In other words, our participants worked harder under the nonmonetary social norms than for the almighty buck (OK, 50 cents).

Perhaps we should have anticipated this. There are many examples to show that people will work more for a cause than for cash. A few years ago, for instance, the AARP asked some lawyers if they would offer less expensive services to needy retirees, at something like $30 an hour. The lawyers said no. Then the program manager from AARP had a brilliant idea: he asked the lawyers if they would offer free services to needy retirees. Overwhelmingly, the lawyers said yes.

What was going on here? How could zero dollars be more attractive than $30? When money was mentioned, the lawyers used market norms and found the offer lacking, relative to their market salary. When no money was mentioned they used social norms and were willing to volunteer their time. Why didn’t they just accept the $30, thinking of themselves as volunteers who received $30? Because once market norms enter our considerations, the social norms depart.

- From Predictably Irrational by Dan Ariely

Quotable Quotes

"The fact that the circumstances of a particular investor might objectively lead to a certain viewpoint does not mean that he or she necessarily has that viewpoint. A baby is in an objective position to take a long-term view, but will not actually look beyond the next feeding-time."

- Richard Oldfield
[Simple But Not Easy]

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That's it for this weekend folks.

Have a wonderful week ahead!!

- Tejas Gutka

[Nov 11, 2023]