The Weekend Bulletin (Vol. 1 | Iss. 20)
A digest of some interesting reading material from around the world-wide-web. Your weekly dose of multi-disciplinary reading.
Volume 1 | Issue 20 | April 04, 2020
Section 1: Investing Wisdom
Something that we hear a lot during market crashes is the phrase ‘dead cat bounce’, meaning a temporary recovery in share prices following a sharp fall. The operator here is ‘temporary’. But how is one to know if the bounce is prices are temporary or permanent? Is there some historical precedence to identify a dead cat bounce from a new bull market? Read on to find out here.
I would generally suggest that you stay away from reading forecast about the economic outlook post the covid outbreak (since no one knows how things will pan out). However if you can’t resist the temptation, then I suggest reading this balanced deliberation by Howard Marks.
I am a big fan of what Howard Marks writes. But the above is probably the first of his Memo’s that I have just skimmed through. And that has nothing to do with his writing but rather with the subject. We are in the middle of such uncertainty that one doesn't know how things will eventually pan out. Therefore rather than crystal gazing, I would suggest re-reading some old classics, like the two below:
A prolific writer and a well regarded investor, Seth Klarman's investor letters are hard to find. Therefore when a decade old letter re-surfaces, you ought to re-read it. In this letter of 2009, titled 'The Value of Not Being Sure', Seth talks about dealing with a market fall and the uncertainty surrounding it.
The second letter comes from a prominent writer on behavioral finance and another well regarded investor - James Montier. His 2011 paper titled 'The Seven Immutable Laws of Investing' puts together a set of principles that work as a guide for investors to make sensible investments.
Lastly, in what was my first writing in my new role, I sent our a note to investors titled 'Navigating a Financial Storm'. It touches upon prudent measures to be taken before, during, and after a market panic. In doing so, it also outlines the investment philosophy that I am currently pursuing (I say currently as I believe that it is ever evolving through the many mistakes that you make over time). I hope you find it worth your while.
Section 2: Mental Models & Behavioral Biases
Outliers - not the book by Malcom Gladwell, but data points that lie at the edge of a normal distribution - is often under-appreciated and generally mis-understood concept. And therefore it has a significant impact on outcomes.
For instance, consider this business that I had a read about in the aftermath of the global financial crises (and therefore may not completely recollect all the details). It used to provide short term bridge loans to subprime patrons looking to buy a house and then help them get a mortgage on the house. Since it made loans that were short term in nature, the businesses was funded also with short term liabilities mostly, leading a proper match of assets & liabilities. However, as the GFC unfolded, patrons could not get mortgage on their houses and the company could not rollover its borrowing - leading to bankruptcy. A six-sigma or higher event led to the eventual death of a business. Indeed, it was an unforeseen event - and that is what black swan events are. Understanding the concept of black-swan events can help us mitigate such fatal risks.
This article explains the concept a little succinctly than Nasim Taleb himself. You can read NNT's original version here.
Section 3: Lessons From History
This one is from the archives, but is a timely revisit. Veteran investor Durgesh Shah looks back at history for some important investment lessons. He talks about things to look at while making an investment as well as pitfalls to avoid. What better time to look at mistakes than the current downfall. You can watch the video here, read a summary here, and browse through the presentation here.
Section 4: Personal Development
The current time at home can be put to good use by learning something new - a skill, a language, or some hobby. However, given that this time has come unannounced, most of us are not prepared. This uncertainty can lead to inaction. Without a plan, you may actually end up wasting time figuring what to learn, rather than learning something. If you find yourself in such a place, then this article will help you figure. It lists three different ways in which you can pick a project to further your skills.
Section 5: Trivia
Nothing could symbolize the current situation better than the N95 mask. The mask fits tightly around the face and is capable of filtering 95% of airborne particles, such as viruses, from the air, which other protective equipment (such as surgical masks) can’t do. A life-saving device that is now in dangerously short supply. But how did this object come into being? It has a long history apparently.
Masks started as an object to stop smells - people improvised masks to cover their faces as they generally believed diseases like the plague were gases emanating from the ground.
By the late 1870s, scientists learned about bacteria. Doctors started wearing surgical masks in 1897 to prevent coughing or sneezing droplets onto wounds during surgery. That is the point of surgical masks even today, and an important difference between a respirator (N95) and a mask.
The next set of masks were made from from gauze and cotton by a Chinese doctor in response to a deadly plague that broke out in 1910 in Manchuria (Northern China). When Spanish flu arrived in 1918, companies around the globe increased production of similar masks to help abate the spread of flu.
Through World War I and World War II, scientists invented air-filtering gas masks that wrapped around your entire head to clean the air supply. Similar masks, loaded with fiberglass filters, began to be used in the mining industry to prevent black lung. However, the fiberglass required a lot of effort to breathe, and the full head enclosures were hot to wear.
Around the same time, a former décor magazine editor began consulting with the 3M’s giftwrap division. She saw a project of making stiff ribbons, and realized it potential through her connections in the fashion industry. She made a case to 3M to look at the product in a bigger way and was assigned to design a molded bra!! Around that time, she was visiting a lot of sick family members in hospitals and also lost some. And out of that grief came a new invention: A “bubble” surgical mask that 3M released in 1961, that yes, takes its inspiration from the cup of a bra!!
By the 1970s, regulatory bodies teamed up on creating the first criteria for what they called “single use respirators.” The first single-use N95 “dust” respirator as we know it was developed by 3M, and approved on May 25, 1972.
N95 respirators were used in industrial applications for decades before the need for a respirator circled back to clinical settings in the 1990s with the rise of drug-resistant tuberculosis.
And that is the story of over 100 years of evolution of the N95 respirator - and remember, its not a mask. (Text and the image sourced from this article)
Bonus Feature: A few projects to fill the extra time during the lockdown
Have a lot of free time on hand and don't know what to do? The following are some high time-involvement activities that you can take up to fill the void. Under normal circumstances, you'd always find the 'too busy' excuse to take these up.
If you like reading books, but have always struggled to read more than a couple due to paucity of time, now might be a good time to catch up on that reading. However, if you prefer skimming over a deep dive, then this website is a treasure trove for you. It has a collection of free book summaries of over 100s of titles, from classics to more recent ones. It has a visual as well as a searchable library from where you can find summary of books that you seek.
If you prefer watching over reading, then may I suggest this playlist: It is a collection of 135 short and long videos of Charlie Munger, sorted by topics.
In case you are interested, here is my favorite talk by Charlie Munger.
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Have a safe & secluded weekend!!
- Tejas Gutka.