[The Weekend Bulletin] #94: Believing the Unbelievable, Extending the Trend,...
...managing decisions, distancing from people, 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
Most of us, me included, often look at prices as signals. We think that the prices tell us something, and frequently assert that it can’t go up or down any further. This collection of charts is a reminder that such assertions are far from true. The market doesn’t have to do anything, least of all what you think it should do. The market does what it wants, when it wants to do it. Having a few extreme charts on your wall can serve as a helpful reminder that there is no such thing as “can’t,” “won’t,” or “has to” in markets.
There are two opposing factors in investing - mean reversion and momentum. As the name suggests, mean reversion means that things tend to go back to a normal/average. Momentum, on the other hand, suggests that recent performance can continue further in the future. Both can be true over different time horizons. That's good as far as prices are concerned. However, when it comes to forecasts, momentum (extending the trend) can be a dangerous tool, as this article explains. Investors should be cautious in believing the forecasts of companies that have either done too well or too bad in the recent past.
This fascination conversation titled 'paint outside the lines' with a film-maker, a travel entrepreneur, a venture capitalist, and the producer of an award winning documentary (all of which is the same person) makes for a very interesting listen. A common theme across this conversation is the importance of betting on people over anything else. Contrast this with the thread by Ho Nam shared last week for a contrasting view. The conversation also reminds that sometimes the best perspectives come from someone outside the industry, rather than within.
Section 2: Mental Models & Behavioral Biases
Decision making is one of the key responsibilities of the modern knowledge worker. The number of decisions to be made today are far more than at any time in history. More importantly, the quality of these decisions matter a lot to our personal and financial well-being. However, as we make more decisions, we reach decision-fatigue faster. The quality of our decisions fall as we make more of them. How then do we ensure that we make high-quality decisions for the things that matter? This article suggests that we create systems to automate a number of our regular decisions, creating the mental band-width to keep up the quality of decisions. The author also argues that these systems will also help you lead a better (healthy) life and do more of the things that matter to you.
Section 3: Personal Development
“It is inevitable if you enter into relations with people on a regular basis...that you will grow to be like them. Place an extinguished piece of coal next to a live one, and either it will cause the other one to die out, or the live one will make the other reignite. … If you consort with someone covered in dirt you can hardly avoid getting a little grimy yourself.” — Epictetus
We unconsciously become what we are near. If you work for a jerk, sooner or later you will become one yourself. If your colleagues are selfish, sooner or later you become selfish. If you hang around someone who is unkind, you will slowly become unkind.
Few things are more important in life than avoiding the wrong people. It’s tempting to think that we’re strong enough to avoid adopting the worst of others. But that’s not how it typically works. The changes are too gradual to notice until they are too large to address.
Over a long enough timeline, bad people eventually destroy themselves. They ignore relevant data because it doesn’t agree with them, they take unwarranted risks, they end up alone, without any friends. They might achieve external success, but they lack inner calmness and clarity.
Just as you watch what you put into your body or your mind, closely look at who you spend your time with. Are they kind? Are they honest? Are they thoughtful? Are they helping you or pulling you down? Are they reliable? Are they clear thinking? In short, are they the things you want to become? If not, don’t tempt fate, cut bate.
Distance yourself from the people you don’t want to become. Cultivate people in your life that make you better. People whose default behavior is your desired behavior. If circumstances make this difficult, choose among the eminent dead.
Source: Sunday Brain Food by Farnam Street
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 #22:
Two analogies from cricket - a sport the nation is crazy about - to explain the art of investing.
Investing, a long inning of a test match: A colleague pens a newspaper column asking why triple centuries are only common to test matches and what that means for your net worth.
Investment Approach - Dravid vs Sehwag: Some of us are born with exceptional skills; for the rest of us, a learnable, repeatable, and reliable process needs to be followed. An interesting perspective of what that means for investors.
Section 5: Readworthy Passage
Let's read together a random, but read-worthy, passage from a randomly picked book.
Why does a tennis player always wear his lucky shirt in the finals?
In one experiment, American psychologist B.P. Skinner fed pigeons small quantities of food at regular intervals. After some time the pigeons began to behave superstitiously. If a pigeon was bobbing its head when food appeared, it got the idea that bobbing its head must have made the food appear. The pigeons continued with the behavior that worked - every time they performed the behavior, food appeared. But food appeared independent of what the pigeons did. Skinner wrote in "Superstition" in the pigeon: "There are many analogies in human behavior ... A few accidental connections between a ritual and favorable consequences suffice to set up and maintain the behavior in spite of many nonreinforced instances."
Are the right incentives important?
Incentives act as reinforcers. Charles Munger tells a story about the importance of getting the incentives right:
From all business, my favorite case on incentives is Federal Express. The heart and soul of their system - which creates the integrity of the product - is having all their airplanes come to one place in the middle of the night and shift all the packages from plane to plane. If there are delays, the whole operation can't deliver a product full of integrity to Federal Express customers. And it was always screwed up. They could never get it done on time. They tried everything - moral suasion, threats, you name it. And nothing worked. Finally, somebody got the idea to pay all these people not so much an hour, but so much a shift - and when it's all done, they can all go home. Well, their problems cleared up overnight.
John invested in a biotech start-up that went sour and he lost money.
After a success, we become overly optimistic risk-takers. After a failure, we become overly pessimistic and risk-averse - even in cases where success or failure was merely a result of chance. Good consequences don't necessarily mean we made a good decision, and bad consequences don't necessarily mean we made a bad decision.
The next time someone presents John an investment opportunity in a biotech start-up the chances are he will decline. He associates the new proposal to his earlier experience. And since people tend to believe that the future mirrors the past, he declines. But what happens if John's first investment made him a lot of money? Wouldn't John associate the new proposal to his old pleasurable experience? Isn't he therefore more likely to invest? This automatic association to what worked in the past causes people to under-react to new conditions and circumstances.
- From the book SEEKING WISDOM: FROM DARWIN TO MUNGER by Peter Bevelin
"You only need to know the direction, not the destination.
The direction is enough to make the next choice."
- James Clear
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That's it for this weekend folks.
Have a wonderful week ahead!!
- Tejas Gutka
[Oct 02, 2021]