[The Weekend Bulletin] #186: Active Funds Get More Stocks Wrong Than Right, But Why That Alone Should Not Matter,...
...Pattern Recognition, Self-Healing Cycles in Asset Classes, Embracing Failure, Life Lessons From Seneca, And More.
A digest of some interesting reading material from around the world-wide-web. Your weekly dose of multi-disciplinary reading.
Investing Wisdom
Investors often rely on intuition backed by their experience and memory in drawing investment strategies. However, this paper argues that experience and expertise are not the same. it is often believed that having experienced market cycles in the past, you can navigate future cycles better, as you have developed certain patterns in your head. This is not completely true as recognising patterns works only in certain environments. The paper looks at scenarios under which pattern recognition works well, when does it fail, and how to improve at it.
Taking the discussion about market cycles further, this article explains how cycles are self-healing; for instance, falling prices lead to lower valuations which make future returns attractive which lead to higher prices eventually, and vice versa. It then goes on to explain how despite this understanding, why most investors find it difficult to be a contrarian and gain from such self-healing nature of asset classes (the reason is not only behavioural).
This article presents some interesting findings for managers as well as investors of funds. It presents data on how most fund managers get more stocks wrong than they get right. However, it also goes on to explain why that should not be the reason for investors to shun active funds and run towards passives. It then goes on to explain the factor that matters more than simply the number of right or wrong calls, and how investors can use this data to pick better active funds.
Mental Models & Behavioral Biases
There is a very important mental framework that adults should ideally learn from kids. Practically, however, adults tend to draw kids away from this mindset as they grow. The mindset that is being spoken about here is: embracing failure. This article explains why it is important, which kind of failure should be embraced, under what conditions should we embrace failure, and draws a step strategy for failing effectively.
Personal Development
Despite the controversies surrounding his conduct, Seneca remains a prominent figure in history. His philosophical works, including letters, essays, and treatises, continue to inspire contemplation and introspection and offer profound wisdom. Here are five timeless lessons from drawn from his various writings that can benefit us all.
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 109:
When stocks, especially growth stocks, fall it can be extremely difficult to figure the right time to move in to them, especially if you don't already own them. This article lists a couple of frameworks that you can use to buy such crashing stocks.
This article suggests that to make big gains, avoid tiny losses. The gains and losses spoken here are not about investing but pertain to everything in life. A short but educative read.
They say in investing that you should buy the dip. Dips, however, occur not just in markets but also in life. No matter what activity we undertake, we all experience a dip. This article explains these dips, how to survive them, and why surviving them is important.
Quotable Quotes
“There are a lot of areas where people who have experience think they’re experts, but the difference is that experts have predictive models, and people who have experience have models that aren’t necessarily predictive.”
- Gregory Northcraft
"The brilliance of the stars would be invisible without the vast darkness of space behind them. Do not wish away the difficult portions of life. They provide the contrast needed to appreciate the joyful moments."
- James Clear
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That's it for this weekend folks.
Have a wonderful week ahead!!
- Tejas Gutka
[Feb 10, 2024]