[The Weekend Bulletin] #54: The Many Risks In Investing
+ Mental Models through applications, millions vs billions, being below average, and more...
A digest of some interesting reading material from around the world-wide-web. Your weekly dose of multi-disciplinary reading.
Readers in India would be familiar with #IshqHaiToRiskHai following the release of a web-series called Scam. Generally speaking, readers would agree that all of investing is fraught with risk. There is no return without risk. Risk can be minimised, but cannot be eliminated. These tenets are well understood by investors.
What remains less appreciated, however, is the multitude of risks that exist in investing. Generally, risk is associated with downside, or the loss of capital. However, as this issue attempts to highlight, there is more to risk than loss of capital. As one of the articles below expounds,
"The derivation of the word “risk” reaches back to the early Italian risicare, which translates as “to dare.” Risk looked at from this viewpoint is a choice rather than a fate. And it can broadly be viewed as the probability of something going wrong, and the negative consequences if it does."
Let's dive in.
Section 1: Investing Wisdom
To begin with, let's understand risk broadly, and then we'll narrow down to the specifics. One of the foremost authorities on the subject of risk was, author and finance historian, Peter Bernstein. This article culls out ten insights on risks taken from his books and interviews over the years.
Still Curious? Check out this thread that I had tweeted on Peter Bernstein:
At the opposite end of the risk of losing capital - our general perception of risk - is the risk of losing out on potential gains. This one is tricky, as focusing on the upside is not the usual wisdom doled out by the likes of Charlie Munger and Warren Buffet. Nevertheless, without asking you to be greedy, this article asks you to fight a specific fear that prevents you from giving up future returns - the fear of optically high P/E multiples.
It's easy to be greedy, but it's very difficult to fight fear. Especially when the fear arises from extreme price movements, in either direction. This article looks at the results of a study of more than four million trades made in nearly 800 institutional portfolios from 2000-16, to highlight the risk from selling. One of the reasons for this: spending too much time only looking for ideas to buy.
What is riskier than spending most of your time looking for ideas to buy? Spending your time looking for a multi-bagger. This article explains why using the story 'The Old Man and The Sea' by Ernest Hemingway.
The last risk for this issue is the risk of buy and hold investing. More specifically, it is risk arising from concentrating your buy & hold investments in a few instruments. While this article makes the case for index investing, in general, reasonable diversification can also be used to overcome this risk.
Section 2: Mental Models & Behavioural Biases
One of the best ways to learn and commit any concept to long term memory is through application. When you can take a theory and apply it to your life, your understanding is usually cemented for the long the term. With that thought it mind, this post explains a number of mental models from the perspective of career change. It uses multiple mental models to determine what kind of a career move would be beneficial for one's long term goal. Outside of deepening our understanding of mental models, this post should also be read because it touches upon one of the crucial decisions of our lives.
Section 3: Lessons From History
Reminiscing events around the tech bubble, this article reminds us why easy gains should not be celebrated too soon and why too much concentration in fast moving stocks is a risky enterprise.
Section 4: Personal Development
Technology has raised the importance of creative pursuits by replacing most low skill jobs with lines of codes. However, in doing so, it has also killed the basic element from which creativity brims - SILENCE. Between the ting and ding of notifications from a constantly connected world, we have lost touch with silence. Here is an 'An Ode to Silence' that we all should not just read, and appreciate, but also make space for in our otherwise busy lives.
Everybody considers themselves to be above average in their pursuits. Apart from being statistically impossible, this mindset hinders long term growth. This article explains why, and suggests you to consider yourself below average to be a learning machine.
This article draws an inverse relationship between time and money, and provides an interesting perspective to think about each of these individually and in relation to each other.
“…people don’t really understand the difference between billionaires and millionaires. He said a million seconds is like 11 days. A billion seconds is 31 years.”
…
“Take a step back today and ask yourself — do I invest my capital based on the greatest resources that I have access to? For some of you, that resource is money. But for most of you, that resource is time. Press your advantage. Start thinking in terms of decades. Use your status as a time billionaire to become a dollar billionaire, but remember — the time billionaire always dies with zero.”
Section 5: Trivia
Tom Whitwell publishes a list of 52 things he learns each year. While the entire list of 2020 makes an interesting read, some of the most interesting ones are reproduced below:
EXPONENTIAL SCALING (POWER LAW):
In just eight years, the British National Grid went from being 40% coal powered to 2% coal powered.
In 2014, the International Energy Authority forecast how the price of solar power would fall over the next half century. After just six years, we’re 40 years ahead of expectations.
EFFICIENCY (not all of it is good):
Developing and launching the iPod in 2001 took just 41 weeks, from the very first meeting (no team, no prototype, no design) to iPods shipping to customers.
For VC companies in 2004, the average time from first contact to funding was 90 days. Today, it’s just nine days.
UNINTENDED CONSEQUENCES:
Car safety laws in the US make it more expensive to have three children — women in states with mandated car seats are 0.7% less likely to have a third child. The safety measures may have saved 57 car crash fatalities each year, but caused 145,000 fewer births since 1980.
Biased debugging is a problem in data-heavy research. When code produces an unexpected result, it is checked for errors. But when it produces an expected result, it’s left unchecked.
LAW OF ATTRACTION:
Attractive criminals receive lighter sentences than unattractive criminals. In one study, unattractive criminals were fined 3 x more than attractive criminals for moderate misdemeanours. However, appearance doesn’t seem to influence verdicts of guilt or innocence.
WOULD YOU BELIEVE THIS?:
In Warsaw’s Gruba Kaśka water plant there are eight Clams with sensors attached to their shells. If the Clams close because they don’t like the taste of the water, the city’s supply is automatically shut off.
A 70% dilution of isopropyl alcohol is better at killing bacteria, fungi, and viruses than ‘pure’ 99% isopropyl alcohol, for several distinct reasons.
When you lose 1kg of weight, around 840g of that weight is exhaled as carbon dioxide. 🤨
Quotable Quotes
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That's it for this weekend folks.
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If you have any feedback/interesting articles that you’d like to share -> simply reply to this email/leave a comment below.
Have a wonderful week ahead!!
- Tejas Gutka
[Dec 12, 2020]