[The Weekend Bulletin] #76: Portfolio Management 101, Polarity,
+ Investment vs Speculation, Summary of ALL self-help books, Investment Risk
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 latest quarterly commentary of Miller Opportunity Equity strategy makes a couple of interesting points. First, it talks about increasing volatility in the markets and how investors can benefit from it (rather than treating it as a risk). Second, is the following quote on survival being the ultimate measure of success for investment managers (emphasis added):
"As a young analyst, I remember being shocked when I first heard my boss, Bill Miller’s response to the question, “what is investment success?” and he replied that over the long term it was simply “survival.” Isn’t that the lowest possible bar, I wondered, full of youthful ambition and naivety. As Bill explained and I’ve come to know firsthand: not at all! Investment management is exceedingly competitive. To survive, one must perform well in a variety of environments. Outperforming the market net of fees is extremely difficult. Doing so through various market environments is almost impossible."
While the above article talks about volatility and benefiting from it, the general perception in the market is that too much activity in the portfolio is not a good sign. How should investors then think of benefiting from volatility and portfolio activity? This slightly dated article provides a good perspective, breaking down returns into profit margins and turnover, just as we breakdown ROCE into profit margins and asset turnovers.
While you may make great profit margins on individual trades, either with a high portfolio turnover or without, these margins may not have a meaningful impact on your overall portfolio returns if this position forms a very small part of your portfolio. That's what this article drives - the importance of position-sizing in portfolio management. It also provides a simple and practical framework to apply the principle to your existing portfolio.
Together, the above three articles could easily be a course in portfolio management 101: diversification, portfolio turnover, profit margins, position sizing
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Benjamin Graham made the distinction between Speculation and Investment in his seminal book - The Intelligent Investor. After more than half a century since Graham's definition, this article adds some interesting perspectives and data points. The most important takeaway for me is how markets fuel the demand for the very thing that speculators desire, and how that eventually leads to the end of the speculative bubble.
Section 2: Mental Models & Behavioral Biases
A note in a recent issue (Oakmark Fund Commentary in Issue 74) reminded us of an important concept that we first saw in Issue 29 - 'balancing opposing forces'. All of investing is about finding the balance between two opposites like conviction and agility, concentration and diversification etc. This concept is not just useful in investing, but in life, in general. Termed 'Polarity', this mental model is useful tool in dealing with most situations in life. This article provides a good introduction to the concept of Polarity and provides a practical framework for adopting it in everyday decisions. This one is meant to be consumed slowly and repeatedly over time.
Section 3: Personal Development
When you try to break-down most things from the 'first-principles' perspectives, you discover that most things are built out of a certain set of universal principles (which is why we try to study mental models). The applies to the genre of self-help as well, as this article demonstrates. It boils down the lessons from most self-help books in to 11 simple rules.
Section 4: Blast From The Past
“Intelligence is not only the ability to reason but also the ability to find relevant material in memory and deploy to attention when needed” — Daniel Kahneman
Risk is perhaps one of the most commonly used term in financial markets (second only to return). Despite its ubiquity and undoubted importance, it is often not clear whether it refers to volatility or the permanent loss of capital. Both sides of this argument are right, but wrong to believe that there is any single concept that can encapsulate investment risk, claim the authors of this article.
It’s not simply that we are thinking about risk in the wrong way, but we are thinking about the wrong risks entirely.
(This article was featured in the fourth issue of TWB. You can read the whole issue here).
Quotable Quotes
On saying no:
"Saying no saves you time in the future. Saying yes costs you time in the future.
No is like a time credit. You can spend that block of time in the future.
Yes is like a time debt. You have to repay that commitment at some point.
No is a decision. Yes is a responsibility."
On taking action:
"You can either be judged because you created something or ignored because you left your greatness inside of you. Your call."
Both the above quotes by James Clear
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That's it for this weekend folks.
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Have a wonderful week ahead!!
- Tejas Gutka
[May 22, 2021]