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Thursday 24 June 2021

Weekend Reading


Reading across disciplines is one of the best ways to improve our investment acumen. Here is a summary of some of the best articles I read this week. If you like this collection, consider forwarding it to someone who you think will appreciate it.

1. Your side projects (hobbies) are more powerful than you think 
It's easy for something new to feel like a project of your own. That's one of the reasons for the tendency programmers have to rewrite things that don't need rewriting, and to write their own versions of things that already exist. This sometimes alarms managers, and measured by the total number of characters typed, it's rarely the optimal solution. But it's not always driven simply by arrogance or cluelessness. Writing code from scratch is also much more rewarding — so much more rewarding that a good programmer can end up net ahead, despite the shocking waste of characters.

Remember that careless confidence you had as a kid when starting something new? That would be a powerful thing to recapture.

If it's harder as adults to retain that kind of confidence, we at least tend to be more aware of what we're doing. Kids bounce, or are herded, from one kind of work to the next, barely realizing what's happening to them. Whereas we know more about different types of work and have more control over which we do. Ideally we can have the best of both worlds: to be deliberate in choosing to work on projects of our own, and carelessly confident in starting new ones.

2. Why do we get misled by misinformation?
Why do people — and by “people” I mean “you and I” — accept and spread misinformation? The two obvious explanations are both disheartening. The first is that we are incapable of telling the difference between truth and lies. In this view, politicians and other opinion-formers are such skilled deceivers that we are helpless, or the issues are so complex that they defy understanding, or we lack basic numeracy and critical-thinking skills. The second explanation is that we know the difference and we don’t care. In order to stick close to our political tribe, we reach the conclusions we want to reach.

There is truth in both these explanations. But is there a third account of how we think about the claims we see in the news and on social media — an account that, ironically, has received far too little attention? That account centres on attention itself: it suggests that we fail to distinguish truth from lies not because we can’t and not because we won’t, but because we are simply not giving the matter our focus.

Pay attention; get some context; ask questions; stop and think. Misinformation doesn’t thrive because we can’t spot the tricks. It thrives because, all too often, we don’t try. We don’t try, because we are confident that we already did.

3. A good shareholder report
There's a reason everybody reads Buffett and Bezos—they give insight into interesting financial concepts, economic outlooks, managerial insight that is far ahead of anything being taught in business school, and more.  So, what are the traits of a best shareholder letter? Specifically, there are five: 
(1) Define the company and its strategy, 
(2) be candid, 
(3) educate, 
(4) tell a story (the investment thesis story), and 
(5) entertain. 
The shareholder letters have impact on stock price. Companies with the best shareholder letters outperformed the Index. If you skip through the corporate jargon phrases and pretty much skim the rest, it will hardly take about two minutes to go through it. A good chunk of companies won’t even have a letter. And the truly great letters could actually save you time in the long run.

Note: At Intelsense, we have decided to go through as many annual reports as possible and summarise them. Link here: http://blog.intelsense.in/2021/06/summary-of-annual-reports.html

4. Mistakes while managing risk (an old but relevant article by NN Taleb)
Instead of trying to anticipate low-probability, high-impact events, we should reduce our vulnerability to them. Risk management, we believe, should be about lessening the impact of what we don’t understand—not a futile attempt to develop sophisticated techniques and stories that perpetuate our illusions of being able to understand and predict the social and economic environment.

To change the way we think about risk, we must avoid making six mistakes:
1. We think we can manage risk by predicting extreme events.
2. We are convinced that studying the past will help us manage risk.
3. We don’t listen to advice about what we shouldn’t do.
4. We assume that risk can be measured by standard deviation.
5. We don’t appreciate that what’s mathematically equivalent isn’t psychologically so.
6. We are taught that efficiency and maximizing shareholder value don’t tolerate redundancy.

No one should have a piece of the upside without a share of the downside.

5. Nassim Taleb explains his views on Bitcoin 
“In its current version, in spite of the hype, bitcoin failed to satisfy the notion of “currency without government” (it proved to not even be a currency at all), can be neither a short or long term store of value (its expected value is no higher than 0), cannot operate as a reliable inflation hedge, and, worst of all, does not constitute, not even remotely, safe haven for one’s investments, shield against government tyranny, or tail protection vehicle for catastrophic episodes.”

A central result (even principle) in the rational expectations and securities pricing literature is that, thanks to the law of iterated expectations, if we  expect that we will expect the price to vary, then by backward induction such a variation must be incorporated in the price now. When there are no dividends, as with growth companies, there is still an expectation of future earnings, and a future expected reward to stockholders–directly via dividends, or indirectly via reverse dilutions and buybacks. Earnings-free assets are problematic. The implication is that, owing to the absence of any explicit yield benefiting the holder of bitcoin, if  we expect that, at any point in the future, the value will be zero when miners are extinct, the technology becomes obsolete, future generations get into other such "assets" and bitcoin loses its appeal to them, then
the value must be zero now.

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