The Weekend Bulletin (Vol. 1 | Iss. 22)
A digest of some interesting reading material from around the world-wide-web. Your weekly dose of multi-disciplinary reading.
Volume 1 | Issue 22 | April 18, 2020
Section 1: Investing Wisdom
Breaking away from the tradition of only sharing articles that offer timeless wisdom rather than talking about current affairs, below are two articles on the current market conditions. I share them because I feel that they serve an important reminder of the fact that markets are unpredictable in the short run, and can be disconnected from near term reality.
Drink this cocktail responsibly: Right now market participants are drinking a cocktail of different investor time horizons, risk preferences, fear, greed, and hope. Shake this up and you get some moves that defy logic, both up and down.
Two powerful but opposing forces: It’s a battle between collapsing economic activity and, to use a silly meme from finance Twitter, the federal government’s money printer going “brrr.” In the stock market, at least, the revving of the money printer is winning.
While at reminding about the abnormalities of the market, here is another important reminder: valuations don’t matter in a bear market!
Two analogies from cricket - a sport the nation is crazy about - to explain the art of investing:
Investing, a long inning of a test match: A colleague pens a newspaper column asking why triple centuries are only common to test matches and what that means for your net worth.
Investment Approach - Dravid vs Sehwag: Some of us are born with exceptional skills; for the rest of us, a learnable, repeatable, and reliable process needs to be followed. An interesting perspective of what that means for investors.
Among the many under-appreciated topics in investing, is understanding financial accounting. There is so much being spoken about growth and profitability that the balance sheet is often overlooked in most financial analysis. However, the study of financial frauds reveals that the hint to most frauds were in the balance sheet. Further, understanding the balance sheet in itself is also not adequate. A comparative study with other companies in the sector is important. This article carries all the details.
Section 2: Mental Models & Behavioral Biases
The 'Law of Unintended Consequences' states that consequences have consequences. Howard Marks, in his book The Most Important Thing, talks about 'Second Order Thinking'. Both these mental models require the investor to look beyond the obvious, to think at higher level than common norms. A related mental model, one that deals with causes rather than consequences, is ‘Root Cause Analysis’ - getting to the bottom of things. This article explains the difference between proximate and root causes. Below is my imperfect version of how it applies to investing:
Level 1: The company stock collapsed due to an increase in defaults by its customers. The customers defaulted due to a shutdown of the economy due to the spreading of a virus. It is a temporary issue, and therefore one should not worry. Rather one should be excited about its growth prospects due to the under-penetrated nature of its business - providing short term loans to the most under-privileged sections of the society. Further, company makes very high yields on these loans which make up for the riskiness of the business model.
Level 2: Those are the most vulnerable sections of the society, and can be affected en-masse due to a number of reasons like the spread of a disease, a natural calamity, riots etc. There are instances of Government intervention to forego the loans in the past. Further, the loans are unsecured in nature as there is no collateral against which they are lent. The interest is a very small component of the overall exposure and therefore cannot salvage the business from a situation where defaults rise indiscriminately. Given the highly leveraged nature of the business, vulnerability of the customers, and the absence of any collateral, this business should be avoided by long term investors, or at worst, should be accorded a very low multiple, irrespective of the growth in the business.
A very talented gentleman (@jackbutcher) is doing a wonderfully creative work of converting axioms into pictures using the handle @visualizevalue on twitter. While all his work is amazing, his visualization of these 10 mental models - not specific to investing, but to life in general - deserves a special mention. As an illustration, below are three of my favorite out of the ten:
Section 3: Lessons From History
Does the sharp and significant rally leave you in doubt? Maybe part of you believe that this rally is sustainable and therefore should be invested into. Maybe another part of you fears that prices have run up too fast too soon, what if they fall again. Maybe the first part of you is further wondering if you should invest in one go, or in parts. Well, lets look at history for an the answer to these questions.
Section 4: Personal Development
An Introvert is often misunderstood as a loner. However, in reality, an introvert is any one who likes social interactions, but also cherishes alone time, especially to recharge and think things through. Here is how the current situation is ideal for the introvert in you, and how it has worked well for some geniuses in the past.
Section 5: Trivia
The Internet we know today was dreamt in the 1960s, debugged in the 1970s and built in the 1980s. Thirty years of work to create a reliable, flexible, inexpensive, global network. However, as early as 1970s, before it was a 'world wide web' (just a private network then), it was already being used to communicate, collaborate, and invent. 50 years from then, that is exactly what is the internet - now a world wide web - is being used for. Below are some interesting stats shared by the CEO of Verizon, speaking to Harvard Business Review.
Right now in the U.S., Verizon customers are making 800 million calls a day. That’s double the amount of the highest peak during a typical year, which is Mother’s Day. Secondly, the duration of the calls is 33% longer.
Roughly 9 billion messages are being sent in the U.S. EACH DAY, the same as New Year’s Eve. And this is constant.
Gaming is up 100%, connecting from home to office over a virtual private network is up almost 50%, web browsing is up 20%, while personal mobility is down 27%.
Peak hours for home broadband and the wireless network are in the mornings and during the day. That wasn’t the case before. And network usage is now going down on weekends when it has usually gone up.
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.
With the lock-down being extended further, you are probably bored of watching series on internet or playing games on social media. May be you plan to read a book, but don't know which to one to start with. Here is a long list of books on various subjects, along with a reason to read the book, that someone has very generously shared.
If books are too much a commitment for you, if you prefer more focused lessons on investing, then here's an opportunity to learn from one of the best - Michael Mauboussin. This page has links to most of his works (2009-2017).
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Have a safe & secluded weekend!!
- Tejas Gutka.