[The Weekend Bulletin] #180: An Ode to a Sage, Lessons from Managing The World's Largest Fund,...
...Adding by Subtracting, Competitive Advantage and Captial Allocation, Frugal, Marshmallow Trap, Self-Anthropology, and more.
A digest of some interesting reading material from around the world-wide-web. Your weekly dose of multi-disciplinary reading.
This is a sad week for the financial world as it lost its beacon. Charlie was a true sage - imparting wisdom selflessly and sharing his secret to building wealth widely. Rarely would there be a person who would have discovered Charlie Munger and not have some part of his life altered. For me, his advice of trying to be a little wiser each day changed my perspective the most. This newsletter is a tribute to that very advice - more than anything else, it is a means for me to be disciplined about reading each day so that I have something worthwhile to share at the end of the week.
There is an ancient Indian tradition called GuruDakshina - the idea of repaying a teacher or guru for their wisdom, guidance, and teachings. In that vein, thank you so much Mr. Munger for all your mentorship, guidance, and wisdom. You shall continue to live for many generations through your Mungerisms - one of the best legacies that anyone can leave behind. You professed learning from the eminent dead, and now you join that list right at the top. The flame of your teachings will continue to glow eternally.
Here are two resources that memorialize Charlie's teaching:
The Charlie Munger Manifesto by Vishal Khandelwal, which contains his most important rules for living a good life, and avoiding bad outcomes.
Revised Poor Charlie's Almanack - a new revised edition that Charlie was himself involved with is now available for pre-order (kindle version as well)
Investing Wisdom
This interview of Nicolai Tangen makes for a good listen. Nikolai is the CEO of Norges Bank Investment Management which is the largest publicly held financial fund in the world, holding 1.5 percent of all listed companies in the world. The interview is a reminder that the fundamentals of investing apply equally to an individual investor or a hedge fund or the largest sovereign wealth fund. There is no need for any unnecessary complication in investment philosophy with increasing size of the funds under management.
Famed microcap investor Ian Cassel draws some interesting lessons from the above interview, asking investors to consider how much they are hurting their own returns. You can read the post here.
Echoing the takeaway from the above podcast, the author of this article posits that our typical response to any problem is to complicate it. He argues that the best do the reverse - the simplify through subtraction. He further reflects that the investment philosophies of the best investors are based on some common attributes - three to be precise.
In a recent presentation, Pat Dorsey of Dorsey Asset Management discusses competitive advantage and capital allocation in investing. The presentation serves as a good guide to build you understanding on these subjects as it explains the importance of economic moats to create structural competitive advantages and outlines the different types of competitive advantages. It also delves into the basics of capital allocation, such as internal growth, dividends, repurchases, and M&A, and assesses how to evaluate capital allocation.
Mental Models & Behavioral Biases
In his latest, Morgan Housel makes an interesting distinction about people who spend less than they earn. Most personal finance texts will advocate spending less, or being frugal. But as Morgan demonstrates, spending less does not necessarily mean being frugal. It is a different mindset for many people.
Reflecting upon a similar mindset, Frederik Gieschen talks about the downside of the Marshmallow mind in this post. We are all aware of the famous Marshmallow study that concluded that kids who would resist eating a marshmallow did better later in life (although there were contrasting results discovered later). He argues that once you make delaying gratification a part of your identity, you may not be able to go back to ever enjoying the spoils - rich but unhappy. He draws up three paths - the marshmallow failure, the marshmallow trap, and the middle path to advocate for a balance of wealth and happiness.
Personal Development
Here an interesting hack to tackle distractions. It takes the benefits of journalling and combines it with the anthropologist's practice of taking field-notes to record, observe, and analyse the root cause of distractions. Its a simple practice that can potentially unlock huge productivity or creative gains.
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 #103:
What's the fastest animal you know of? Most people (me included) would say the cheetah. Indeed the Cheetah can touch very high speeds, however it cannot sustain it beyond half a minute. On the other hard, an Antelope can run almost as fast as a Cheetah but for much longer (whatsapp University: one is running for food and the other for life). However, most of us know of the animal which can run very fast for a short period but are not aware of something that can cover a long distance at a similar speed. Its the same in investing, as this article explains (this is probably one of the most important as well as most ignored lessons in investing).
There was a concept that I had learnt at my first job in a rating agency that has stayed with me till date - point in time vs through the cycle (I wrote about this concept in an article here). The concept pertained to how we evaluated the credit-worthiness of businesses, and why most industries had a cap beyond which a rating wouldn't usually be assigned. The idea behind the concept was that most businesses experience up and down cycles and therefore it was important to not access the business based on its current performance, but to account for the cyclicality that its industry usually experienced. Markets, like business, are also cyclical (most things over a long enough time are cyclical). Here are two lessons worth learning about the stock market's cyclicality:
The first one talks about how returns of different sections of the markets cycle differently through time, making us believe in the wrong thing at an inappropriate time.
The next one talks about how investors of funds with very good track record end up with much lower returns. The author also claims that “Fund managers in the rear-view mirror are dumber and luckier than they appear”.
The following two examples from the tech world are further proof that most things are cyclical. Outside of this point, they provide some good investing lessons as well:
While everything is cyclical, no two cycles are the same (history repeats, but does not rhyme)
The more things change, the more they remain the same (and some good insights on the fin tech landscape)
Readworthy Passage
Let's read together a random, but read-worthy, passage from a randomly picked book.
Which models are the most reliable? Well, obviously, the models that come from hard science and engineering are the most reliable models on this Earth. And engineering quality control—at least the guts of it that matters to you and me and people who are not professional engineers—is very much based on the elementary mathematics of Fermat and Pascal:
It costs so much and you get so much less likelihood of it breaking if you spend this much. It’s all elementary high school mathematics. And an elaboration of that is what Deming brought to Japan for all of that quality control stuff.
I don’t think it’s necessary for most people to be terribly facile in statistics. For example, I’m not sure that I can even pronounce the Poisson distribution. But I know what a Gaussian or normal distribution looks like and I know that events and huge aspects of reality end up distributed that way. So I can do a rough calculation.
But if you ask me to work out something involving a Gaussian distribution to ten decimal points, I can’t sit down and do the math. I’m like a poker player who’s learned to play pretty well without mastering Pascal.
And by the way, that works well enough. But you have to understand that bellshaped curve at least roughly as well as I do.
And, of course, the engineering idea of a backup system is a very powerful idea. The engineering idea of breakpoints—that’s a very powerful model, too. The notion of a critical mass—that comes out of physics—is a very powerful model.
All of these things have great utility in looking at ordinary reality. And all of this cost-benefit analysis—hell, that’s all elementary high school algebra, too. It’s just been dolled up a little bit with fancy lingo.
I suppose the next most reliable models are from biology/ physiology because, after all, all of us are programmed by our genetic makeup to be much the same.
And then when you get into psychology, of course, it gets very much more complicated. But it’s an ungodly important subject if you’re going to have any worldly wisdom.
And you can demonstrate that point quite simply: There’s not a person in this room viewing the work of a very ordinary professional magician who doesn’t see a lot of things happening that aren’t happening and not see a lot of things happening that are happening.
And the reason why is that the perceptual apparatus of man has shortcuts in it. The brain cannot have unlimited circuitry. So someone who knows how to take advantage of those shortcuts and cause the brain to miscalculate in certain ways can cause you to see things that aren’t there.
Now you get into the cognitive function as distinguished from the perceptual function. And there, you are equally—more than equally in fact—likely to be misled. Again, your brain has a shortage of circuitry and so forth—and it’s taking all kinds of little automatic shortcuts.
So when circumstances combine in certain ways—or more commonly, your fellow man starts acting like the magician and manipulates you on purpose by causing your cognitive dysfunction—you’re a patsy.
And so just as a man working with a tool has to know its limitations, a man working with his cognitive apparatus has to know its limitations. And this knowledge, by the way, can be used to control and motivate other people….
So the most useful and practical part of psychology—which I personally think can be taught to any intelligent person in a week—is ungodly important. And nobody taught it to me by the way. I had to learn it later in life, one piece at a time. And it was fairly laborious. It’s so elementary though that, when it was all over, I felt like a fool.
And yeah, I’d been educated at Cal Tech and the Harvard Law School and so forth. So very eminent places miseducated people like you and me.
- From A Lesson on Elementary, Worldly Wisdom by Charlie Munger
Quotable Quotes
"...doing well with money isn’t about how smart you are or where you went to school. It’s just about having the right behavior – patience, control over greed and fear, long-term thinking, etc."
- Morgan Housel
📢 I am taking the next week off for a short break with the family. I will therefore not be publishing an issue next week. 📢
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That's it for this weekend folks.
Have a wonderful week ahead!!
- Tejas Gutka
[Dec 02, 2023]