[The Weekend Bulletin] #92: The Revisionist
A look back at what matters most in investing, and Malcom Gladwell
A digest of some interesting reading material from around the world-wide-web. Your weekly dose of multi-disciplinary reading.
Why do we revise? To make better connections. Also to discover what may have been missed earlier. Regular readers are aware of the importance that this bulletin places on reviewing old materials - we dedicate an entire section for it.
This weekend, more than one sections are dedicated toward revisiting. Better connections - yes, but more importantly, most of what we'll read in this issue sits at the core of investing. It's the stuff that matters the most. And of course, the usual filter of interestingness has been applied here as well.
Old wine in a new bottle - some may refer to the links below. I'd say that the bottle doesn't matter, so long as the wine is good. So let's drink up.
Section 1: Investing Wisdom
What's the most important thing in investing? Capital? Philosophy? Resources? Access? Talent? When I was younger (and naive), I would have picked up one of those things. Now that I am not (young), I'd say it's character. What good will a philosophy do, if you cant stick to it? What's the point in having capital, when price movements dictate your actions? Character is the bond that holds all of these inputs - capital, philosophy, access, talent etc - in their right place (Warren Buffett: EQ>IQ). Character is what reminds you of your north star, just when you are about to lose sight of it. Here's what you need to build a strong character.
What's the next important thing in investing? IMHO, compounding. And what's the most important rule of compounding - to not disturb it. Which would mean: no rebalancing, no trimming, no in and out. What else could it mean? This article provides a few uncommon views on compounding, including investing in IPOs. Loved it.
What else disturbs compounding? Leverage. It is believed the magnify both the downside as well as the upside. But is that really the case? This article provides some data on what leverage has done for institutional and individual clients.
What's the worst enemy of Leverage? Volatility. Is volatility a risk? Only if you are leveraged or have a short time horizon. What constitutes risk then? Uncertainty. This article discusses Mohnish Pabrai's framework to differentiate between risk and uncertainty. Howard Marks would nod in agreement; Phil Fisher may not.
Lastly, what gets the most attention in investing? Returns, yes. But what else? Valuations. What really is a valuation? A number from today, multiplied by a story about tomorrow, says Morgan Housel in this well written piece. The trick when forecasting is realizing that’s what you’re doing.
Further reading on the subject:
I hope at the end of this, you see that not only was the wine good, but the bottles were also fancy. I loved the style of writing of each of the above articles. I hope you did too.
Section 2: Mental Models & Behavioral Biases
Most people reading this bulletin are finance blokes. So we all understand the time value of money, and the opportunity cost of money. However, if you were to turn this on its head, not many appreciate the concept of the money value of time. Just as there is an opportunity cost of money, so is there an opportunity cost of your time. Read on to find out what it means.
The title of this issue has more to do with a podcast than the links shared herein. Persuaded by two ladies, I started listening to Malcom Gladwell's podcast - Revisionist History. Each episode re-examines something from the past — an event, a person, an idea, even a song — and asks whether we got it right the first time. In doing so, we are left with numerous behavioural lessons from real life examples. Highly recommend this ongoing study of history and behaviour.
Section 3: Personal Development
So you want to buy a car, or phone. You look around, you like a few options. Then you ask your network for suggestions and feedback. You get a lot of contradictory views. You are now totally confused. What do you do to simplify the decision now? This article suggests that you get quiet.
The lesson from the above: do not fear taking risks. Everything is risk until it works. This article explains further.
Section 4: 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 the twentieth issue of TWB:
Outliers - not the book by Malcom Gladwell, but data points that lie at the edge of a normal distribution - is often under-appreciated and generally mis-understood concept. And therefore it has a significant impact on outcomes. For instance, consider this business that I had a read about in the aftermath of the global financial crises (and therefore may not completely recollect all the details). It used to provide short term bridge loans to subprime patrons looking to buy a house and then help them get a mortgage on the house. Since it made loans that were short term in nature, the businesses was funded also with short term liabilities mostly, leading a proper match of assets & liabilities. However, as the GFC unfolded, patrons could not get mortgage on their houses and the company could not rollover its borrowing - leading to bankruptcy. A six-sigma or higher event led to the eventual death of a business. Indeed, it was an unforeseen event - and that is what black swan events are. Understanding the concept of black-swan events can help us mitigate such fatal risks. This article explains the concept a little succinctly than Nasim Taleb himself:
You can read NNT's original version here.
Veteran investor Durgesh Shah looks back at history for some important investment lessons. He talks about things to look at while making an investment as well as pitfalls to avoid. What better time to look at mistakes than the current downfall.
Section 5: Readworthy Passage
Let's read together a random, but read-worthy, passage from a randomly picked book.
CHARACTER PREDICTS YOUR FUTURE
Many years ago, I worked in the music industry in New York City. Then I left.
Fifteen years later, I came back to New York and met with many of the people I hadn’t seen since then.
Every single one of them had ended up about where you’d expect, based on their character.
The disciplined ones had succeeded. The temperamental ones had flamed out. The ones who’d acted like leaders were now leaders. The ones who’d blamed everyone else for their lack of results were still doing just that.
It didn’t matter where they were before. What mattered was the direction they were headed. Some people had been unpaid interns at the bottom of the ranks, but their determination and smart approaches had led them to the top. Some had been famous or successful but seemed so fragile or combustible, and yep — they’d come tumbling down.
Character isn’t fate or destiny. Character isn’t DNA, decided before birth. Character is the result of your little choices and little actions.
How you do anything is how you do everything. It all matters.
Your actions are completely under your control, and seem to be the best indicator of future success.
- From HELL YEAH OR NO by Derek Sivers
“To be strong, you have to be like water: if there are no obstacles, it flows; if there is an obstacle, it stops; if a dam is broken, then it flows further; if a vessel is square, then it has a square form; if a vessel is round, then it has a round form. Because it is so soft and flexible, it is the most necessary and the strongest thing.”
- Lao Tzu
Here's Bruce Lee on the same subject:
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That's it for this weekend folks.
Have a wonderful week ahead!!
- Tejas Gutka
[Sep 19, 2021]