[The Weekend Bulletin] #79: Some Important Market and Life Lessons
+ Framing Effect.
A digest of some interesting reading material from around the world-wide-web. Your weekly dose of multi-disciplinary reading.
Section 1: Investing Wisdom
This is probably the shortest note that I have read from GMO from as far as my memory serves. With just charts and half a page of text, it serves a very pertinent reminder: 'There are no bad assets, just bad prices'.
Based on your reading of the above article, what investment strategy would you adopt if you were to receive a large sum of a money (lets say a multiple of your current networth) today? Would you go all in, wait on the sidelines, or go in with instalments? Which of these strategies do you think will provide the highest returns over a 20-25year period? Pick your strategy and reasons before you read this article (long term readers would be reminded of a similar article that we read in Issue 16).
I really think that putting up a summary of the above article would serve many of us well in the long term. Speaking of which, here is an excerpt from a multi-topic article that I think is worth printing:
...there are many problems selling one great business because you think it might be over-priced to buy another one you think is cheaper. Think of all the ways to go wrong:
You could be wrong about the stock you are selling
You could be wrong about the stock you are buying
You have to pay taxes on your gains
I could add a fourth, which a friend of mine used to like to say: the most risky position in your portfolio is the newest position. It’s the idea you know the least. Doesn’t matter how much time you spent researching it, there is something about owning a position for a period of time. You know what you own better than what you don’t. Ergo, in any kind of tie, favor what you already own/know.
Add all that together, and I get a basic rule of portfolio management: Any new idea has to be significantly better than what it replaces.
I find businesses that might be better than what I have… but not by much. For me, to make a move, it’s gotta be really obvious.
Echoing the above thought is investor Nicholas Sleep (whom we met in Issues 58 and 69) through many of his letters to investors. This article does a nifty job of summarising some lessons from these letters that only recently surfaced on the internet. Some interesting quotes from the article:
"Good investing is a minority sport, which means in order to earn returns better than everyone else, one needs to be doing things differently from the crowd. And one of the things that the crowd is not is patient"
“Many great businesses are available at what seem sensible prices, but in our view, they do not compare favourably with what we already own, and so we move on constantly comparing what we have with the alternatives, but often, as far as the portfolio is concerned, doing nothing”
"...our continued investment success has far more to do with the economics of the underlying businesses than with their last share price quote. The trick, it seems to us, is, to be a successful long-term investor, one needs to recognise the sources of enduring business success, get in early and own enough to make a difference."
"Like Darwin, we find ourselves disagreeing with the theocracy. We would propose that if knowledge is a source of value added, and few things can be known for sure, then it logically follows that owning more stocks does not lower risk, but raises it."
“Good investment process is not apparent in one quarter’s worth of transient stock price quotations, or one year for that matter!”
“Worldly wisdom is a good phrase for the intellectual capital with which investment decisions are made and, at the end of the day, it is the source of any superior investment results that we may enjoy.”
'Wordly Wisdom' - that is the eternal journey upon which this newsletter embarks. I sincerely hope that you have been finding some value along the way!!
Section 2: Mental Models & Behavioral Biases
Given a choice between the following, which one will you choose to display outside a hospital:
Yesterday, 90% of the patients were cured successfully OR
Yesterday, 10% of the patients could not be cured; their families mourn the loss.
Both the sentences mean the same. However, they each solicit a different feeling. This difference is considered to be one of the most powerful biases that influences decision making. So powerful that marketers and researchers swear by it. Called 'Framing Effect', this is a cognitive bias where people decide on options based on how they are presented. This article explains further, and also provides some strategies to manage this bias.
Section 3: Personal Development
Remember the story of the donkey, carrot and stick? Most of us are like the donkey, running on an imaginary treadmill, chasing a carrot that we never seem to get our hands on. Thus, we all experience burn-outs, crises, depression, and what not. Below are some ways that you can avoid falling for this trap:
Build a multi-dimensional life. Here are 17 ways that you can do that.
Figure a way for the carrot to stop moving. Here's how.
Here's a nice story about Joseph Heller (author, Catch-22 fame) written by Kurt Vonnegut (that somehow got edited out of the article over time):
True story, Word of Honor:
Joseph Heller, an important and funny writer
now dead,
and I were at a party given by a billionaire
on Shelter Island.
I said, “Joe, how does it make you feel
to know that our host only yesterday
may have made more money
than your novel ‘Catch-22’
has earned in its entire history?”
And Joe said, “I’ve got something he can never have.”
And I said, “What on earth could that be, Joe?”
And Joe said, “The knowledge that I’ve got enough.”
Section 4: Blast From The Past
We consume a lot interesting text in our quest for knowledge. However, with each new byte of data that we feed into our memory, we lose some bit of old information that was held. Even without the addition of new information, our memory regularly cleans our information that is held deep and not often retrieved. If is for this reason that re-reading old texts (books/articles/notes) is highly recommended.
There are other advantages to re-reading. Spaced repetition for one - when we revisit some old material, it is etched better into our long term memory. More importantly, as we gain more experiences in life, re-reading an old text can provide some fresh perspectives that we may have missed while reading earlier.
It is to reap these benefits that this section revisits article/s from an earlier issue.
A fund that has no fund manager!! It’s a fund that was set up in 1935 with the objective of buying 30 diversified stocks in equal quantities, and never transacting thereafter (with a few exceptions). The fund has almost all its assets in four sectors: industrials, energy, basic materials and financial services - no technology or healthcare exposure. How do you think would a fund like this have performed? You can read about it here (paid article but with recent data) or here (slightly dated article but free).
I made a really lousy summary for this article last time around. This time, I'll only say that if you have even an iota of interest in strategy, read this article. For those of you that need a lousy summary to persuade you, here goes: This nearly two decade old article traces the evolution of early computers and operating systems. In doing so, it explains a very interesting concept that these developments faced, what the author calls a ‘chicken and egg problem’. Numerous businesses face this issue even today, particularly businesses that strive on network effects. This is as relevant today as when it was written.
The above articles appeared in the seventh issue of TWB.
Quotable Quotes
"Patience is a competitive advantage.
In a surprising number of fields, you can find success if you are simply willing to do the reasonable thing longer than most people."
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That's it for this weekend folks.
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Have a wonderful week ahead!!
- Tejas Gutka
[June 12, 2021]