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Thursday 4 November 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. The art of not selling

“Of our most costly mistakes over the years, almost all have been sell decisions. The mistake, in virtually every instance, has been selling too soon. Reflecting on these mistakes gave rise to this letter, and its title, “The Art of (Not) Selling.”

Taking a step back, our investment philosophy involves concentrating our capital in a small number of what we believe to be growing and competitively advantaged businesses. These kinds of businesses are rare and are only periodically available for purchase at attractive valuations. With that in mind, we do our best to hold on for the long term, so that our capital may compound as the businesses grow.

Holding on means resisting the temptations to sell — and there are many. We tune out politics and macroeconomics. To the surprise of many, neither valuation nor price targets play a role in our sell decisions.

To be clear, there may be times when we believe it is appropriate to sell. In these instances, it is typically because of an adverse change in the business itself.



2. The Scientific Argument for Mastering One Thing at a Time

If you want to master multiple habits and stick to them for good, then you need to figure out how to be consistent. Research has shown that you are 2x to 3x more likely to stick with your habits if you make a specific plan for when, where, and how you will perform the behavior. Researchers found that people who filled out this sentence were 2x to 3x more likely to actually exercise compared to a control group who did not make plans for their future behavior. Psychologists call these specific plans “implementation intentions” because they state when, where, and how you intend to implement a particular behavior.


Developing a specific plan for when, where, and how you will stick to a new habit will dramatically increase the odds that you will actually follow through, but only if you focus on one thing.


Follow-up research has discovered implementation intentions only work when you focus on one thing at a time. In fact, researchers found that people who tried to accomplish multiple goals were less committed and less likely to succeed than those who focused on a single goal.


The best way to change your entire life is by not changing your entire life. Instead, it is best to focus on one specific habit, work on it until you master it, and make it an automatic part of your daily life. Then, repeat the process for the next habit.



3. The IPO mania has begun

It's one thing to invest in a loss-making company but quite another to invest in a business that has never made money. Not just that, one could reasonably argue that in some of these businesses, it is unproven on a global scale whether money can be made at all. Food delivery and cab-hailing are perfect examples of this. One particular company may be chronically unprofitable and that's pretty bad but if no one in the world has ever made profits in a particular line of business, then you have to start wondering if that business is a business at all.


The classic logic that is always given for investing in such businesses is that the losses are a price to be paid for fast growth and for capturing enormous market shares. There are many dominant Internet businesses today whose past is said to prove this point. Google, Facebook, Amazon are all perfect examples. However, the key here is that it takes growth - scorching growth - to justify the losses. Is that kind of growth visible in the big Indian names here? Paytm, which is apparently going to come out with the largest Indian IPO ever, has now had a stagnant topline for three years! Its net income for the March 2021 year-end is actually lower than that for the March 2018 year-end.


In fact, when one looks at Nykaa, one realises that never having made any profits actually works well for such companies at the time of the IPO. Nykaa has had the misfortune of having actually made some small amounts of profits here and there. This means that investors can calculate the P/E and see what value they are getting. Perpetual lossmakers like Zomato and Paytm are, in that sense, lucky that they have never made any profits, so no P/E can be calculated, and therefore, all that is there is a hot story about the future, unsullied by any whiff of reality.



4. Internal vs external benchmarks

If you measure your career solely relative to an external benchmark – you’re on the neverending path of feeling inadequate, incompetent, and poor. Nothing you do will ever feel that great because someone is always smarter than you, more popular than you, better looking than you, getting richer faster than you, and making sure you know about it.


It’s not until you focus on internal benchmarks and see how far you’ve come, relative to where you began – the gap between today and your own cost basis – that you have a good view of where you stand and what you’ve accomplished.


Almost everything looks better from the outside. When you’re keenly aware of your own struggles but blind to others’, it’s easy to assume you’re missing some skill or secret that others have. Few things are as awful as chasing something you eventually realize you never actually wanted.



5. Jeff Bezos' management principles

“Amazon has no secret management principles.” Jeff talks about them all the time at “all-hands” meetings. He explains them in press interviews that can be viewed on the internet, and they are listed at the bottom of every press release. But, I explained, you have to live by them all of the time, and most businesses are unwilling or unable to do so.


The most important is customer obsession. In his words, too many companies focus on their competitors and not on their customers.


The second principle is constant invention and innovation. As noted above, invention is closely linked to customer satisfaction. Constantly invent and apply technologies to solve problems and build new businesses.


The third principle is operational excellence.


Think long-term is the fourth touchstone, whether in launching new businesses or investing in new technologies.


Perhaps Jeff’s overriding principle, which is not on Amazon’s formal list, is his abiding optimism of the future and how we are only in Day 1.


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