[The Weekend Bulletin] #50: Personal Finance, Corporate Governance, Customer Ignorance
Why investing is simple, but not easy; Lessons in multi-disciplinary learning from the man who has completed 146 courses; Note-taking systems for better retention.
A digest of some interesting reading material from around the world-wide-web. Your weekly dose of multi-disciplinary reading.
At the risk of boring you with repetition, let me reiterate that ‘investing is simple, but not easy’ remains one of favorite investing aphorisms by a wide margin. While I have shared my thoughts on this subject earlier from the lens of the markets, this time around, let’s look at it from the lens of the market participants - the investor, the business owner, and the customer.
Investing is simple because there are a few fundamental tenets that have stood the test of time: spend less than you earn, focus on long term capital appreciation, partner with honest and able people, learn to endure volatility, choose high quality businesses to generate alpa (excess returns) etc.
On the other hand, it is not easy as: the temptation to spend a little more every time your earn a raise is difficult to resist; everybody wears a badge of honesty, but it is very difficult to judge honesty from a distance; the long term is made up of numbers short terms that will test your capacity to suffer; and so on…
The articles in this issue not only highlight few of these factors that make investing not so easy, but also reveal ways in which investors can overcome some of these hurdles.
Section 1: Investing Wisdom
One way to summarise investing would be: postponing today’s consumption to a later date. Every unit of currency that we decide to not spend today, goes into a pool that we can dip into when the well of regular income dries up. While we understand this very well, the challenge really arises as our incomes start to rise. The comfort of an increasing stream of cash inflows can make us complacent about our savings rate, argues this article. Before you go on to read to the article, answer the following question:
Say you are currently saving 50% of your income. Through a combination of hardwork and some luck, say you land a 30% raise in your annual take home. How much of this incremental 30% should you be saving in order to maintain your overall retirement goal? If your answer is 50% or lower, then you are WRONG. In fact, you would be wrong even if you had guessed 60%. The actual number is HIGHER than 70%!! Surprised? Read the article to find out why.
Given the choice between a 2% alpha generating fund but a low market return, and a high cost (2% p.a.) index fund in a market that returns above average, which one would you choose? This article presents an interesting paradox between alpha and beta, asking you to ignore the former over the latter.
So far, we have looked at savings and markets. Let us now turn our focus to businesses. A widely accepted truth is that long term return can be generated by investing in businesses that are run by honest and able managements that work relentlessly towards creating and defending a moat or competitive advantage. However, hidden behind the simplicity of this wisdom are the intricacies involved in identifying a) honest managements, and b) the sources of competitive advantages.
A person's character cannot be easily judged in a few short meetings. More importantly, managements are well aware of the attributes that investors seek in them. They can easily window-dress their persona to meet these requirements, especially in light of the short time that most investors get to spend with them. Investors are therefore handicapped in the process of judging managements. While ability can still be judged based on historical performance, honesty is difficult to judge, given that performance can also be window-dressed. How then should investors choose their partners? By following the GOVERN framework, suggests this article. It provides a framework that can be used the judge management integrity and shareholder friendliness.
Moats or competitive advantages enable businesses to generate industry leading returns on capital, making them highly attractive to investors. However, not all moats are equal. Some businesses develop their competitive advantage by delighting customers by way of providing a higher value to the customer than what they pay for. On the other hand, there are certain businesses that gain their competitive positioning by exploiting a vulnerability. Such moats, while profitable in the short term, usually lead to an eventual collapse of the business, once the vulnerabilities disappear. Thus, more important than identifying a moat is understanding the source of such competitive advantage for the long term investor, claims this article (read the section titled ROE and Customer Ignorance).
Section 2: Mental Models & Behavioral Biases
Multi-Disciplinary Learning: that’s the subject of this post by the man who has completed 146 courses on Coursera, an education and training website co-founded by his son. In it, he recalls his experiences of how lessons from different fields of knowledge helped him solve real-life problems. This post serves as a reminder of how creating mental models from various fields can will help us navigate the complexities of life with relative ease.
Section 3: Personal Development
We are all well aware of the benefits of reading. However, as we read more, we realise that simply reading is not enough. We may have processed a thread of knowledge very well while reading it, however, such a thread is really useful only if we can remember to use it at the right moment. But how does one remember all the things that one reads about? The answer to good retention lies in creating a note-taking system. Below are some popular note-taking systems (in increasing order of complexity/effort) that you can use to improve your retention skills:
Ness Lab’s Key Ideas System
Alex’s Note Taking System (Highlighting, Summarising, Arranging)
Tim Ferris’ Indexing System
Ryan Holiday’s Zettelkasten
One common thread in each of the above systems is highlighting interesting material. In case you are wondering how to define interesting, the following might help:
Section 4: Trivia
Some anecdotes to keep you motivated to continue onto your pursuits:
* * *
That's it for this weekend folks. I hope that you enjoyed this issue; let me know your thoughts/feedbacks by commenting below.
Have a wonderful week ahead!!
- Tejas Gutka
[Nov 07, 2020]
P.S.
If you come across an interesting article that you feel is insightful and worth sharing with the community of readers of The Weekend Bulletin, please email a link of the article along with a short summary/note on why you like the article to: share2TWB[at]gmail[dot]com.