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Thursday 16 December 2021

Weekend Reading - 17-Dec-21


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.

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1. The elements of effective thinking

We’re seduced into believing that brilliant thinkers are born that way. We think they magically produce brilliant ideas.


Nothing could be further from the truth while there are likely genetic exceptions, the vast majority of the people we consider brilliant use their minds differently.


Often, these geniuses practice learnable habits of thinking that allow them to see the world differently. By doing so, they avoid much of the folly that so often ensnares others. Eliminating stupidity is easier than seeking brilliance.


The five habits are:

1. Understand deeply

2. Make mistakes

3. Raise questions

4. Follow the flow of ideas

5. Change




2. How chemistry is part of the solution to climate change – and not just part of the problem

Chemical-based products often have a harmful impact on the environment, including their CO2 emissions toll. Green chemistry minimizes the use of hazardous substances when designing products and processes. Resulting in more efficient manufacturing processes, green chemistry is also good for business.


The chemical industry is also the largest industrial consumer of both oil and gas, using these as the building blocks to create products. This is not only energy-intensive, but it also produces potentially hazardous waste. Green chemistry looks to replace the use of these non-renewable, depleting resources with renewable materials that are less harmful to humans and the environment.


One of the most exciting innovations to emerge is the use of CO2 itself as a feedstock for making products such as building materials, chemicals and fuels. Scientists have also developed a process to use CO2 in computer chip preparation, significantly reducing the quantities of chemicals, energy and water required. Turning CO2 into a useful resource rather than just a harmful by-product is a crucial step towards decarbonizing the economy.


Besides being better for the environment, green chemistry is also well-placed to benefit the bottom line, with less waste and faster, more energy-efficient manufacturing processes. Add to this higher yields and a move away from a reliance on depleting resources like petroleum products – slowing their depletion – and it avoids the hazards and price fluctuations associated with the use of hydrocarbons.



3. Toyota vs Tesla - the difference in developmental approach

The auto industry owes Toyota a debt of gratitude. The giant Japanese automaker taught the industry how to run its manufacturing operations to their utmost efficiency, it set the industry standard for product development and it showed that corporate strategy should be measured in decades, not quarters.


It took the rest of the auto industry nearly 30 years to accept, learn and finally adopt what Toyota was doing. But they did it and it served them well. They improved their productivity, quality and profitability.


One reason the old-time players move slowly is because they copied Toyota’s product development process. Toyota freezes the specifications of a vehicle a year before Job One. And then it typically doesn’t make design changes until two years after the start of production. Under the Toyota doctrine, design changes introduce variability, and variability leads to quality problems. So, by freezing the specs, Toyota and its suppliers have the time to SPC their manufacturing ops to Six Sigma quality.


Not Tesla. It doesn’t freeze specs. Just the opposite. It makes design changes on the fly. And it mainly makes those changes – this is a key point – to take cost out of its cars.


Tesla’s electronic architecture is a prime example. The architecture in the Model X worked just fine, but two years after it came out the Model 3 debuted with an entirely new architecture.




4. Reimagining photosynthesis

The more that was discovered about the intricacies of photosynthesis, the more was revealed about its inefficiency. The comparison is often made to photovoltaic cells. Those on the market today convert about twenty per cent of the sunlight that strikes them into electricity, and, in labs, researchers have achieved rates of almost fifty per cent. Plants convert only about one per cent of the sunlight that hits them into growth. In the case of crop plants, on average only about half of one per cent of the light is converted into energy that people can use.


The rate of yield growth for crops like wheat, rice, and corn appears to be plateauing, and the number of people who are hungry is once again on the rise. The world’s population, meanwhile, continues to increase; now almost eight billion, it’s projected to reach nearly ten billion by 2050. Income gains in countries like China are increasing the consumption of meat, which requires ever more grain and forage to produce.


To meet the expected demand, global agricultural output will have to rise by almost seventy per cent during the next thirty years. Such an increase would be tough to achieve in the best of times, which the coming decades are not likely to be. Recent research suggests that climate change has already begun to cut into yields, and, as the planet warms, the bite will only get bigger. (Agriculture itself is a major contributor to climate change.) Devoting more land to farming isn’t really an option, or, at least, not a good one. Most of the world’s best soils are already under cultivation, and mowing down forests to plant corn or soybeans would lead to still more warming.




5. Volatility takes a bite

Feeding stock prices into your brain every day (or worse, multiples times a day) invariably compresses timeframes and makes every day seem important. Then before you know it, you are one of those people who go around with explanations for why such-and-such stock was up (or down) that day. Seems a recipe for madness.


“You sit in an ivory tower and think, ‘Oh, all I care about are returns over 5 to 10 years and I don't care about the path to get there. I don't care about volatility.’ That is true in an idealistic sense – the most important risk is always going to be permanent loss of capital. But your clients care about volatility…”


Well, I’m not going to say “I don’t care about volatility.” I’d rather have a smooth ride! Who wouldn’t? But that’s not realistic. I will say that I don’t actively manage volatility.


What I found most interesting about this interview was its blunt talk about the difference between running a portfolio as a professional and running your own personal portfolio. (I don’t have a personal portfolio anymore. It’s in the fund). At one point he says, “maximize your Sharpe and your Sortino ratios because that is your job as a professional investor. As an individual investor, you should not care at all about those ratios.”




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