[The Weekend Bulletin] #179: Downside of Diversification, Two Sides of Conviction, Sequence of Returns,...
...Withdrawal Rates in Retirement, Upgrading Your Brain, Stop Excuses and Start Marking Changes, and more.
A digest of some interesting reading material from around the world-wide-web. Your weekly dose of multi-disciplinary reading.
Investing Wisdom
Investing is a realm where contradictory ideas co-exist. An investor is expected to maintain a fine balance while holding two opposing ideas in her mind at the same time. Below are two such ideas:
This article deals with the two sides of conviction - one of the most important elements in investing. It contrasts conviction with arrogance, even as investing demands humility as the markets are supreme. It also quotes the story of an investor whose conviction was tested when Warren Buffet dismissed his idea. What would you have done if this investor was you?
The benefits of diversification have been known for over half a century. This article therefore discusses the practical difficulties of diversification and its downsides. The author shares personal experience with diversification and illustrates what to expect in a diversified portfolio.
The next two articles deal with details about certain popular concepts in personal finance:
One of the important considerations is personal finance is how much can an individual withdraw from her corpus after retirement. The withdrawal rate determines the tenure for which the funds will support the retiree and therefore one cannot go wrong with the rate. This article examines a recent seemingly logical discussion on the withdrawal rate, questioning its viability, and testing it over historical market conditions.
Imagine that your investing journey is about to start today, and will continue for the next decade i.e. you will be investing increasing sums of money each year (in monthly instalments - SIPs) for the next 10 years. You have the choice of picking up the sequence of returns that you earn between the following two options (they both average to the same number):
To make the comparison easy, here is journey of an investment of 100 units of currency in each option:
When both the options end at the same number, does the sequence of returns matter? And if it does, which one is better - lower returns initially, or higher returns initially? What happens when you turn the table - i.e. you are not in an investment phase, but in retirement - how do these considerations change. Take some time to think about these issues before reading the answers in this article. This is such an important concept - I would urge everyone to read this article.
Mental Models & Behavioral Biases
'Your brain is a phenomenal tool. [It} will find whatever it is that you are looking for', claims the author of this article. In some ways, his words reflect the idea of Growth vs Fixed Mindset popularised by Carol Dweck in her book Mindset. The human brain is known to exhibit neuroplasticity - the ability to change through growth and reorganisation of the neural networks. But how is that we can do this? The article provides some practical insights on upgrading cognitive function by highlighting seven habits to eliminate. It discusses how certain common behaviors can hinder mental performance and offers actionable advice on what to avoid.
Personal Development
Having improved your cognitive abilities in the pervious section, it is now time to improve your physiological abilities. Your brain may have started highlighting high potential activities, but the lazy self pushes back from undertaking these activities. That is where this article helps. It focuses on overcoming the habit of making excuses and embracing change. The author provides actionable strategies and insights into recognizing and combatting excuses. It motivates individuals to shift their mindset, fostering a proactive approach towards personal growth and transformation.
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 #102:
This article asks an interesting question: Why aren’t there more Warren Buffetts out there? The answer is drawn from the mental model called 'Paradox of Skill' (which we looked at in detail in #90). In trying to answer the question, the article also looks at the story of Shelby Davis (Subject of the book:The Davis Dynasty) and highlights some interesting parallels and contrasts between Buffett and Davis.
This three part series by Sequoia India explores the need and power of playing long games (long investment horizon) for investors. The following are the three parts:
Part I: Why play the long game?
Part III: How to play the long game
Of the many opposing forces in investing (and in life in general), the most difficult to deal with is: holding on to old ideas and being open new ideas. Most things evolve, while a few things remain the same over long periods of time. Therefore, finding a balance between the two forces is important. However, years of experience makes us stubborn enough to not see an underlying change. And therein lies the problem, says Morgan Housel in this piece.
There are times when we have all the information needed to make a decision and there are times when some details are missing. Not liking ambiguity, our brains try to fill the gap of these missing details by defaulting to our prejudices. Thus we create stories in our heads. This article is an interesting window into such stories (often lies we tell ourselves) and how to avoid them.
Readworthy Passage
Let's read together a random, but read-worthy, passage from a randomly picked book.
There are two dimensions to life, and we should be able to touch them both. One is like a wave, and we call it the historical dimension. The other is like the water, and we call it the ultimate dimension, or nirvana. We usually touch just the wave, but when we discover how to touch the water, we receive the highest fruit that meditation can offer.
In the historical dimension, we have birth certificates and death certificates. The day your mother passes away, you suffer. If someone sits close to you and shows concern, you feel some relief. This is the world of waves. It is characterized by birth and death, ups and downs, being and nonbeing. A wave has a beginning and an end, but we cannot ascribe these characteristics to water. In the world of water, there is no birth or death, no being or nonbeing, no beginning or end. When we touch the water, we touch reality in its ultimate dimension and are liberated from all of these concepts. If you know how to touch your mother in the ultimate dimension, she will always be with you; you can see that she is there in you, smiling. This is a deep practice and it is also the deepest kind of relief.
One day as I was about to step on a dry leaf, I saw the leaf in the ultimate dimension. I saw that it was not really dead, but it was merging with the moist soil and preparing to appear on the tree the following spring in another form. I smiled to the leaf and said, “You are pretending.” Everything is pretending to be born and pretending to die, including the leaf I almost stepped on. The day of our so-called death is a day of our continuation in many other forms.
- From How To Focus by Thich Nhat Hanh
Quotable Quotes
"It's not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.”
- Robert Kiyosaki
"Nice is not always the same as good.
"Sometimes being hard on someone is the most helpful thing you can do for them. Sometimes being nice to someone is the most unhelpful thing you can do for them.
Nice is not always the same as good.
...
Choosing to be nice is strength. Feeling compelled to always be nice is weakness.
Choosing when to be disagreeable, when required, is strength. Always being disagreeable is weakness."
- Mark Manson
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That's it for this weekend folks.
Have a wonderful week ahead!!
- Tejas Gutka
[Nov 25, 2023]