[The Weekend Bulletin] #45: Add, but also Subtract
A digest of some interesting reading material from around the world-wide-web. Your weekly dose of multi-disciplinary reading.
We are programmed to generally revere the positive and despise the negative. Add, don’t take away; unite, don’t divide; more, not less, and so on. While positivity is progressive, negativity also holds a considerable place in progress. For instance, we may have combined a stick, a rope, and a stone to make a hammer. At the same time, we would also have shaved off the sides from a stone to make an axe/knife. You get the drift.
Like most things in life, investing requires us to find a good balance between the additive and the subtractive (we looked at the idea of opposing forces first in Issue 12).
Nothing reflects this balance better than the basic tenets of risk & return in investing. Frontline technology stocks have been the top performing stocks in the US over the last decade making it an attractive investment destination - everybody wants a little bit of tech in the portfolio. However, within the overall cohort of technology stocks, more stocks are likely to appear in the list of worst performing stocks over a decade than best performing, as per recent research (h/t to Joachim Klement for highlighting this). This means that as a group, technology stocks were either very good performers or very bad - a high risk, high return kind of payoff.
Something not so obvious is an attribute like confidence. We would all prefer to be confident investors, wouldn’t we? But with confidence, comes higher risk-tolerance, which may be a risky combination, particularly as we age.
It is for this reason that they say that investing is part science, part art. For there is no formula for success, there are just tenets that work as guardrails, like 'strong convictions, loosely held’.
As you would have guessed by now, while we usually focus on the do’s, this issue focuses on the dont’s.
Section 1: Investing Wisdom
Let’s start with something that no-one wants to hear currently, for as we covered in Issue 43, the enterprising investor should pay attention to everything that sounds unconventional. And the most unconventional sounding advice currently is not to over-pay for a good quality business. I know that past articles shared around this thought have garnered very little interest, but my job is to highlight what I find interesting, while you decide on its usefulness. So here it is again: how a recent IPO at high valuations is a reminder of a similar event in the past, that obviously didn’t end too well for investors.
Sometimes when you look back at the market, events in history seem to have been obvious indicators of a large move on either side for the market. This rear view vision often makes us believe that identifying large market moves may be relative easier. This oversimplification of the past is a trap that investors should avoid, claims this article. For,
“A simple calculation proves that odds are not in your favour,” Methodical notes. “The best investors don’t even have a 55% success rate in getting their investment decisions right, but let’s say for example that you have a crystal ball and are able to get the calls right 60% of the time. To get it right twice (on exit and entry), you only have a 36% chance of making the right decision (60% x 60% = 36%).”
He studied multibaggers, so much so that he wrote a book on them. Now he invests in companies that he thinks are potential multibaggers. And he has an advice for you: Look at the big picture, but don’t make too much of it. For, as he highlights from personal experience, these things don’t matter as much as other things do. Even if they matter, there are very few who can understand them well, consistently over time.
We are all aware of the importance of a good management in the making of a good business. It may therefore sound a little surprising at first that the author of this article tells you to not trust managements, at least not take them on face value. He also prescribes some hard work that must be undertaken before trusting managements.
Moving back from the dont’s to the do’s, here is a visual treat worth savouring. A painstaking effort of visualising some interesting investment frameworks. Three of my favorites are:
Make sure to check them all out.
Section 2: Mental Models & Behavioral Biases
This 2-min video is a very simple explanation of a chaotic system like the stock markets. How small changes in the initial conditions can lead to completely different outcomes - something that is difficult to understand but easy to observe. The video has three parts; below is my interpretation of each of the parts:
In the first part, green pendulum is how we think of the market - gyrating between cheap and expensive. The other pendulum is how the market actually works - taking different paths from cheap to expensive and back.
The second part of the video explains how the interaction of fundamentals and emotions (each being the half hand of the pendulum) have an impact on the market.
The third part is the same, but represents how stocks move with the market - how minor differences in fundamentals lead to vastly different outcomes.
Here is another interesting visualisation of the double pendulum.
Section 3: Personal Development
It is good to chase happiness, however, happiness can sometimes be sadistic or indulging. Such momentary happiness can actually lead to long term regret (having an extra dessert makes me happy at the moment, but I will regret it later). Thus, don’t seek happiness when deciding on any course of action. Instead, heed to the advice of this article.
It is usually advised that habits must be made easy, removing all obstacles so that we do not resist what ever it is that we want ourselves to do. However, sometimes it is helpful to place obstacles rather than remove them in order to make a habit stick, as this article explains.
Section 4: Trivia
Here’s a question for you: Who do you think (intuitively, without calculating) will retire with a bigger corpus, Investor A or Investor B?
Investor A: saves INR 20,000 per year from age 26-65
Investor B: saves INR 20,000 per year from 19-26, after that never saves a penny until retirement but also doesn’t touch his savings.
Both retire at age 65, and earn a 10% return on their savings until then.
Closing thoughts...
"Success is largely the failures you avoid.
Health is the injuries you don't sustain.
Wealth is the purchases you don't make.
Happiness is the objects you don't desire.
Peace of mind is the arguments you don't engage.
Avoid the bad to protect the good.”
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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 26, 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.