Growth: why it matters and why it goes missing sometimes; why even the best choke under pressure; how our brain tricks us into taking more risk during a pandemic; big lessons from history; and more...
💥💥 Have a Happy Diwali and a Prosperous New Year!! 💥💥
Section 1: Investing Wisdom
In reading about the ingredients of long term value (Issue 48), we learnt about the importance of growth and returns on capital over most other factors. In order to cement those lessons, here is an interesting example by Prof. Bakshi around why one without the other is not desirable (this is the tweet that started the discussion).
We’d all wish that investing was as simple as finding a growth machine that generates high returns on capital and riding it over decades. However, as we discussed last week, investing is simple but not easy. The long term is a long-winding road, and a lot can go wrong as your traverse the distance, including growth remaining elusive for a long stretch. In fact, in a study of over 400 companies that appeared in the list of Fortune 100 over a long period, and around 90 similar corporations outside of US, it was observed that 87% of the companies in this group had suffered one or more stall points - an extended period of low or no growth. Thus, even high quality companies suffer growth pangs, making it imperative for investors to understand why this happens. This long form article looks in to some of the common factors that lead to a growth stall, arguing that most of the factors are internal to an organisation, knowable in advance, and are controllable by management. It also goes on to provide a checklist for managements and investors to identity such growth stalls in advance. If there was only one article that you’d want to read this weekend, let it be this one.
If you were to find a common thread between companies like Levis Strauss, Dominos, 3M, Apple, Caterpillar, Daimler-Benz, Toys “R” Us, and Volvo, you’d discover that all of these companies went through long period of ‘growth stall’.
Section 2: Mental Models & Behavioral Biases
There are two things that we know about a crisis, as it relates to us: a) everybody faces a crisis in their life, independent of their religion, title, position or whatever egotist way we may want to classify ourselves; and b) one of the best test's of a person’s character is during a crisis (the other being when the person is extremely successful).
Remember the 1999 cricket World Cup? The historic match between SA and Aus? Gibbs dropping Waugh? The epic runout between Klusener and Donald? This was probably one of the biggest public display of how even the most trained people buckle under pressure. Using similar stories, this article looks at why we choke under pressure and how we can avoid it.
There was no better crisis in recent history that tested the character of the human race than the Covid pandemic that we continue to face. It has helped us further our understanding of the numerous behavioural biases that exhibit, as well as discover how the brain tricks us in to taking more risks during the pandemic (does this explain the rise of robinhoods?).
Section 3: Lessons From History
Morgan Housel argues that two are kinds of history that we can learn from. One is a specific event like a cricket match, a war, a pandemic. The other is to observe history from a distance for behaviours that show up time and again in multiple areas. He further argues that specific lessons cannot be applied widely, while the general observations are the most relevant. He then goes on to draw some of the big lessons that we can learn from history.
Section 4: Personal Development
We are taught to value structure as we grow. Not having goals, or pursuing aimlessness is culturally frowned upon. However, in living a structured life, we often forget that 'Doing things we enjoy without a goal in mind leads us to find new information, better understand our own capabilities, and find unexpected beauty around us’. This article argues that 'When the pressure mounts to be productive every minute of the day, we have much to gain from doing all we can to carve out time to play.'
You have the ability to put in far more effort into things than you normally do. The reason you don’t is that, most of the time, a full effort isn’t necessary.
We think that a full effort will be draining, that we ought to save our energy for when we really need it. Yet, more often than not, the opposite is the case. When we really use our full effort toward a central concern that matters deeply to us, we feel more energized—not less.
The paradox is that life is often easiest when it is hardest. When you’re working on a pursuit that may fail if you don’t take it seriously, you find the energy to take it seriously. And, in doing so, you find the other nagging things in life that needed effort weren’t so hard either.
The key is to find the one thing that will necessitate all the rest.
Section 5: Trivia
Would you be surprised if Charlie Munger advised you to be dumb rather than intelligent in order to be rich?
That's it for this weekend folks. I hope that you enjoyed this issue; let me know your thoughts/feedbacks by commenting below.
Once again, best wishes for the festivities. Have a wonderful week ahead!!
- Tejas Gutka
[Nov 14, 2020]
P.S.
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