[The Weekend Bulletin] #43: Unconventional Wisdom
A digest of some interesting reading material from around the world-wide-web. Your weekly dose of multi-disciplinary reading.
To catch the best fish, you simply need to find a pond with a dense population of good quality fishes, and one that is less crowded or relatively unknown. It’s the same with investing. The best investors are those that do not think with the crowd - they are nonconformists. They are not necessarily contrarians - they don’t go against the crowd for the sake of it - they just like to look where no one else is looking. But being a nonconformist is not easy - if it was, we would all be nonconformists, which would make no sense.
The wisdom of the crowds (conventional thinking) usually sounds logical and is easily agreeable, until proven otherwise - there was a time when anyone who said that the earth is round, or that it goes around the sun was either laughed at or condemned.
What makes unconventional wisdom powerful is not that it is contrary to popular belief, but the fact that it is hard to believe initially. Therein lies an opportunity for the enterprising investor, for that unconventional wisdom can be highly profitable. Thus, as investors, it is very important that we are constantly on the lookout for ideas that do not confirm to popular beliefs.
To be sure, no everything that sounds absurd will turn out to be true - there will be a number of false positives. Therefore, rather than acting upon any nugget of unconventional wisdom, the enterprising investor would do well to dig deeper every time she discovers a thread of information that is contrary to popular belief. This issue presents some such threads that are worth exploring.
Section 1: Investing Wisdom
“From a given “expensive” starting point, there was a 56% probability that the market had a 10% correction within three years, waiting for which would result in about a 10% return benefit versus having invested right away.”
Conventional wisdom would say that it probably makes sense to wait for a correction because history is on your side. Unconventional wisdom says that you would be wrong to assume that. Read on to find out why.
What would it take to identify a 100-bagger - a stock that can go up a 100x. You would imagine that it would be an extensive analysis of growth rates, profitability factors, competitive intensity along with detailed financial calculations of cost of capital, gearing, interest burden etc. Turns out, it’s much simpler than that. While each multibagger is unique in itself, there are some common threads that can be drawn by looking at past multibaggers. Here is one such thread-drawing by the author of the book 100-baggers. You would wonder if it is indeed so simple to identify 100-baggers using such an analysis.
Most investors seek mentors who can help them formulate an investment philosophy and guide them with a research process - Warren Buffett had Benjamin Graham, and later Phil Fisher and Charlie Munger; today a large section of investors looks up to Buffett for wisdom. However, while this investor had a mentor who helped him set a career path, his approach to developing an investment philosophy was very unconventional. Yen Liow of Aravt Global retraces his journey in to the world of investment in this aptly titled podcast, 'What Got You There’ and talks about (among other things) how he unconventionally used case studies to identify an investment philosophy that would help him deliver consistent and outsized returns over long periods of time. Of the interviews that I have heard and shared in the recent past, this one is probably amongst the very best. If I were an aspiring investor, I wouldn’t miss this one.
To wrap this section, here's a story of how a well known private investor started his investing journey, failed, learnt, and then grew independent. He also doles out some relevant but unconventional advice to aspiring financial independence seekers.
Section 2: Mental Models & Behavioral Biases
Befitting the theme of unconventional wisdom is the act of two funds to look back at their investments - one to learn from the mistakes by trying to identify the biases that influenced the original decision(a rarity in an industry that only celebrates success), the other to learn from the successes(not to boast about them but to show how different reality can be from an estimated future, even when you get your investment right). However, for the sake of brevity, we’ll look at them in some other issue, as they both are quite a handful. As is the rest of this issue.
Section 3: Lessons From History
"If somebody had told you in December that in 2020 we will witness the biggest recession in almost 100 years (sending the unemployment rate in the US to 25%), Russia and Saudi Arabia would enter an all-out oil war and in the United States twice as many people would die in three months than during the Vietnam War, every sane person would have predicted that stock markets would collapse. Instead, they have experienced only a regular-sized bear market so far and declined about 20% to 30% in February and March and have recovered ever since. At the time of writing, there is hardly any damage done in stock markets year-to-date.”
Conventional wisdom says that even as markets are forward looking, they remain connected to the economy. After all, strong economy means increasing demand, easy availability of capital for businesses, which leads to strong stock markets. On the other hand, a weak economy reverses these effects, leading to a weak stock markets. Unconventional wisdom says Wall Street is not the Main Street.
Supporting the above argument is this interactive infographic that looks past economic downturns and charts the market returns during those periods (click on the green bars).
Section 4: Personal Development
Over the last couple of issues we have established that 'The modern worker's biggest strength is knowledge, unlike his ancestors that needed physical strength.’ Consequently, we have been trying to answer the questions: "How does a modern worker ensure that he keeps his mental muscles exercised? How can he learn and understand more?” And while we have looked at some conventional methods so far, here is an unconventional advice: take breaks, and capitalise on distractions.
Lastly, here is an interesting way of learning new concepts: The ADEPT method.
Section 5: Trivia
I’ll leave you with one question: What one popular belief do you not agree with?
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That's it for this weekend folks. I hope you enjoyed this issue; let me know your thoughts/feedbacks by commenting below.
Have a wonderful week ahead!!
- Tejas Gutka
[Sep 12, 2020]
P.S.
If you come across an interesting article that you feel is insightful and worth sharing with the community of readers of The Weekend Bulletin, please email a link of the article along with a short summary/note on why you like the article to: share2TWB[at]gmail[dot]com.
I am 100% on board with the article on breaks. It's good that the age-old "wisdom" of forcing yourself to keep your attention focused for long periods is being debunked. Distractions are inevitable - voluntary or involuntary.