[The Weekend Bulletin] #63: The Need for Evolving Investment Styles, How A Castle Compounds A Moat, The Difficulty In Being A Skillful Investor,
...An Active Reading Framework, Making Of A Good Investment, and more.
A digest of some interesting reading material from around the world-wide-web. Your weekly dose of multi-disciplinary reading.
A quick announcement:
I am taking a small break with the family this week, and so will not be publishing an issue next weekend. We’ll be back in business as usual after that.
Section 1: Investing Wisdom
Extending Mark Walker’s argument from issue 61 (on why visible moats won’t make you excess returns), this letter from Andrew Rosenblum of Bonsai partners argues that investment styles have to be ever evolving. What worked over the last few decades won’t give you any edge, as it has been copied and commoditised. As Picasso said “Learn the rules like a pro, so you can break them like an artist.” Similarly, investors should learn from the masters, only to break some of those rules and develop and independent style.
The following is an interesting discussion on topics ranging from actively reading investment documents, to seeking non-consensus views, to looking for operating efficiency in a business etc. Lots of tiny nuggets of wisdom in this one.
One of the central tenets of a good long term investment is 'buying well'. While this activity is usually associated with buying cheap, that is only one of the factors that go into the making of a good long term investment. Often more that a few factors come together in the making of a good investment, some of which are listed in this twitter thread.
A couple of interesting articles on the topic of skill in investing:
Less to read here than to think about really: Prof. Aswath Damodaran recently updated his Cost of Capital computations for 2021. The below image summarizes the outcome:
Notice how low the cost of capital currently is, across the globe, thanks to the low interest rates as well as equity risk premias. Now correlate these cost of capital to the valuations that you witness on stocks and ask yourself if they really look so out of whack (or WACC - pun intended).
Section 2: Mental Models & Behavioral Biases
Traditionally, we understand and refer to competitive advantages as moats. With the advancement of technology and subsequent emergence of new business models, maybe there is a need for a more contemporary perspective to this. That is what this article attempts to provide. It looks at how building additional advantages can compound the benefits to the firm's competitive position. Maybe it's time of think of the castle together with the most around it as a big competitive advantage.
"You can only increase the difficulty of crossing a moat incrementally by digging a wider and deeper moat. But when you reinforce your moat with a castle wall, then reinforce both the moat and the wall with a tower, all the different components work together to increase the impact of each of the others. The defensibility of the castle as a whole undergoes non-linear improvement."
Section 3: Lessons From History
"One of the hallmarks of every bubble is a loss of interest or ability of investors to distinguish between investment and speculation."
As share prices continue to scale new highs, there is a lot of chatter around the sustainability of earnings momentum as well the current high valuations. While there are no real answer to those questions, one can only look back at past manias and draw some comparison. That is exactly what this long article does. It looks back at how past bubbles have been formed and how were people reacting to the conditions that prevailed just before the bubbles burst. An informative read in to the past manias and some really good quotes in there as well.
Section 4: Personal Development
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.
The greatest of ideas often emanate from the simplest of observations (there is a whole book on this subject that I have enjoyed reading: Obvious Adams). Here is one such story of a simple observation and the snowball that it created for Richard Montanez, who went from cleaning toilets to being one of the most respected execs in the food industry. If you are looking for some motivation this weekend, then this is a story you must read.
Section 5: Trivia
There are a lot of interesting things coming out of the GPT-3 (a deep learning algorithm that produces human like text). Here is one such interesting output from it's predecessor, GPT-2:
After reading thousands of hedge-fund and shareholder letters, the algorithm was able to write an investor letter of it's own. It makes for a fun read, and I especially loved the conclusion. This is the scary movie version of an investor letter.
The following is snapshot of the letter. You can read the whole here:
Quotable Quotes:
On how we can be trapped by our own perspective from The Great Mental Models (Vol. 1) by Farnam Street/Shane Parish (Not exactly a quote, but an interesting read nonetheless):
On The Things that Schools should teach:
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That's it for this weekend folks.
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Have a wonderful week ahead!!
- Tejas Gutka
[Feb 13, 2021]