[The Weekend Bulletin] #80: Wealth, Return on Capital and Returns on Investments,
+ A philosophical discourse, Availability Bias, Circle of Influence, and More.
A digest of some interesting reading material from around the world-wide-web. Your weekly dose of multi-disciplinary reading.
Hola!!
Just a quick heads-up that I have jumbled some of the sections in this issue, simply to maintain continuity of thought.
Some of the links are long talks/conversations. I do hope that you make the time to hear/read them. Trust me, they’ll be well worth you time.
Let's jump in.
Section 1: Investing Wisdom
What would you do if you had a windfall large enough to make you wealthy (whatever your definition of wealthy was, but at the minimum, enough for you to not having to work for the rest of your life at current expenses)? The author of this article would have donated it all. Sounds absurd, doesn’t it! It won’t after you read why he would do so. Quite an eye opening read.
Two very interesting reads on the importance of returns on capital in a business, and for an investor:
In this interview with The Motley Fool, Michael Mauboussin goes into the details of ROIC and how it relates to value creation in business. He explains the popular notion of high ROIC being an indicator of a quality business, but also makes the surprising observation that, in and of itself, high ROIC does not lead to relative share price outperformance. The discussion also covers some interesting topics like management compensation, things to focus on while meeting managements, how to avoid value traps, decision making (heuristics and prospect theory), as well as forecasting (importance of base rate, or inside vs outside views). All in all, a well-rounded conversation that is worth returning to every once in a while.
"In the long term, the return an investor gets from a business will roughly equal the return the business itself earns on its capital."
For a very long time, I used to carry a slide explaining the above to investors. It is a well-known, but highly under appreciated aspect of investing - especially in mid/smallcap segment. An investor who understands and implements this, and has a very long investment horizon, will have among the highest returns per unit of stress, in my view. A very powerful concept explained simply here.
Usually, when two investing minds come together, the conversation revolves around investment journey, ideation process, market views, and the likes. This one, however, is different. While it does start off with a discussion around investments, it then turns towards philosophy - not investment philosophy, but the philosophy of life. The conversation draws from a number of eastern schools of philosophies like Buddhism, Vipassana, as well as Hinduism. A very enlightening conversation that you can watch/hear/read here. Below is a snippet from this conversation:
Life is evolution. It is like when the raindrop falls, and then it becomes part of the river, and the river goes to the sea, and the sea gives out steam and it becomes the cloud, and it comes back. So, it is a cycle, and discovery of how we are part of this grander cycle of life is really the purpose and the journey that we have. And if you tell the drop of water that you have had such a long journey from the Himalayas to the Bay of Bengal to join with the sea, it is not a journey but a flow which was meant to be. And you have choices along the way of whether to take this track or that track. Do I end up in Arabian Sea or Indian Ocean? But we are going to end up in the sea, one way or the other. It is part of nature’s design.
If you think of it, the way we are designed so beautifully that the first 25 years of your life you are only thinking about yourself – I, me, myself. And you are learning, growing, getting an education, and so on. Then you find your partner and suddenly you start transferring your thoughts and attention to that person. Then you have children, and it suddenly multiplies. Then it multiplies into your organisation, then it multiplies into your society, then into your country, your world, your universe.
That is the nature of the way we are designed to evolve, to get closer and closer and closer to what I call the sea. And you realise that, like the metaphor I used of the gamification of the world, you are the wire which is transmitting the electricity which is there in the world. We talk of solar power, but we are also solar powered in a sense, and a part of this circle of life. We have to be the flow.
Section 2: 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. Below are articles that first appeared in the eighth issue of TWB:
This article talks about the impermanence of economic dominance and moats. It makes a very interesting point: sometimes moats don't get eroded, but simply by-passed. New castles with better moats come up elsewhere.
At a dinner, Charlie Munger asks the following to a group of investors: a famous investment house set up a 'best ideas' fund multiple times - a multi-fund-manager fund where each fund manager bought his best ideas. However, the fund never managed to do well. Why? Famed investor Mohnish Pabrai narrates this story and talks about why intensive stock research can be injurious to your financial health.
Section 3: Mental Models & Behavioral Biases
Mohnish talks about the power of repetition in the beginning of the above talk. When we hear the same thing over and over again, we begin to believe in it, even though it may not necessarily be true. That is a bias called 'Availability Bias'. The good folks at Farnam Street have put up a nice explanation about this heuristic, and also explain how we can avoid it.
Section 4: Personal Development
From the above article on Availability Bias: 'It explains why the five people closest to you have a big impact on your worldview.' Given how important this close circle is, it is imperative that we take utmost care in carefully curating it. This twitter thread provides nine steps to improve your circle of influence.
"Saying no saves you time in the future. Saying yes costs you time in the future.
No is like a time credit. You can spend that block of time in the future.
Yes is like a time debt. You have to repay that commitment at some point.
No is a decision. Yes is a responsibility."
We've discussed this in a coupe of issues in the past: being additive is easy, but being subtractive is being productive. When it comes to decisions, commitments, desires etc, Less is More. Here is an interesting story involving Pablo Picasso and Apple about how focus and simplicity can lead to outsized results in life and business. Food for thought:
Jony Ive says Steve Jobs key trait was “focus”.
And the way Jobs measured it in others was to ask “what thing that you truly care about have you said NO to?”
Quotable Quotes
Living in the moment:
Reading:
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That's it for this weekend folks.
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If you have any feedback/interesting articles that you’d like to share → simply reply to this email/leave a comment below.
Have a wonderful week ahead!!
- Tejas Gutka
[Jun 19, 2021]