[The Weekend Bulletin] #66: Not Selling, Margin of Safety, Inflation,...
...A Possible Fraud, Need for Multidisciplinary Learning, Common Denominator of Success, 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
Picking up on a thread we discussed last week - should you part-sell your winners - here is a perspective from the house of Chuck Acre (in agreement with investors like Peter Lynch and Yen Liow). In order to persuade you to read this article, reproduced below is a section of it for you to consider (emphasis mine):
You are given the choice between two sums of money: one million dollars or a penny that will double every day for 30 days. Which should you choose?
Here are a couple hints. The penny that doubles daily would be worth $1.28 after the first week. After the second week, it would be worth $163.84.
You will probably reason that the penny would be worth more than the one million dollars. (Why, otherwise, all the theatrics?) By just how much, though, might surprise you.
It turns out that after doubling 30 times, the penny would be worth $10,737,418.24!
This is a terrific exercise because it highlights the not-so-obvious power of compound returns (in this case, the penny compounds at 100% for 30 periods).
I say not-so-obvious because you would have been better off taking the one million dollars until the 27th day.But in those final four days, the value of the penny increases from less than $700,000 to more than $10.7 million. Patience and a long-term perspective are required to give the power of compounding an opportunity to do its magic.
To put this in to Indian perspective, here is a chart that I think about often:
The chart above is just one of the hurdles that a long term investor faces - that of lower relative return for an extended period. There are a number of other hurdles (mountains really) that an investor has to overcome in order to earn a long term compounded return, as enumerated in this thread (yet another reason why I love the tenet: "Investing is simple, but not easy").
Here's one more read related to last week: The article on Seth Klarman last week took me back to his book that I had read nearly a decade ago (on a holiday!). This summary of Margin Of Safety was the most detailed that I found and served as a good reminder of the key concepts covered in the book. Reading through it, you'll realise that SK nearly covered the entire spectrum of activities that make up value investing. I wish he'd write more publicly.
Coming out of the trance of the long term, let's turn our attention to the medium term. One of issues that remains highly discussed and debated today, across the globe, is that of inflation. The unprecedented scale of monetary and fiscal stimulus over the last decade (in particular, the last one year) has the investing community worry about an upcoming onslaught of inflationary pressures. Whether you belong to this camp or not, this article (a research on past instances) on inflation will make for an interesting read. For it will tell you that we not only have always underestimated inflation, but also haven't done much to find an effective hedge against it as yet. This ties up well with the opening article of this section:
"…it has been our experience that we are at our worst as investors when we allow concerns about these issues, including elections, trade wars, and Fed policy, to influence our investment decisions."
Section 2: Mental Models & Behavioral Biases
Below are two articles that tell you why this section is as - if not more - important for investors to follow as compared to the previous one.
Morgan Housel bats for the need for the need for multi-disciplinary learning in his latest. The basic premise is that we should read widely in order to become better investors.
"Restricting your investment learning to the narrow lens of finance means you’re less likely to uncover the biggest and most important parts of investing, which are the ways that people think about things like risk and reward and show up in many fields. You can’t appreciate how important a topic is until you see it play out with as much influence in, say, evolutionary biology as it has in investing."
This extract from Joel Greenblatt's The Big Secret for the Small Investor argues that understanding our behavioural biases is a very powerful tool, for we’re practically hardwired from birth to be lousy investors.
Understanding some of these things about ourselves is actually pretty powerful. It’s from this understanding of our natural responses that we can begin to explain things like the most recent bubbles in housing and the Internet. To a large extent, maybe the value effect we examined in the last chapter is merely a result of the emotional overreactions that are built into all of us. Maybe it helps explain why Mr. Market acts crazy at times. But maybe it’s also why we can’t seem to take advantage of Mr. Market’s craziness just when we should. Then again, none of this is really our fault! After all, we’re busy surviving, herding, fixating on what just happened, and being overconfident!
Now that you are convinced, how about reading a nifty list of practical mental models that we should try and incorporate in our business thinking?
Section 3: Lessons From History
This is not really history yet, but has all the ingredients in the making of history. There is a possible financial misdemeanour undergoing currently from Australia, to Japan, and parts of Europe. Below are a couple of articles that capture the ongoings:
This one is two part series by someone who first smelled foul and raised an alarm. (Part 1, Part II)
This article compliments the above with some additional juicy details.
Section 4: Personal Development
A transcript of speech delivered by an insurance executive in 1940, this is a wonderful meditation on why some people succeed over others. It serves as a wonderful guide for anyone that seeks success (don't we all?). And unlike most articles that will tell you what successful people do differently, this article goes a step further in explaining how they are able to do this differently, and therefore how you can adopt the same strategy in your pursuits. The clarity in the article, coming from almost 8 decades ago, makes this a very worth read.
Compliment the above with this infographic
Quotable Quotes (and some food for thought)
On minimising regret/role of luck:
On Fomo/Envy:
On making money:
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That's it for this weekend folks.
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Have a wonderful week ahead!!
- Tejas Gutka
[Mar 13, 2021]