[The Weekend Bulletin] #87: Sustainably Unsustainable, The Opposite of Truth,...
+ Portfolio Construction, Betting, Optimism, Productivity, Pets, and more.
A digest of some interesting reading material from around the world-wide-web. Your weekly dose of multi-disciplinary reading.
Section 1: Investing Wisdom
Sometimes the opposite of truth is also a truth - like markets always go up in the long run. Buy and hold is a wonderful strategy, but it has its own pitfalls, as this thread reminds us. Data like this is what makes investing Simple, But Not Easy.
[P.S. before you pull out your swords against the buy and hold guys, remember that the thread is very selective in the data that it looks at. If you were to change the start date by few months, the results could be entirely different. Which brings us to another important point - your start date matters in the returns that you earn. The thread also ignores the potential purchases that could have been made during market falls - no body invests just once in their lifetime.]
The underperformance of value investing is widely discussed. On the other hand, the relentless rise in growth/technology stocks has puzzled many investors (Jeremy Grantham once again called the market a bubble recently). Momentum seems to be a strong factor in the markets - stocks that go up continue to do so, even at the cost of astronomical valuations. On the other hand, sections of the market remain completely ignored, despite dividend yields cross risk free rates. What is driving this dichotomy in the markets? Helicopter money? Pandemic? Reddit? What if I told you that all this is the result of shortening investment horizons? Don't believe me? This article makes some research backed assertions.
A portfolio managers opens up about his portfolio construction process. In a short podcast (transcript available), he defines a 7-step checklist that his firm uses to build global portfolios. This is a very interesting and thoughtful way of approaching portfolio construction.
One important attribute that long term investing demands from investors is that of Optimism. Without a belief in a bright future, it is nearly impossible to invest in it. Despite its importance, optimism is not easy to hold on to - especially in the face of crisis. On the other hand, being a skeptic is easy (and for some, fashionable). This article provides some good fodder for optimism - at any time in general, and in the 21st century in particular. Till date, it's one of the finest pieces on the subject that I have read.
A number of businesses let go of employees during the pandemic. Some enforced unpaid leave, while some others moved to variable pay or hourly wages. While the pandemic forced businesses to take such extreme measures, some have resorted to similar measures on a sustained basis. Underinvesting in employees is just one of the many unsustainable practices (underinvesting in the future is the most common). Such practices can go unnoticed for extended periods, with the business reporting higher than sustainable profits or cash flows. In the long run, however, such practices are unsustainable. As investors, it is important that we pay attention to such unsustainable practises(to avoid financial ruin), some of which are listed in this article.
Section 2: Mental Models & Behavioral Biases
Inspired by Annie Dukes 'Thinking in Bets', this memo by Howard Marks is a mini masterclass in decision making, games (understanding skill vs luck), and betting on odds. It talks about the various aspects of decision making, compares investing to betting, and also talks about different types of games and how they relate to investing. Most importantly, using probabilities, it explains why the best business may not be the best investment. Andrew, Howard's son, also pends a part of this one. Highly Recommended.
"Investing is a game of skill – meaning inferior players can't expect to be above average winners in the long run. But it also includes elements of chance – meaning skill won't win out every time. In the long run, superior skill will overcome the impact of bad luck. But in the short run, luck can overwhelm skill, and the two can be indistinguishable."
"Everyone will have both winners and losers. Various factors will determine the ratio. But the ability to assess propositions can enable you to win more on your winners than you lose on your losers. The size of your bet should take into account both the probability you are correct about who's going to win and the asymmetry of the potential payout. “Getting your money in” when you have a great hand is one of the most important keys to winning at poker. You don't get many great hands, so when you do, you have to be sure to take maximum advantage."
"It's important to have discipline when risking your capital, so that you can survive unfavorable periods and still be around when the winners show up. You have to avoid the risk of ruin, and this requires solid discipline (you must “never forget the six-foot-tall man who drowned crossing the river that was five feet deep on average”). To that end, good play isn't just a function of relying on the expected value of your holdings and pure math, but also of thinking broadly about risk. Would you bet all your money on an 80/20 favorite?"
"You need the discipline to follow a process and the wisdom to accept that no process is sure to produce good results."
Section 3: Personal Development
The best productivity advise: don't try to be over-productive. As much as we want to make the most of every minute, our brains don't work that way. The most effective way is to find 3-4 hours for solid focused work and then disengaging.
Using pets as an analogy, this article explains how to stop carrying the burden of a number of unfinished activities, and let go. After all, not just in your daily work-routine, but in life as well, doing less lets you do more.
Here is a good list of self-talk that should be placed in such a manner (in your daily journal, on your desk, as you phone's wallpaper etc) so as to reminded about it frequently.
(please quote the source if you intend to share this on social media or whatsapp or the like).
Source: Patrick OShaughnessy
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. Below are articles that first appeared in the fifteenth issue of TWB:
We all know that it is difficult to hold on to a stock that is very volatile or one that sees sharp price corrections. However, can stocks that run up too much too soon also be bad for investors in the long run? Read on to find out.
Quotable Quotes
Your Life Is Not A Journey
"The existence, the physical universe is basically playful. There is no necessity for it whatsoever. It isn’t going anywhere. That is to say, it doesn’t have some destination that it ought to arrive at.
But that it is best understood by the analogy with music. Because music, as an art form is essentially playful.
We say, “You play the piano” You don’t work the piano. Why? Music differs from say, travel. When you travel you are trying to get somewhere. In music, though, one doesn’t make the end of the composition, the point of the composition. If that were so, the best conductors would be those who played fastest. And there would be composers who only wrote finales. People would go to a concert just to hear one crackling chord… Because that’s the end!
Same way with dancing. You don’t aim at a particular spot in the room because that’s where you will arrive. The whole point of dancing is the dance.
...
If we thought of life by analogy with a journey, with a pilgrimage, which had a serious purpose at that end, and the thing was to get to that thing at that end. Success, or whatever it is, or maybe heaven after you’re dead.
But we missed the point the whole way along. It was a musical thing, and you were supposed to sing or to dance while the music was being played."
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That's it for this weekend folks. Have a wonderful week ahead!!
- Tejas Gutka
[Aug 14, 2021]