[The Weekend Bulletin] #71: 🐙&🦈 (Octopus & Shark), ⚒️&𓄥 (Picks & Shovels), Volatility, Deliberate Practice,
Using Mental Models, Data Crunching, Asset Allocation, 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
The Octopus and The Shark: this short note with a catchy title takes the explore vs exploit mindset that we saw in issue 69 and applies it to research. The authors talk about the ideal conduct that a good analyst should follow in order to find new ideas - go wide, and then go deep.
Picks & Shovels: This is another short note with an interesting framework to identify companies. It borrows from the 1847 Gold Rush when everyone ‘rushed’ to California to dig for gold. The most wealth during that period was not created by digging gold, but by selling picks and shovels to these gold-diggers. This reminded me of a framework once mentioned by Prof. Sanjay Bakshi - fast moving industrial goods (the term was coined by Ravi Purohit, but I couldn't find his presentation on it).
Moving over from brief notes to a detailed presentation: In this 30 min talk, Yen Liow of Aravt Global (whom we first met in issue 43) provides some valuable advice on how to be a right tailed (high returns over a very long period of time) investor. In addition to the usual concepts like investment philosophy and process, the talk also touches upon a number of interesting concepts like not fighting fair fights, and tools that can be used for surviving and benefiting from volatility. In order to demonstrate his thought process, Yen also pitches an idea towards the end of the talk. I said this in issue 43: "Of the interviews that I have heard and shared in the recent past, this one is probably amongst the very best." which I'll reiterate for this talk as well.
Section 2: Mental Models & Behavioral Biases
We've looked at numerous mental models in this section over the past many issues. While these models make for very interesting reads, their usage is not easy to come by (it takes some deliberate practise to find their use). That is a problem that the author of this post is attacking - how can we use mental models in our everyday life. Using examples of regular practitioners, he demonstrates some easy hacks that you can try to fastrack your understanding and usage of mental models.
(This reminded of a rare recording of talk given by Peter Kauffman - author of Poor Charlie'e Almanack - on similar lines that we saw in issue 33).
This mind-boggling analysis is a great read on two counts:
It provides a glimpse into the future of data crunching that investors will be able to use to enhance their investment skills.
More importantly, it provides a good mental model to understand the impact that people (human capital) can have on businesses as well as stock returns.
Section 3: Lessons From History
It is a widely known fact that recent history has a bearing on our decision making (recency bias). In investing parlance, recent macro-economic conditions impact our future asset allocation. This impact is even more pronounced when the macro-economic conditions have largely prevailed for nearly a decade. However, over the very long term (on a time scale and not in context of investment horizons), asset classes have behaved differently based on the economic conditions that prevailed for an extended period (like a decade). Thus, while the recent period of improving growth and low inflation led to equities and corporate bonds shining, using that an as input for future asset allocation may not yield optimal results.
This first part of a series of articles looks at how different asset classes have behaved during different economic conditions, making the case for a more well-diversified asset allocation (including commodities, gold etc). Long term investors may not react to every macro-economic data points, however, having an eye on the macro-trends is important for portfolio construction. This gains importance especially now as inflation expectations have started to move up (and so have commodity prices).
The second part of the series looks at certain price-related indicators that can help investors identify a change in the macro-economic landscape and adjust their asset allocation accordingly. The simple indicators discussed in this instalment can help investors build counter-cyclical portfolios.
Section 4: Personal Development
Practice makes a man perfect. Or does it? Consider this: we have all been using the keyboard to type for more than a decade now. But how many of us are great at typing? A similar observation could be made about reading. We have easily spent more than 10,000 hours doing these activities, and yet, most of us are not proficient enough. What do you think is the missing link here? The answer lies in this wonderful article which itself is a compilation of notes from some of the best books on this subject. If there is anything that you want to improve at in life, then this article will serve as a good guide - at a reading time of 38 minutes (longer if you will stop to take notes), this is as detailed a guide as it can be.
This article finds a mention in the above guide and is related to the Octopus and Shark article above, as well as the ambidextrous mindset article that we saw in issue 69 (Section 2). It a short guide on knowing when to explore new opportunities, and when to double down on existing ones.
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That's it for this weekend folks.
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Have a wonderful week ahead!!
- Tejas Gutka
[April 17, 2021]