[The Weekend Bulletin] #59: Conviction+Confidence+Courage, Failure, Quality Margin Of Safety...
...a twitter poll based portfolio, how to read more and remember better, 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
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.
We can never avoid failure, but we can surely try and minimize it's impact. One of the ways in which we can do this in investing is by building a margin of safety - a room for error. While margin of safety is usually spoken in terms of the gap between price and value, this article provides a fresh perspective, calling it the quality margin of safety.
"Unlike the value definition of “margin of safety” where your biggest risk is not buying cheap enough, with quality “margin of safety” your biggest risk is not buying enough or selling too soon."
Here's an interesting recent development to lighten the mood after all the serious talk about courage and failure: 'At the beginning of 2020, before the pandemic’s retail frenzy erupted, Ramp Capital — one of Finance Twitter’s biggest anonymous accounts — set out to run an experiment: What happens when you put up $10,000 of your own money and ask more than 190,000 followers on Twitter to vote on a stock to buy or sell each week? The answer in 2020 is that you beat the S&P 500 by more than 1,300 basis points'!!!
Section 2: Mental Models & Behavioral Biases
Why spend words when you can say it with a simple image. The first principles to a healthy and wealthy life:
Section 3: Lessons From History
Following up on last issue's thread on the tech bubble, is another interesting episode from the same period. This true story, involving Warren Buffett, highlights how rapid changes in technology can make even the most attractive business models obsolete.
Section 4: Personal Development
This article and many like it are the foundation of this bulletin. There was a time, not so long ago, when I used to wonder how some people managed to read and recollect so much. What I thought was some genetic secret, turned out to be a simple technique involving discipline. This article highlights some of these simple techniques that have helped numerous people improve not just the amount they read but also their comprehension. I am sure you will find it useful too.
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.
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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."
Section 5: Trivia
The right side of the fat tails - out sized equity returns generated by investors for a period of 10 years or more. Some mind-boggling numbers in the list (almost unbelievable):
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That's it for this weekend folks.
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Have a wonderful week ahead!!
- Tejas Gutka
[Jan 16, 2021]