[The Weekend Bulletin] #196: Historians vs Futurists, Catalysts, Inflation and Investing, ...

... Why Even The Best Investors Don't Clone, Controlling Yourself, Diversifying Skills, And More.

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

Investing Wisdom

• There are more than one ways to make money in the market. When we read about or follow a successful investor we often think that their way is the only way to succeed. However success doesn’t come simply from cloning someone. And who better to explain this than a long term friend of Warren Buffett. This article elaborates.

• This article categorises investors in to two buckets: historians and futurists. Historians rely on past data for predictions, while futurists look ahead and ignore the past. The author discusses the pros and cons of both these approaches. He also provides examples of how either approach can not work for extended periods. 

• A term that you often hear, especially in value investing circles, is 'catalyst'. Many investors recognise securities that trade cheaply and then look for triggers that can make the price move. This post argues that this approach is not practical as catalysts are often easier to identify with the benefit of hindsight.

• The following are two interesting write-ups on investing during inflationary periods:

  • This short note presents the performance of various asset classes during the last three years. While short on text, it helps learn many lessons. First among them being that the market always overestimates trends in either direction. Remember how oil was touted to be a dying commodity thanks to focus on ESG, or how Gold was a thing of the past with the rise of cryptocurrencies. Guess what, these were the two best performing asset classes over the last three years. Second being that there is no permanent formula for success. For instance, falling interest rates over the last few decades led to the popularity of the 60:40 portfolio. Both bonds and equities benefitted from the lowering of cost of capital. However, treasuries were one of the worst performing asset classes in recent years. Third, and most important, is that you have to choice of one of two pains: The pain of severe underperformance of the entire portfolio for an extended period (for instance 60:40 would have underperformed a more diversified portfolio over the last two years) or the pain of always having some portion of your portfolio underperforming (like investors who held Gold/Commodities in their portfolios in the pervious decade) [We looked at the downside of diversification in #179].

  • This tweet discusses pricing power in the context of inflation.

Mental Models & Behavioral Biases

• Business performance can gyrate in the short term. Unforeseen circumstances can lead to higher or lower than expected results by a large margin. Extrapolating such performance into the future can lead to over- or under- estimation of the company’s real potential. Therefore, the author of this post suggests that rather than trying to control the short term, control yourself. Maintaining a longer-term perspective and allowing room for short-term disappointments is to key to long-term success in investments, suggests the author.

Personal Development

• The author of this post promotes diversification - not in business but in skill development (he has also written a book onto the same lines). He presents findings from multiple studies that point to the downside of early specialisation in sports. He argues that having exposure to multiple activities helps a child develop better skills at a particular activity later in life. If you are a parent to a toddler or a young child, you should definitely pay attention to this.

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 119:

• If you had two investment choices - one that mostly goes up, and other that mostly goes down - how would you build your portfolio? Most of us would want to invest only in the one that goes up. However, as this thread explains, the ideal investment would be a combination of the two. This is one of the best explanations of diversification that I have read in a while.

• Narrating the story of how Elon Musk came to build rockets at SpaceX, this article explains First Principles Thinking, also called Reasoning from First Principles. The principle has been used by many great thinkers including inventor Johannes Gutenberg, military strategist John Boyd, and the ancient philosopher Aristotle.

• The following are two long but very interesting reads:

  • The first one, rooted deep into philosophy, is a meditation on why we are never satisfied. Here is a summary courtesy Swanand Kelkar and Saurabh Singh (who originally shared the article):

    

  • The second one approaches the problem from the other side. Instead of asking why we are never satisfied, it seeks to find what makes us happy? This is  probably the longest running research project where for 72 years (as at 2009), researchers at Harvard have been following 268 men who entered college in the late 1930s - through war, career, marriage and divorce, parenthood and grandparenthood, and old age - to find the answer to this question. The findings are quite interesting and unexpected.

Quotable Quotes

“When undemanding investors appear, they’ll buy anything. Underwriting standards fall, and it gets hard for demanding investors to find opportunities offering the return and risk balance they require, so they’re forced to the sidelines. Demanding investors must be willing to be inactive at times.”

- Howard Marks

“A DCF is like the Hubble telescope - turn it a fraction of an inch and you're in a different galaxy.”

- Curtis Jensen

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That's it for this weekend folks.

Have a wonderful week ahead!!

- Tejas Gutka

[May 11, 2024]