[The Weekend Bulletin] #90: Paradox of Skill, Illusion of Control, Downside of Conviction, ...
..Why Facts Don't Change our Mind, Six Characteristic of Success, Valuation, Smallcap Investing, 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
Successful Investing requires you to hold two opposite ideas in your head at the same time. There are no blacks or whites in investing, or any absolutes (we looked at this idea in detail in Issue 12). Drawing on this thought, this article highlights that while conviction helps you stay invested, there is a downside to having conviction as well. The lesson: strong convictions, loosely held.
Valuations attract a lot of attention. Investors are constantly debating whether a given valuation is cheap or expensive. The media likes to talk about market valuations. A lot of investing decisions are driven by valuations, to the extent of being invested in the market or staying away. However, as this dated article highlights, the right valuation will only be known in hindsight. Seemingly cheap businesses turn out to be expensive, while seemingly expensive businesses may not be so. The lesson for investors: Valuations tell you nothing about future returns. What matters is the direction of the business over time.
The landscape of small-cap companies is very interesting. Finding and partnering with someone that is building a high quality business that remains hidden from most of the investors is a very rewarding endeavour. Ian Cassel has been a long time proponent of investing in small businesses (microcaps as he calls them, and names his website after). In this essay, Ian reflects on his 20 years investing in microcaps, talks about his research process and averaging up, discusses why holding onto winners is painful, and much more. I really enjoyed this article, and hope you will too. Below are some quotes from the article:
When you find a winner, people will say you are wrong. When you hold a winner, people will say you are stupid. When you get rich from a winner, people will say you got lucky. You tell them you love being wrong, stupid, and lucky.
Alpha is generated by being just a little bit different in a disciplined and thoughtful way.
Perfection is not the goal. If you aren’t taking some small losses from time to time you aren’t taking enough risk.
The two most important frameworks or mental models I try to apply is combining tailwinds (top-down) and scarcity (bottom-up). When these two are combined they become powerful drivers of returns.
Nothing screws with your head more than watching something you used to own outperform the things you own. Losers aren’t as painful because you can only lose what you invested. When you sell winners too soon you can miss out on making multiples of your invested capital.
It is easy to think of the Roblox example and think winners are these long linear stairways to heaven. But as many of us know, the biggest winners also have the biggest drawdowns.
A quick short thread on the six characteristics required for success as aggressive investors from the 1963 book The Strategic Investor.
Section 2: Mental Models & Behavioral Biases
"When the facts change, I change my mind. What do you do sir?"
This is a rather famous quote in the investing circles highlighting the importance of letting facts drive our decisions rather than our biases. However, we all know that it is not that easy to acknowledge a change of facts. This article tells us why this happens, what is it that changes our opinions faster than facts can, and why we should be kinder first and right later. Going back to opposing ideas:
“Faced with a choice between changing one’s mind and proving there is no need to do so, almost everyone gets busy with the proof.”
Let’s take a simple example: say you played the lottery and in one scenario, you picked the numbers and the second you let a random number generator pick them for you. Let’s assume you won in both scenarios– which one would you be happier/prouder about? Most people would be happier in the first scenario, even though the odds in both the scenarios were the same. This happens due to a bias called The Illusion of Control. This short and pointed article explains what this is, and why we should neither be too proud of success, nor too dejected by failure.
Section 3: Personal Development
The Paradox of Skill states that even though people may becoming more skilled at a certain pursuit, it is often more difficult for them to succeed because their competition is also becoming more skilled. Talent can take us only so far. From a business perspective, a good product is only a good starting point and doesn't guarantee success. To quote from last week, more often, the difference between number one and number two in most industries is culture.While last week we looked at culture from a business perspective, let us now look at it from an individual perspective. This article explains why culture should matter to employees, or to anyone that seeks to win in a hyper-competitive world. A very nice read.
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 eighteenth issue of TWB:
Some of my favorite interviews/talks (worth bookmarking):
How to get rich: what started as a tweetstorm, ended up being a long (over 3.5 hours) interview podcast, which was later transcribed in to a giant article. A great meditation on the subject of wealth.
Howard Marks: Luck, Risk and Avoiding Losers [The Knowledge Project Ep. #53]: A stimulating conversation between Shane Parish and Howard Marks where Howard Marks discusses risk assessment, how to think different than the crowd, and the three mighty dares that separate the successful from the also-rans.
Grant Williams in Conversation with Anthony Deden: An enriched interview of a media-shy investor who opens up about everything, from his investment journey, to finding the right partners, to his investment philosophy and process. This one is quaranteed to sweep you off your feet.
Tom Gayner: "The Evolution of a Value Investor" [Talks at Google]: Another fabulous talk of an investor describing his journey, defining is investment philosophy and outlining his investment process.
Quotable Quotes
Pen isn't mightier that the sword. Pen doesn't win battles and swords don't write poetry. Mighty is the hand that knows when to pick the pen and when to pick the sword.
- Gaur Gopal Das
(h/t: James Clear)
* * *
That's it for this weekend folks. Have a wonderful week ahead!!
- Tejas Gutka
[Sep 04, 2021]