[The Weekend Bulletin] #184: 3 Types of Investing Mistakes, The Art of Looking Stupid, Investment Fingerprints, ...
...Batting Average vs Slugging Rate, Building a Mental Gym, Being More Agentic, Corporate Governance Red-flags, and more.
A digest of some interesting reading material from around the world-wide-web. Your weekly dose of multi-disciplinary reading.
Investing Wisdom
'Looking stupid is not the same as being stupid' - explains this short note. The author argues that while most of us want to avoid being stupid, we should not avoid looking stupid. Understanding the distinction between the two, and mastering the art of looking stupid is one of the keys to long-term success in investing.
In discussing the investment strategy of Turtle Creek Asset Management, this article makes a very interesting point - 'Alpha is generated by being a little different in a disciplined and thoughtful way'. The author explains that like our fingerprints, our investment strategies have to be unique to ourselves in order to be optimal, for then it truly incorporates our own behavioural elements.
Early in my career as a credit analyst, I was taught an important distinction between the probability of default and loss given default. This concept finds application not just in credit analysis but in any endeavour that involves weighing the upside potential against the downside risks (insurance pricing, poker, investing, career decisions etc). Particularly in investing, this is an important concept to understand not just from evaluating potential positions (Mohnish Pabrai: heads I win, tails I dont lose much), but also from portfolio construction perspective. This article explains how this concept applies to portfolio construction by breaking it down in to batting average and slugging percentage. As the article explains, while the former is widely tracked, the latter deserves more attention than it gets.
Here's is an interesting investor letter that was shared with me recently. The author highlights the discount that South Korean companies trades at ('Korea Discount'), compared to their Asian peers, and reflects upon the reason behind the same. The letter blames poor corporate governance as the major reason behind the 'Korea Discount' and goes on to list a few ways in which minority shareholders are short-changed by controlling shareholders. While the letter further explains the investment firms overweight position in South Korea despite these challenges, our interest should largely be in understanding the many practical ways in which minority shareholder interests can be compromised.
Mental Models & Behavioral Biases
We've read a lot about how tracking and analysing our mistakes (as well as that of others) can help us improve our decision making skills. This article takes this a step further by laying out a very useful framework of classifying our mistakes in different buckets. This classification helps us improve our diagnosis of the mistakes and take appropriate corrective measures or avoid misleading actions.
Personal Development
Just as going to the gym helps us build muscles over time, learning new skills or having new experiences strengthens our cognitive fibres. However, unlike an expensive gym membership, a lot of skills and experiences have very little to no costs. This article lists a few such activities and groups them under four pillars which when balanced together will help you build your own mental gym.
The idea of 'fixed vs growth mindset' has really gathered momentum in the last decade or so. While we have read about it in multiple issues in the past, here's a quick refresh: a fixed mindset reflects beliefs that your talents/abilties/skills are fixed and cannot be improved upon, whereas a growth mindset believes that most of these can be improved (read more here). Building on this concept, this article argues that agency - ability to fulfil/exceed own potentials - can be improved upon. It lists a few ways - mostly personal reflections of the author - in which one can be more 'agentic'. In an are where individuals are overtaking institutions, this seems like an important skill to double down upon.
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 107:
Michael Porter recommended three business strategies for success: be better than competition, be cheaper than competition, or be different (operate in a niche). Which amongst these three do you think would be consistently better than the other two? This article tells you which one and why. It also suggests that investors adopt one of these strategies for successful wealth creation.
In addition to the above, what other things help achieve success in investing? Curiosity - definitely. Analytical skills - maybe. What's needed the most, in addition to all of these, is the ability to handle the surprises that the market consistently throws at you. This article explains what that is and why its important.
“The markets will always do whatever they have to do to screw over as many people as possible.”
Here is a light read on the follies that draw investors towards assets with lower expected returns. Pertinent to read this in a bull market.
“Much of our investment activity involves doing things that make us feel good in the moment. We can then repent at leisure.”
Doesn't it often happen that you are thinking about a problem and cant seem to find a solution. Then, at a seemingly random moment, Eureka strikes!! Archimedes found it in the bathtub, many find it on long walks, some find it in their sleep. There are many way that Serendipity strikes us. But is that a way to make this deliberate rather than random? This article provides one way to do, somewhat on the lines of what Charlie Munger prescribes.
Quotable Quotes
“The world as a whole has never been richer, and it has never been more heavily in debt, living off borrowed money. The record shows that, for society, the richer we become, the harder it gets to live within our means. Abundance is harder for us to handle than scarcity.”
- Nassim Taleb
"With every new wave of optimism or pessimism, we are ready to abandon history and time-tested principles, but we cling tenaciously and unquestioningly to our prejudices."
- Benjamin Graham
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That's it for this weekend folks.
Have a wonderful week ahead!!
- Tejas Gutka
[Jan 27, 2024]