[The Weekend Bulletin] #55: Sound Investing Advice
+ Extreme Wealth & Luck, Bubbles, and Sivers.
A digest of some interesting reading material from around the world-wide-web. Your weekly dose of multi-disciplinary reading.
It’s that time of the year when the inbox is full of outlooks and look-backs. Sifting through these, I found a compendium of some sound investment advice for you. A lot of it is things that we already know. Nevertheless, year-end is a good time to remind ourselves of these solid principles that have stood the test of time. I hope you enjoy reading them.
Section 1: Investing Wisdom
How old would you think that age-old advice would be? From around 1950's when Phil Fisher first published 'Common Stocks and Uncommon Profits'? Or around 1930's when Benjamin Graham and David Dodd's 'Security Analysis' was first published? How about 1888, nearly 40 years after the classic 'Extraordinary Popular Delusions and the Madness of Crowds' was first published by Charles Mackay? Published in 1888, 'The Timeless Art of Investing' carries some timeless advice for investors, some of which is summarised here. It’s interesting how some piece of advice written in 1888 sounds so much relevant even today. This goes to show how little the tenets of investing have changed despite the many advances that we have made in technology as well as in understanding human psychology.
Following advice from a classic, is advice from one of today's top financial writers, Morgan Housel. In a recent interview, MH spelled some beans on "What You Need to Know to Be a Successful Investor".
Another modern writer that I admire is Drew Dickson of Albert Bridge Capital. In this short, thought provoking note, he advises investors to not lose their perspective in trying to comprehend the market - i.e. 'don't miss the trees for the forest'. A pertinent read in current times.
Charles Ellis wrote a seminal paper in 1975 whereby he argued that Investing is a Loser's Game i.e. a type of game in which you win due to the mistakes made by your opponent. Winning a loser's game thus is not about winning points but losing lesser points. But how do investors ensure that they lose less than their opponents (practically the whole market)? This article provides some advice drawn from various sources.
"Simon Ramo identified the crucial difference between a Winner's Game and a Loser's Game in his excellent book on playing strategy, Extraordinary Tennis for the Ordinary Tennis Player. Over a period of many years, he observed that tennis was not one game but two. One game of tennis is played by professionals and a very few gifted amateurs; the other is played by all the rest of us.
Although players in both games use the same equipment, dress, rules and scoring, and conform to the same etiquette and customs, the basic natures of their two games are almost entirely different. After extensive scientific and statistical analysis, Dr. Ramo summed it up this way: Professionals win points, amateurs lose points. Professional tennis players stroke the ball with strong, well aimed shots, through long and often exciting rallies, until one player is able to drive the ball just beyond the reach of his opponent. Errors are seldom made by these splendid players.
Expert tennis is what I call a Winner's Game because the ultimate outcome is determined by the actions of the winner. Victory is due to winning more points than the opponent wins – not, as we shall see in a moment, simply to getting a higher score than the opponent, but getting that higher score by winning points.
Amateur tennis, Ramo found, is almost entirely different. Brilliant shots, long and exciting rallies and seemingly miraculous recoveries are few and far between. On the other hand, the ball is fairly often hit into the net or out of bounds, and double faults at service are not uncommon. The amateur duffer seldom beats his opponent, but he beats himself all the time. The victor in this game of tennis gets a higher score than the opponent, but he gets that higher score because his opponent is losing even more points."
Lastly, here's some advise about advice. Extending Sturgeon’s Law to investing, this article advises that 90% of everything in investing is crap. It also provides a framework for identifying and avoiding such crap.
Section 2: Mental Models & Behavioral Biases
Going back to Charles Ellis' claim, if winning in investing is dependant upon your opponent making more mistake than you, then does that mean that investing involves no skill? Well, that wouldn't be completely true, since you'd need some skill to make sure you make lesser mistakes that your opponent. Does that mean that those who amass more wealth are more skilled than the rest of the population? Not necessarily. In fact, taking the luck vs skill argument to it extreme, this article makes the bold claim that 'The distribution of wealth at the highest end of the scale is quite consistent with pure luck.'
Section 3: Lessons From History
Simple, and straightforward, this article discusses the 5 phases of a bubble drawn from the history of financial crises. It argues that these five phases can be viewed through the lens of every asset bubble in history because human nature is the one constant in the markets. It further presents some interesting anecdotes to advice you to stop worrying about bubbles.
Section 4: Personal Development
I can't recollect how I first encountered Derek, but I remember being thoroughly impressed by some of his writings, in particular: 'No “yes.” Either “HELL YEAH!” or “no.”' and 'Benefits of a daily diary and topic journals’. Not just his writing, but his overall approach to life is quite impressive. Outside of his writings, the following two podcasts offer so much to learn and think about. These should help fill the gap of a lean work season with the festivities around (collectively over four hours of content):
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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 19, 2020]