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Thursday 20 January 2022

Weekend Reading - 21-Jan-22

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. Investing wisdom from Terry Smith's 2021 annual letter

In investment, as in life, you cannot have your cake and eat it, so it is difficult if not impossible to find companies which are resilient in a downturn but which also benefit fully from the subsequent recovery. Of course, you could try to trade out of the former and into the latter at an appropriate time but it is not what we seek to do as the vast majority of the returns which our Fund generates come from the ability of the companies we own to invest their retained earnings at a high rate of return because they own businesses with good returns and growth opportunities.


In our view it would be a mistake to sell some of these good businesses in order to invest temporarily in companies which are much worse but which have greater recovery potential.


Consistently high returns on capital are one sign we look for when seeking companies to invest in. Another is a source of growth — high returns are not much use if the business is not able to grow and deploy more capital at these high rates.


Our portfolio consists of companies that are fundamentally a lot better than the average of those in either index and are valued higher than the average S&P 500 company and much higher than the average FTSE 100 company. However, it is wise to bear in mind that despite the rather sloppy shorthand used by many commentators, highly rated does not equate to expensive any more than lowly rated equates to cheap.


2. Winds of Change

The years since then have seen a massive shift in our environment. Today, unlike in the 1950s and ’60s, everything seems to change every day. It’s particularly hard to think of a company or industry that won’t either be a disrupter or be disrupted (or both) in the years ahead. Anyone who believes all the firms on today’s list of leading growth companies will still be there in five or ten years has a good chance of being proved wrong.


For investors, this means there’s a new world order. Words like “stable,” “defensive” and “moat” will be less relevant in the future. Much of investing will require more technological expertise than it did in the past. And investments made on the assumptions that tomorrow will look like yesterday must be subject to vastly increased scrutiny.




3. Efficiency is the Enemy

There’s a good chance most of the problems in your life and work come down to insufficient slack.


If you ever find yourself stressed, overwhelmed, sinking into stasis despite wanting to change, or frustrated when you can’t respond to new opportunities, you need more slack in your life.


Many organisations are obsessed with efficiency. They want to be sure every resource is utilised to its fullest capacity and everyone is sprinting around every minute of the day doing something. They hire expert consultants to sniff out the faintest whiff of waste. Personally, we view sleep, sickness, and burnout as unwelcome weaknesses and idolise those who never seem to succumb to them. This view, however, fails to recognize that efficiency and effectiveness are not the same thing.


Slack consists of excess resources. It might be time, money, people on a job, or even expectations. Slack is vital because it prevents us from getting locked into our current state, unable to respond or adapt because we just don’t have the capacity.


Too much slack is bad because resources get wasted and people get bored. But, on the whole, an absence of slack is a problem far more often than an excess of it




4. Why Your Brain Never Runs Out Of Problems To Find

Why do many problems in life seem to stubbornly stick around, no matter how hard people work to fix them? It turns out that a quirk in the way human brains process information means that when something becomes rare, we sometimes see it in more places than ever.


You can probably think of many similar situations in which problems never seem to go away, because people keep changing how they define them. This is sometimes called “concept creep,” or “moving the goalposts,” and it can be a frustrating experience. How can you know if you’re making progress solving a problem, when you keep redefining what it means to solve it?


It turns out that for your brain, relative comparisons often use less energy than absolute measurements. Human brains have likely evolved to use relative comparisons in many situations, because these comparisons often provide enough information to safely navigate our environments and make decisions, all while expending as little effort as possible.




5. Sleeping well at night is not always the best investment advice

Selecting the right asset allocation is all about trade-offs and one variable is your appetite for risk. But figuring out what helps you sleep at night can be terrible advice for many investors.


I had numerous conversations with people who would have slept better at night if they could have sold out of their entire portfolio and went to cash during the depths of the market crash earlier this year. Had they done so they definitely wouldn’t be sleeping better now that stocks have recovered their losses.


The problem is your preference for risk often changes more than your tolerance for risk based on what’s happening in the markets.


You could hold your entire portfolio in cash and sleep like a baby for years only to realise later in life you’ve lost money to inflation over time. Or you could throw all of your money into only the best-performing fad companies at the moment and feel better about your positioning until those investments blow up in your face.


Most good investing should be at least a little uncomfortable at times.



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