[The Weekend Bulletin] #204: Biggest Winners + Ugly Ducklings, Mindmaps, Folly of Certainty, ...
... Not Losing Money, Base Rate Neglect, Diderot Effect, and more.
A digest of some interesting reading material from around the world-wide-web. Your weekly dose of multi-disciplinary reading.
Investing Wisdom
Hendrik Bessimbinder - famous for his research that only 4% of the stocks accounted for all the wealth created by the stock. market over time - recently updated this research. In the updated version, he zooms in to the stock that have done well over long time frames - the biggest winners. The research has some interesting and surprising findings, which this short article summarises.
Talking about the biggest winner, a famed microcap investor asserts that most of the big winners for individual investors were not great businesses at the time, rather they were ugly ducklings. The article echoes Warren Buffet's ideology of buying when there is blood on the street, but refutes another one that says that turnaround seldom turn.
Talking of Warren Buffet's ideology, his primary rule in investing is to not lose money. Using excerpts from Seth Klarman's and Howard Marks' writings, this article explains why taking this rule literally is a mistake.
Mental Models & Behavioral Biases
This article highlights the downside of base rate neglect. Base rate neglect is when we ignore statistical data and focus on individual stories, leading to flawed judgments. This can have serious consequences, as explained in the article.
Your birthday is coming up. You buy yourself a new pair of jeans for the big day. But then, you realise that most of your shirts look old compared to the brand new jeans. So you pick up a new shirt as well. Then you realise that your shoes dont match this new attire. So you decide to get yourself new shoes. You get the drift. You started by buying one item and ended with three. This phenomenon is called The Diderot Effect. This article explains the story of the philosopher who lent his name to this effect and how to avoid it.
In his latest, Howard Marks warns against the folly of certainty, as we live in a probabilistic world. He explains how the current macro environment and the market's reaction to it proved both bears and bulls right (or wrong!) to drive his point.
Personal Development
This hour long video serves as a masterclass in the art of making mindmaps. These serve as effective tools for organizing information, distilling the key principles, as well as enhancing memory and understanding. The video discusses the intricacies of the principles and strategies that can be used in creating an effective mindmap.
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 127:
Different schools of thought act differently. On the one hand, value investors look for beaten down and out of favour names. On the other hand, momentum investors believe that what goes up will continue to go up, and vice verse. Which is these schools to follow? Recent research looked in to this dichotomy, and came out with interesting findings about value and growth stocks. Here is a summary of the research.
Two pieces of advice(from the same author) that are worth their weight in gold:
How to Succeed as a Sell Side Trader (dont go by the title; the advice applies as much to a long term investor as much as it applies to a trader. Strongly recommend reading this)
Quotable Quotes
“The best in the world are not the best because they win every point. It's because they lose again and again and have learned how to deal with it.”
- Roger Federer
“There are at least 4 types of wealth:
- Financial wealth (money)
- Social wealth (status)
- Time wealth (freedom)
- Physical wealth (health)
Be wary of jobs that lure you in with 1 and 2, but rob you of 3 and 4.”
- James Clear
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That's it for this weekend folks.
Have a wonderful week ahead!!
- Tejas Gutka
[Jul 28, 2024]