[The Weekend Bulletin] #104: Rebooting 2021 - Links Worth Revisiting
A collection of some of good articles worth re-reading.
A digest of some interesting reading material from around the world-wide-web. Your weekly dose of multi-disciplinary reading.
This is a collection of some of the best (in my opinion) articles that we've read through the course of the last one year, which makes it an unusually long issue (will surely be truncated by your email service provider).
Other than the division in to relevant topics, there is no order to the articles. Feel free to explore the way you deem fit.
Rather than being read over a weekend or a week, this one is meant to be consumed slowly, over time. The ideal way would be to just bookmark this issue and then return to it for a deep dive into a topic that you wish to learn more about.
Lastly, a reminder that the next issue will hit your inbox on Jan 08th.
Section 1: Investing Wisdom
Investor Attributes
Let's start with an interesting exercise. Say you are a fund manager who is evaluating four stocks (denoted by A-D), one of which you have to buy for your clients. Your basic due diligence says that all four are good businesses and that their respective valuations are attractive. By some stroke of luck, you also get your hands on to the future data of relative returns and volatility of these stocks, as shown below. Using this data, which stock would be the best investment in your view?
Based on the above data, it seems that Stock D is one of the best investments. However, if you chose stock D, you'd end up with the lowest returns, lower than the benchmark also. This exercise has some very interesting implications about conviction, confidence, and courage, as explained in this article.
Towards it end, the above article asserts, " Conviction and confidence are not enough to win the day—courage is also needed, and most needed precisely when it’s hardest to muster." This touches upon an important aspect of investing, and life in general, that is usually not spoken about - The 'F' word: Failure. Failure is inevitable, but it is also not everlasting, as the two articles below remind us:
A thread about how some of the most successful investors faced extended stretches of failure, to the point of almost quitting the game altogether.
Paul Tudor Jones, one of the traders profiled in the above thread, gave a commencement speech highlighting how failure was devastating, but also a key element to his life's journey. He also talks about the two types of failures, and how most successes are the children of failures. Touching, and enlightening.
A couple of interesting articles on the topic of skill in investing:
Of all the decisions an investor makes, the one that requires the most courage is an implicit decision - to do nothing. The benefits of holding on to a good business are widely known, however, very little is spoken about the conviction to remain invested. This dated article provides some fodder.
In case you are wondering why holding requires the most courage, this thread by Prof. Bakshi has the answers
Peter Kaufman (Author of Poor Charlie's Almanack) made a very interesting presentation titled 'An Unsung Hero'. This is an extra-ordinary story of man whose work touches our lives even today, more than a century later. This is also a story of an extra-ordinary gift of vision and diligence (macro and micro). Given the scale of his work, it's unfortunate how little we know about him. You can either watch the talk below, or read it as an essay here.
Seven Sins of Fund Management: This paper discusses seven commonly observed behavioural biases amongst investors. James Montier provides research backed as well as anecdotal data to help us avoid making these mistakes. If you haven't read his 'Little Book of Behavioural Biases' then this paper (100 pages - a mini book in itself) is definitely a must read. For others, the first 5 pages will serve as a good reminder. Either ways, a good resource to have in your library.
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.
Jason Zweig reminds us in a recent column that "The point of investing isn't to finish first. It's to finish."
Discipline in investing:
This article highlights the three elements that together make up our true investment horizon. Investors would do well to consider each factor carefully for a smooth and rewarding investment journey.
It very well known that our experiences shape our perceptions. In fact, experiences make up a lot of our mental framework. But did you know that your experiences also influence how you think about money? And if that is true (which it is), then it is pertinent to understand that personal finance is truly personal. You cannot borrow your portfolio from someone else.
Life is difficult. Money is hard. You have a lifetime of experiences pushing and pulling you different directions. Don’t fool yourself thinking you have it all figured out.
Market Cycles / Timing
In this video, Charlie Bilello talks about "the story of Bob, the world's worst market timer. Follow along on Bob's journey as an investor who had the misfortune of only investing his savings at the peak of the stock market just before a crash. The results may surprise you."
We all know that markets are cyclical. We also know that the best time to buy is when there is blood on the street. However, when an economy is brought to a grinding halt, how does one access the value of businesses? How does when know when there is enough blood on the street? The answer to all these questions, and more, form part of this wonderful presentation. It's slightly dated, but a timeless read nonetheless. It covers a few important mental models that can help investors find answers to the questions raised here, and a few others: Investing by Design
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.
A very interesting thread on 'What they don't tell you about microcap/smallcap investing' - Smallcap investing is alluring, however, few think about the risks involved (other than volatility, and sharp drawndowns). This thoughtful thread lists some of the things that investors should bear in mind while investing in smallcaps (not meant to scare you away from smallcaps but rather to provide a checklist for you to keep handy).
Valuations
Two interesting but opposing views on the use of DCF as a valuation tool (although you'll find some commonalities in both):
Michael Mauboussin and Dan Callahen argue in their latest paper that “everything is a DCF model”.
Anand Sridharan, on the other hand, argues that DCF is great in spirit, but not so much in practise.
Investing is all about the future, and the future is unpredictable. In addition to this the general over-confidence that we have on our own ability as well as our over- optimism/pessimism about the future, makes forecasting future growth an ardent task. While there is no exact science to forecasting, the following five part series lays out a simple frame-work to reduce such forecasting errors:
FORECASTING GROWTH PART I: THE SIREN SONG OF GROWTH - we are all forecasters, whether we explicitly forecast or not. We are usually over-optimistic about the future, making forecasting error-prone.
FORECASTING GROWTH PART II: USING BASE RATES - the inside view and the outside view in forecasting.
FORECASTING GROWTH PART III: PROBLEMS WITH BASE RATES- whats good about base rates is also a problem with them.
FORECASTING GROWTH PART IV: BEYOND BASE RATES - marrying the inside view with the outside view.
FORECASTING GROWTH PART V: CATEGORY KILLERS & POSITIVE FEEDBACK LOOPS - when to ignore base rates.
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.
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.
Business Attributes (Return on Capital, Pricing Power, Moat, Culture etc)
Imagine 2 businesses, S and F: S is a Slow Growth business. Its earnings grow at 6% per year. F is a (relatively) Fast Growth business. Its earnings grow at 9% per year. Both businesses are trading at 15 times earnings. Which is a better investment? Intuitively, F looks like a better bet, but as you would have figured, the answer is not that straightforward. Read on to find out why.
Nicholas Sleep has been an early and strong proponent of 'scaled economies shared'. His letters make for a very educating read. This thread discusses a section of his June 2009 letter titled "Empty Vessels and a Quieter Approach". It talks about how some businesses, by virtue of the strength of their model, need not make noise about their services in order to grow.
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.
We all know and understand moats. There is a lot of literature on identifying and analysing moats. There's also some literature on the durability of moat (we've looked at it in issues #8, #23, and #50). However, even as we focus on the business and it's moat, we shouldn't forget about the durability of demand for it's products. This article explains further.
Pair the above with the following from Issue 15:
Most things about the future are uncertain, except for one thing - change. Change is unforeseeable, but inevitable. And from this universal truth rises a risk in investing that may lead to the creation of a value trap. Often, business managers and investors fail to notice a change in consumer trends, thereby both continuing to invest in well known brands that are well on their way to obscurity. One way to avoid this trap is to understand the difference between recognizability and relevance. This article explains how.
Traditionally, well known consumer brands are considered to be a moat. Such moats are thought to be everlasting. However, what is a cool brand for one generation, may not be so for the next one - Rasna vs Tang if you've been around in India for over 30 years. Putting the above in context, this article asks if your company is demographically advantaged, or demographically challenged? An interesting perspective.
Portfolio Construction
While you may make great profit margins on individual trades, either with a high portfolio turnover or without, these margins may not have a meaningful impact on your overall portfolio returns if this position forms a very small part of your portfolio. That's what this article drives - the importance of position-sizing in portfolio management. It also provides a simple and practical framework to apply the principle to your existing portfolio.
Compounding/Multibaggers
This thread provides a simple yet powerful framework to identify compounders. An insider condenses his experience of working for a company that went 30x in ten years (wasn't a tech company) in to seven simple lessons.
Lesson 4 in the above talks about the second act, which is elaborated here.
Morgan Housel is a master story-teller, and one of the best financial writers of our time. In his latest, he draws two lessons from nature about cycles and compounding. A very insightful read.
This short note presents some very interesting data on multi-baggers. It shows that multibaggers are not that rare - about 45% stocks increased their market values by 5x, 30% of those increased their market value by another 5x, 30% of those increased their market value by another 5x, and so on... Does this mean that multi-baggers are easy to find, or that using a momentum strategy, if you buy stocks that have increased their market value by 5x recently, you will end up multiplying your wealth at a similar rate in the future as well? The article will tell you why it isn't so easy (my favourite quote on investing: simple, but not easy).
There is a certain advantage that experience accords - the ability to identify patterns. This ability to connect dots, to group things, makes the task of selection easier. Here are 15 patterns that will help you identify profitable investments - this one is worth bookmarking.
Risk & Performance
This article explains that our understanding of risk is incomplete. It posits that there are two types of rIsks - fast and slow, and paying attention to one over other can lead to suboptimal decisions - in investing and in life. Which risk are you more focused on?
In a similar vein to the above, there are two ways in which you can measure performance/achievement. Your choice of the measure has a very large impact on your life and happiness. This is probably the most under-rated lesson in personal finance that this article explains. The following just stayed with me:
"I recently had dinner with a financial advisor who has a client that gets angry when hearing about portfolio returns or benchmarks. None of that matters to the client; All he cares about is whether he has enough money to keep traveling with his wife. That’s his sole benchmark.
“Everyone else can stress out about outperforming each other,” he says. “I just like Europe.”
Investor Interviews / Presentations / Letters
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.
In episode 2 of The One Percent Show, Vishal talks to Vinod Sethi (ex MD & CIO of Morgan Stanley India), someone who has maintained a low public profile all these years. In terms of the quality of the conversation, this one picks up from where the first episode ended and raises the bar higher - totally worth the 2.5 hours length of it.
There are a multitude of investment strategies, and most of them work. In other words, investing is a game that has many games within it. Your success, or lack of it, then depends on the game that you choose. In this talk, Yen Liow of Aravat Global ((whom we’ve met in multiple issues starting with #43) talks about a game that his firm has chosen. In doing so, he explains a nifty little framework to marry the volatility in share price with the volatility in intrinsic value to find investment winners.
Compliment the above talk with this very fine article about finding a game you can win in investing.
The deepest of insights can often come from the simplest of places. For instance, analysing codes on the back of envelopes in which CDs were shipped back in the days helped the team at Marathon Partners understand customer churn at Blockbuster, which eventually helped them become early investors in Netflix. This conversation reveals the many benefits of scuttlebutt investing. Very informative and highly recommended listen.
This article is a nifty little write up on Seth Klarman, the investor and his investing style. It details the various perspectives laid out by Seth on valuing a business, including notes from his book. Think of this as a crash course into Seth's investing process.
He couldn't walk, talk, move a finger, go to the bathroom or even breathe without mechanical assistance. Other than a few muscles in his forehead and face, he was completely paralysed. His condition, however, did not stop Jack from becoming a proficient investor. In an article titled The Soul of an Investor, journalist and writer Jason Zweig profiled this extra-ordinary investor.
In this 30 min talk, Yen Liow of Aravt Global (whom we first met in issue 43) provides some valuable advice on how to be a right tailed (high returns over a very long period of time) investor. In addition to the usual concepts like investment philosophy and process, the talk also touches upon a number of interesting concepts like not fighting fair fights, and tools that can be used for surviving and benefiting from volatility.
The shortcomings of various valuation methodologies are well known and widely discussed. However, there is one short-coming that, to my mind, is usually under-discussed.
@SoumilZaveri @permanentcap DCFs cannot capture the ability of a management to redeploy cash flows into ROIC accretive lines of business that are adjacent to the current business.This is just one of many 'upsides' that valuations cannot capture. More broadly, these 'upsides' can be termed as 'Optionality' and can be grouped into a few different categories. This memo from Shawspring Partners provides the details with examples.
He averaged 23% a year at Contrafund, vs. 12% for the S&P 500. He stormed ahead of the index again as manager of the Growth & Income Fund. He was chosen as a worthy successor of famed invested Peter Lynch at Fidelity. He'd beaten the S&P 500 consistently for nearly eight years.
Later, his hedge fund made 95% in 1997, 59% in 1998 and 38% in the first nine months of 1999 - trouncing the S&P 500, as well as hedge fund giants like Julian Robertson and George Soros.
You’d think that such track-record would have made this fund manager a celebrity. You’d be disheartened to know that his reputation was tarnished while at Fidelity, leading to him resigning. He later started his hedge fund that he managed privately, and delivered returns that not only helped him regain his reputation, but made him a star. This is an incredible story of Jeff Vinik, successor of Peter Lynch with an almost contrary investment style.
In a conversation with MoI Global, Bryan Lawrence lays down the investment philosophy as well as the investment framework of Oakcliff Capital - an investment management outfit that started as his family office. Here's an an interesting snippet from the conversation:
At VALUEx in 2019, one of the presenters estimated that of the $80 trillion of assets out there – equity assets across the stock markets of the world – maybe 1% would fit the category of actively-managed, concentrated value investing. He defined actively managed, concentrated value investing as having even a single 5% position and annual turnover less than 30%. So, of the $80 trillion, maybe $800 billion was managed in this way. More than one-third of that was Berkshire Hathaway. It remains puzzling to me after sixteen years of doing this that you can have these results that are much better than the market if you do this type of work and yet, the number of people doing the work is small and appears to be shrinking.
This article is a great collection of the idea generation process of a large number of investors. What struck me the most while sifting through the list was the fact that how little was quantitative screening/filtering mentioned by these investors.
The entirety of the latest instalment of the Graham and Doddsville Magazinemakes for a very interesting read. It carries three long interviews that are totally worth reading:
Brain Bares of Bares Capital Management (whom we first met in issue 41) discusses his journey into the world of investing, his investment philosophy, and his scuttlebutt based investment process. Two things that stood out for me in this interview is how he things about diversification in terms of drivers of value, rather than industries, and how he treats management as an optionality (embedded call option) in his valuation process.
Sean Stannard-Stockton of Ensemble Capital (whose blog makes for very interesting read and has been featured in a number of our issues) also talks about his journey, philosophy, and process. His interview covers some very interesting aspects like how they size their positions using an algorithm, how they relate a businesses relevance to it's growth relative to the nominal GDP, how they differentiate between good and bad pricing power, and an interesting perspective on disguised businesses, among other things.
Lastly, Dan Rasmussen of Verdad Advisers (who very interesting research was discussed in issue 71 - section 3) talks about his journey and philosophy. His empirical research framework, (one of which was featured in the aforementioned issue), his quantitative research bent, and his portfolio construction framework are some of the highlights of this interview.
In the latest quarterly letter to investors, Mark Tollymore of Tollymore Investment Partners looks at a recent mistake that he made in allocating capital, and recounts a number of red flags that had emerged over time. This letter is an essential reading for two reasons:
We are all victims: Even the best in business are not spared from errors of judgement. Don’t fear them, for they will stop you from making good ones as well. However, be quick to identify such errors (by learning from last mistakes of self and others) and, more importantly, reacting to them.
Boiling frog syndrome: slow changes are hard to notice. That is how Mark notes that there were so many red flags but he couldn’t still react. Each red flag is small in and of itself, and therefore easy to argue against. Collectively, however, they make for big errors in judgement.
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.
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.
30 Years of Investing as a Family with Tom Gayner, Co-CEO of Markel Corporation on the Compounders podcast: Tom is a well known figure in the investing industry, and has been with Markel for over 30 years. His thoughts on investing are very insightful (his annual letters and his talk at Google are very good resources), and so is this conversation that ranges from discussing compounders, culture, long term, and the benefits of investing like a grandmother, among other things.
"Arnold Van Den Berg on Five Decades of Investing and Life Lessons" by MOI Global & William Green: An extra-ordinary life story of AVDB, from having to escape to a foster home where he almost died, to his parents being taken to Auschwitz where they were the only people out of 39 family members to survive, to being beaten up and dealing with depression, to not making enough money, to being a successful investor. This is one topsy-turvy story of sheer resistance and a strong mental framework. It is also unlike any other investor story that you would have read.
Arnold Van Den Berg talks about the struggles of his life and how he used the power of belief to overcome them (he also talks about investing, but the power of belief is what stuck with me) in this podcast . AVDB has been a student of the power of the sub-conscious mind for decades, and he lays down a simple, self-tested, exercise that we can all practice in order to become better at our endeavours. His success at using this method should encourage you to try it out.
This decade old interview of Bruce Greenwald makes for an interesting read for three reasons:
it covers some basics of investing;
"Always start with the assets. Then look at the earnings power and see if it's protected by the assets. And only then, and this is what Buffett taught people to do, look to pay something for growth, because growth is only valuable if the investment in growth earns more than the cost of capital. And if it doesn't, growth can destroy value. Growth is not a valuable thing as a rule. So, and if you're going to buy that, you better be very sure of the franchise."
it makes an interesting point that the absence if risk is not no risk;
"People are predisposed to do stupid things. That when they think markets are going well, they're sure, like long-term capital management was, that risk has gone away. It's not just, by the way, in housing markets. If you look at credit default swaps on sovereign debt in 2007, Dubai sovereign debt was trading at four basis points.
That is, you could buy insurance against a default on Dubai sovereign debt for four one-hundredths of a percent. That means you were betting that there was less than a chance, if you wrote that insurance, in 2,500 years that a country like Dubai, in the most unstable region of the Earth, based on the most unstable commodity at a peak price, had a less, had a one chance in 2,500 years of defaulting."
and most importantly, it demonstrates that even the best investors can go drastically wrong for an extended period;
"I'll do the one that I've been wrong on for years. I've always thought Amazon is a bubble. They have no customer captivity. They don't have enough scale that it's hard to replicate. They occupy a really big market. They're not specialized at all.
....I've been semi-wrong about Apple, which I think is a bubble, because we have a lot of experience with consumer electronics companies."
(These statements were made in 2010!)
This interview of Bill Martin of Raging Capital Ventures explores the key ingredients of a winning investment, the early steps of a research process, the need to see beyond numbers in smallcaps and much more.
The beauty of investing is that there is room for all kind of styles and philosophies. These can range from extremely complex computational models that trade within the fraction of a second to a simple and inactive an approach as below:
"He explained his technique, which was ultimate in simplicity. When during a bear market he would read in the papers that the market was down to new lows, and the experts were predicting that it was sure to drop another 200 points in the Dow, the farmer would look through a Standard & Poor’s Stock Guide and select around 30 stocks that had fallen in price below $10 – solid, profit-making, unheard-of, little companies (pecan growers, home furnishings, etc) and paid dividends. He would come to Houston and buy a $25,000 package of them.
And then, one, two, three or four years later, when the stock market was bubbling and the prophets were talking about the Dow hitting 1500, he would come to town and sell his whole package. It was as simple as that. During the subsequent years as I cultivated Mr. Womack (and hunted ducks on his rice fields) until his death, I learned much of his investing philosophy.
He equated buying stocks with buying a truckload of pigs. The lower he could buy the pigs, when the pork market was depressed, the more profit he would make when the next seller’s market would come along. He claimed that he would rather buy stocks under such conditions than pigs because pigs did not pay a dividend. You must feed pigs.
He took a “farming” approach to the stock market in general. In rice farming, there is a planting season and a harvest season; in his stock purchases and sales he strictly observed the seasons. Mr. Womack never seemed to buy a stock at its bottom or sell it at its top. He seemed happy to buy or sell in the bottom or top range of its fluctuations. He had no regard whatsoever for the old cliché – Never Send Good Money After Bad – when he was buying. For example, when the bottom fell out of the bottom in the market of 1970, he added another $25,000 to his previous bargain-price positions and made a vitual killing on the whole package."
In a nutshell: Buy when there is blood on the street, sell when there is Euphoria, and do nothing in between!! (The above excerpt is from this article)
This investor interview is refreshingly different in that it doesn't only discuss investment philosophy and idea, but also discusses the background that influenced the investor's style, his habits and routines, and other such tidbits that we call not only learn from but also aspire to adopt.
This first part of a two-part series on famed investor Bill Miller traces his investment journey and the evolution of his thought process. A very interesting read, not to be missed.
Here is the second and concluding part. While the first part traced his investment journey and the evolution of his thought process, this second part draws lessons from Miller's mistakes among other things.
This article asks an interesting question: Why aren’t there more Warren Buffetts out there? The answer is drawn from the mental model called 'Paradox of Skill' (which we looked at in detail in #90). In trying to answer the question, the article also looks at the story of Shelby Davis (Subject of the book:The Davis Dynasty) and highlights some interesting parallels and contrasts between Buffett and Davis.
I really enjoyed this interview of Mark Walker of Tollymore Investment Partners. Mark lays bare his investment philosophy and ideation process. He also puts forth an interesting perspective against the general notion of investing in companies with a moat.
In this presentation, he talks about one of my all time favourite topics: Why Investing is Simple, but not Easy. This presentation is a collection of eight observations from his experiences. For each behavior he discusses his personal impressions and how we can avoid and uncover our behavioral errors.
Joel Greenblatt sits in the league of the greatest value investors, having compounded capital at a gross 50% CAGR for the two decades that he managed external funds at Gotham Capital. In a recent podcast, Joel talked about how he achieved this success early in his career, why he chose to close down his fund, and then re-open, his books, his investment club, and above all, his investment beliefs.
Section 2: Mental Models & Behavioral Biases
Drawing parallels from Newton's Three Laws of Motion, this article chalks out Three Laws of Human Behaviour. Similar to Newton's simplification of scientific theories in to three straightforwards assertions, the three laws of human behaviour help summarise our mental pitfalls very well. Further, just as Newton's laws formed the foundation for a number of scientific theories, the three laws of human behaviour set the context for a number of our behavioural patterns.
All of investing is about finding the balance between two opposites like conviction and agility, concentration and diversification etc. This concept is not just useful in investing, but in life, in general. Termed 'Polarity', this mental model is useful tool in dealing with most situations in life. This article provides a good introduction to the concept of Polarity and provides a practical framework for adopting it in everyday decisions. This one is meant to be consumed slowly and repeatedly over time.
In issue 74, we discussed the contrast between efficiency and effectiveness - being efficient does not necessarily make us effective; when it comes to choosing between efficiency and effectiveness, we should always vote for effectiveness. However, effectiveness has its own downside as well, as this article explains. Sometimes, the choice of being not-so-effective can also turn out to be a good one. A very interesting perspective.
Given a choice between the following, which one will you choose to display outside a hospital:
Yesterday, 90% of the patients were cured successfully OR
Yesterday, 10% of the patients could not be cured; their families mourn the loss.
Both the sentences mean the same. However, they each solicit a different feeling. This difference is considered to be one of the most powerful biases that influences decision making. So powerful that marketers and researchers swear by it. Called 'Framing Effect', this is a cognitive bias where people decide on options based on how they are presented. This article explains further, and also provides some strategies to manage this bias.
Drawing analogy from the behaviour of animals, this mental model provides an interesting framework to analyse people, especially leaders, and decision making. Called the 'Hedgehog and Fox', this model provides us with the two extremes of a scale along which we most leaders lie. The fox here is a metaphor for someone who has many strategies (multi-faceted), while the hedgehog represents someone who holds a single world-view (focused). Take a pause here, and think about the leader of a business that you want to invest in - would you prefer that he is a fox or a hedgehog? Think why you make a choice over the other. Now read the following three articles to find the answer:
Often, when we are reminded of the past (either through an old photo or video, or through someone narrating an event to us), we either remember it differently or have no recollection of it. This happens due to the way our brain functions - instead of storing entire memories of an event, it stores a summary; over time, this summary get fuzzy, and so the brain starts filling up gaps with vivid imaginations. This is a mental fallacy called manufactured memories and is something that investors should especially pay attention to.
"Every time you pull out a piece of information from memory, you get back the gist which has a lot of missing details. To comprehend that piece of memory your brain regenerates some part of it on the fly by imaginatively filling in the missing details with stuff that seems plausible, whether or not it’s actually what happened.
This reconstruction of any piece of memory happens not just once, but every time we access it. So the next time we remember it, we’re pulling up false details; maybe we’re even adding new errors with each act of recall. Presence of this feedback loop in memory reconsolidation compounds the problem over time."
(This is one of the reasons why it's so important to create a system to not only record your decisions, but also review them periodically. Imagine what happens otherwise - your brain will justify every wrong decision you have taken, providing an incorrect feedback loop. I designed a journal to capture this)
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 pens a part of this one.
"Now, ya'll would guess that more often than not, the highest paid player on an NFL team is the quarterback. And you'd be right. But what you probably don't know is that more often than not, the second highest paid player is, thanks to Lawrence Taylor, a left tackle. Because, as every housewife knows, the first check you write is for the mortgage, but the second is for the insurance. The left tackle's job is to protect the quarterback from what he can't see comin'. To protect his blind side."
The above quote is from the movie The Blind Side (highly recommended) which is based on a 2006 book by the same name by Michael Lewis ( of The Big Short, The Undoing Project, and Moneyball fame). The blind side applies as much to sports, as it applies to life, and investing. Interestingly, the field of magic is based upon exploiting this blind side. This is an interesting mental model called Inattentional Bias, which is explained here.
When it comes to corporate success, strategy gets more attention than culture. In reality however, culture trumps strategy (or to quote Peter Drucker, Culture Eats Strategy for Lunch). More often than not, the difference between the number one and number two in most industries is defined by culture. Strategy can be replicated, but culture is unique. Taking this thought forward, Peter Kaufman talks about the fourteen critical aspects (mental models) behind the culture at his firm Glenair (which Charlie Munger considers as one of three best operating companies) in this presentation.
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.
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.
The importance of working within one's Circle of Competence is well known and well accepting in investing. However, there is a particular case in which working within one's circle of competence may not be all that profitable. In other words, sometimes working in the Circle of Incompetence may be more profitable that in the circle of competence. This article explains why strong convictions should be loosely held.
In Issue 55 we came across Charles Ellis' theory of 'The Loser's Game' and how it applies to investing. (To recap: There are two levels of game play - amateur and expert. At an amateur level, winning is a function of losing less, while at en expert level, winning is a function of gaining more). Taking the idea forward, this articlediscusses how we can apply this model to investing, and to life in general by seeking to be less stupid than brilliant.
Of the many opposing forces in investing (and in life in general), the most difficult to deal with is: holding on to old ideas and being open new ideas. Most things evolve, while a few things remain the same over long periods of time. Therefore, finding a balance between the two forces is important. However, years of experience makes us stubborn enough to not see an underlying change. And therein lies the problem, says Morgan Housel in this piece.
Most things in life are a matter of perspective. And that is a mental model worth learning, called the Framing Effect. 'By framing things in the right way, you can make smarter choices with your money that lead to better outcomes. It can help you avoid rash decisions, such as impulse buying and making emotional investment changes.'
Section 3: Personal Development
Time Management
We all have the same number of hours in day. Despite this fact, how is it that some people are able to achieve way more than most of us? Someone attempted to find this out by interviewing a number of rockstars from various fields. The result is this article that lists a few things that super productive people do differently.
Consider the following:
Aren't we all like the protagonist here, with too much to do and too little time? Don't we all have a volume of ideas but not enough time to work on any of them? Is there a way that we can be more productive with at least some of our ideas? Can we enjoy some of those figs before they go dead? The following framework exhibits one of the ways in which we can do this:
This article explains the above in details.
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.
We all know that time is valuable, but can't really figure an exact value of time. If time is money, how much is it really worth? For instance, how much would you pay to save an hour - 10/100/1000/10000? This article will help you put a tangible value on your time (free excel sheet included).
Learning / Building Habits
Using the Super Mario game as an analogy, this TED talk provides a fresh perspective to making learning fun. Please don't skip this one.
One of the reasons that we fail at building habits is that we do not like to go through the grind. Who wouldn't love to be in great shape? But who wants to suffer from eating healthy and exercising daily? Who wouldn't love to wiser? But who wants to spend time reading when you can simple Netflix? While we all understand that there is no gain without pain, we fail to appreciate it. Therefore, instead of thinking about what you want from life, relationships, work, etc, it would be better to consider the question 'what pain do you want in life?'. This article explains further.
Life Lessons
Often, what looks simple from the outside, masks so many layers of sophistication under it. Like an animated movie - usually a genre reserved for children - that can teach us adults some profound life lessons. Peeling the layers from one such recent movie from the house of Pixar, this post reminds us to live in the present. A light and entertaining, yet profound, read.
"I am not good enough right now. I will wait for the right moment - has made a billion lost souls.
…
And it is ok if you haven’t figured it out, yet. It is ok to be in search for it. As long as we know that the only way to find one’s purpose in life is when one is ready to start start living every moment of the present. Being there. Breathing deep.
Because in finding the present, you’ll find your purpose."
This slighted dated, long form article addresses an important question: How will you measure your life? Part of a speech delivered by Prof. Clayton Christensen (Disruptive Innovation fame) to the graduating class of 2010. In it, he talks about how we can take some of the business principles and apply them to real life. The talk answers three distinct questions:
How can I be sure that I will be happy in my career?
How can I be sure that my relationships will become an enduring source of happiness?
How can I be sure to stay out of jail?
Lastly, the professor also advices students to choose the right yardstick to measure their life. The talk, converted in to this article, was eventually converted in a book by the same title.
This article is a collection of the wisdom of Naval Ravikant on the subject of health, wealth, and life in general. Using equations, Naval explains the important areas that one should focus upon in order to lead a happy life. A formula for health, wealth, and a good life - you don't want to miss this one.
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. This article explains why culture should matter to employees, or to anyone that seeks to win in a hyper-competitive world.
The following is a very short but powerful message: Beware of chasing prestige. This is akin to being beware of blindly chasing the crowd in investing.
Should you have difficulty in letting go off the prestige, or taming your ego, or should you feel that life is being unfair, then the following should set you straight:
Letting go:
“Every time we interact with another person at work, we have a choice to make: do we try to claim as much value as we can, or contribute value without worrying about what we receive in return?”When it comes to your interactions with the world, are you a Giver, a Taker, or A Matcher? What you are will impact your life outcomes. This article explains how.
Productivity / Efficiency / Effectiveness / Success
A transcript of speech delivered by an insurance executive in 1940, this is a wonderful meditation on why some people succeed over others. It serves as a wonderful guide for anyone that seeks success (don't we all?). And unlike most articles that will tell you what successful people do differently, this article goes a step further in explaining how they are able to do this differently, and therefore how you can adopt the same strategy in your pursuits. The clarity in the article, coming from almost 8 decades ago, makes this a very worth read.
This is probably one of the best resources that I have read so far on how the modern day knowledge worker can work around to having a meaningful working life. Titled “Managing Oneself” this article by Peter Drucker acts as a guide that anyone with modest talents can use to transform into an out-standing performer.
Albert Einstein in the early 1900s. Aretha Franklin in the 1960s. Steve Jobs in the 2000s. There are certain spans of time when scientists, artists, and inventors have phenomenal periods of productivity. This is also true of most people - at least on a smaller scale. Aren’t there periods when you feel like you’re effortlessly flourishing at work, while other times you feel incompetent and uninspired? You might recognize these periods of concentrated success among your friends, peers, and competitors too.
The Northwestern University economist Dashun Wang has peeled back the mystery of why these special creativity clusters happen and how individuals and companies can multiply and extend them. Read this article to see how three words can enhance your career.
A modern day Indian actor who is worth learning from (IMHO) is Akshay Kumar. Its not as much about his acting skills as much as his journey (and his healthy habits) that impress me. He has not only survived a long career but also is amongst the richest; all this without a Godfather, family name, super-stardom or block-busters (until a few years back), or lots of awards. In most walks of life, we'll find such people who are not the best in what they do, and yet are quite successful (and rich!). How do these people manage to do this? As per this article, success is not about being the best or the most well known, but about a combination of three things. These principles apply to investing too.
The philosopher George Santayana famously said that “those who cannot remember the past are condemned to repeat it.” This is especially true in investing where there are so many decisions being taken regularly. With the benefit of hindsight and some good luck, we can easily look back at a below-average decision as a successful one. This sets us up for a big failure in the future. This article provides that antidote (its something that a few well-known investors practise, but doesn't get as much attention from the investing community as it should). The benefit of this practice is not just better hindsight, but also clearer thinking. The three stage process defined here is worth adopting in every decision.
"When people shower praise on you, are they unwittingly pouring poison into your soul?" That is the question raised in this post which argues that being called a dumbass is better than being called wise.
Facing Challenges / Overcoming Obstacles / Resilience
Sometimes life gets the better of us. We feel the pressure of the world on our shoulders. These testing times feel life they last a life time. Here are two different perspectives that will help ease the burden of the tough times:
The first one comes out of the diary of Marcus Aurelius. It is the internal system that he used to keep push himself to keep moving forward even when the tasks ahead felt like moving mountains.
The second one presents a very interesting lens through which we can see our lives with a fresh perspective. There is a certain loop that exists in our lives, and is similar to something that we have all played with. A long, but interesting read. You will definitely think about your life differently after reading this.
Love them or hate them, but you cannot escape the challenges the life throws at you. Here are 6 principles for navigating life's challenges. Loved the concept of 'rugged flexibility':
"To be rugged is to be tough, determined, and durable. To be flexible is to adapt and bend easily without breaking. Put them together and the result is a gritty endurance, an anti-fragility that not only withstands change but can thrive in its midst. The principles and practices below can help you develop rugged flexibility."
Perspectives define everything. A problem can be an obstacle, or an opportunity, depending on your perspective. The following narrative provides an interesting perspective to adopt: following the engineering mindset - problems exist to be solved.
Here is an interesting story from the Mahabharata (a conversation between Karna and Lord Krishna) to cement this perspective.
"Destiny is not created by the shoes we wear but by the steps we take"
The lesson from the above: do not fear taking risks. Everything is risk until it works. This article explains further.
Building Habits
Once you understand how to tackle change, the next step is to ensure that the change sticks - consistency, in other words. Here again, one realises that there is a mental roadblock that prevents us from continuing to so something new over a long period of time - anybody who has tried to quit smoking, or start writing a journal knows this very well. This article provides a framework to make new habits stick.
Here is an interesting exercise to build those habits that you have been wanting to work upon:
Following the 14 month challenge, here are Ten 90-day challenges for your mind, body and soul.
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That's it for this weekend and the next.
Best wishes for the upcoming holiday seasons. See you in the new year!!
- Tejas Gutka🎅🏼
[Dec 25, 2021]
Hey Tejas!
This post is a diamond mine… one of the greatest gifts a student can expect on a Christmas.
I run out of words to thank you. Your newsletter has been one of the greatest treasures I found in 2021. Can’t simply thank you enough! Respect. 🙏🏽