[The Weekend Bulletin] #72: Multi-baggers vs Compounders, 5 types of investors, Valuations...
...Diderot Effect, History of Wealth, Giver/Taker/Matcher, Dog & the Brain, and more.
A digest of some interesting reading material from around the world-wide-web. Your weekly dose of multi-disciplinary reading.
Before we get to business, here are some really well written words on reading:
Section 1: Investing Wisdom
A bull run produces many multi-baggers - stocks that increase multi-fold in value (2x-4x-10x...). However, not all these multi-baggers are compounders (stocks that grow at a decent rate over very long period of time). Confused? Read on to find out the difference between multi-baggers and compounders.
On similar lines, this article argues that not all wealth is real. It is important to understand the distinction between paper wealth and real wealth, especially as your wealth increases substantially.
Two interesting but somewhat contrasting takes on valuations:
In this short memo, investor Robert Vinall argues that in a world where businesses are changing rapidly, more importance should be laid upon the future (these businesses do no revert to the mean like older businesses). Therefore valuations of modern businesses should not focus much on the past, but, should rather be based on a relatively accurate estimation of the future. In his view, not appreciating this nuance is one reason why older 'value' investors have struggled in the recent past.
On the other hand, this article argues that short term price movements have no correlation with valuations. The market always over- or under- shoots fair valuations and therefore investors should not overtly focus on valuations to make purchase/timing decisions, generally. Valuations are usually more useful in extreme scenarios, where it is easy to make a distinction between cheap and expensive.
(Readers should not be disheartened by the above paragraphs. While it may seem that one author advocates being as accurate as possible about valuations and the other dismisses the usefulness of valuations as a signal, both the articles offer some interesting perspectives on the use of valuations. More importantly, even in their seemingly differing views, both the authors seem to agree about the correct way to use valuations. For an even better perspective, pair these articles with the talk on narratives that we saw in Issue 70)
This recent summary of Lee Freeman Shor's book 'The Art of Execution' makes for a very interesting read. Shor is an allocator who created a “fund of funds” managed by 45 of the world’s best investors. The book is about lessons learned from watching their trading for 7 years. Using these observations, Shor categorised investors in to five different tribes based on their behavior with respect to losing and profitable positions. There is a lot that we can learn from understanding each of these tribes and knowing which ones to avoid. The book and the summary both make for very interesting reads. Here is an infographic that I made basis this summary:
A couple of resources for the younger readers of this bulletin:
If you've always wondered how institutional investors differ from each other, and what kind of skills sets differentiate one investor from another (or an analyst from a portfolio manager) then this podcast will lay the groundwork for you: Paul Enright - The Buy Side Primer
This recent presentation by Kuntal Shah at Flame University will bring you up to speed with the history of financial frauds across the globe:
Compliment the above video with this detailed presentation that goes into the details of how companies can trick investors by 'managing' (or mis-reporting) financial information.
Section 2: Mental Models & Behavioral Biases
What better way to learn about our behavioural biases than through stories? Morgan Housel pens yet another read-worthy essay - this time, a collection of short stories - to remind us of our own behavioural pitfalls. Entertaining and educative.
There are two equations below that I want you to solve mentally. Before you jump ahead, make sure you pause for a minute to think about each:
108 + 93 = ?
313 - 112 = ?
Although both the equations lead to the same answer, my guess is that most people would have found it easier to solve the first one than the second. My guess is based on the premise that we usually prefer to add than subtract (maybe because we were taught BODMAS?)
Nevertheless, this post is not about mathematical formulas or equations. It is about our need to accumulate belongings - a need that often leads to financial ruin when taken to the extreme. One such case of extreme is that of a French artist and writer Denis Diderot upon whom this Mental Model is named: The Diderot Effect. The following video gives a quick introduction to this mental model:
Pair it with this article that lists a few ways in which we can prevent ourselves from falling into this trap.
Section 3: Lessons From History
This short essay looks at the history of the richest people in America and draws some interesting observations. For instance, back in 80's the most common source of wealth was inheritance. Today, heirs account for only 27 of the 100 wealthy (down from 60). The change in the source of wealth of the people weaves an interesting story about our socio-economic developments. A light but enlightening read.
Section 4: Personal Development
“Every time we interact with another person at work, we have a choice to make: do we try to claim as much value as we can, or contribute value without worrying about what we receive in return?”When it comes to your interactions with the world, are you a Giver, a Taker, or A Matcher? What you are will impact your life outcomes. This article explains how.
We've all often heard the advice about finding passion in the work you do. After all, if you enjoy doing what you do, you'll do it well. However, that is just half the truth. Passion is more inward looking, more individualistic. While it definitely helps one perform one's job better, what really raises the bar of performance is a more outwardly feeling called Purpose - the sense that you are contributing to someone's well-being. This short note on the difference between Passion and Purpose has a lot of data to convince you on the above. A very informative read.
Quotable Quotes:
Some interesting analogies between the dog and the brain:
"You gotta treat your brain like a dog you just got. The mind is infinite in wisdom. The brain is a stupid, little dog that is easily trained. Do not confuse the mind with the brain. The brain is so easy to master—you just have to confine it. And it’s done through repetition and systemization."
- Jerry Seinfeld on Tim Ferriss’ podcast (although I read it here)
And then, this on our behaviour during the ongoing pandemic:
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That's it for this weekend folks.
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Have a wonderful week ahead!!
- Tejas Gutka
[April 24, 2021]