Thursday 3 February 2022

Weekend Reading - 04-Feb-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. It’s OK To Build Wealth Slowly

Life and risk are both full of trade-offs.


I know clients with tens of millions of dollars who have the ability to take lots of risk but not the desire so they play it safe. I know other clients with tens of millions of dollars who have the ability to take lots of risk and do so with certain parts of their portfolio because they can.


So much of the success for any investment or wealth-building strategy comes down to your personality. And the best part about building wealth slowly is…it actually works.


Had I made some extreme bets with my career or portfolio I could have way more money but those bets also could have crashed and burned, leaving me in a far worse position.


What ifs are useless when it comes to your finances. There are plenty of different ways to build wealth. The important thing to remember is you don’t have to follow someone else’s path just because it looks easy.


There are always trade-offs in life and investing.




2. Why competitive advantage dies

Buddhism has a concept called beginner’s mind, which is an active openness to trying new things and studying new ideas, unburdened by past preconceptions, like a beginner would. Knowing you have a competitive advantage is often the enemy of beginner’s mind, because doing well reduces the incentive to explore other ideas, especially when those ideas conflict with your proven strategy. Which is dangerous. Being locked into a single view is fatal in an economy where reversion to the mean and competition constantly dismantles old strategies.


Maintaining financial success takes precedence over traits that were vital to building the initial idea. Nothing to lose is a wonderful thing to have. You focus all your energy on building something great. Having a quarterly dividend to maintain is what happens after you build something great. But it can come at the expense of what made you successful in the first place.



3. Your Attention Didn’t Collapse. It Was Stolen.

The average teenager now believes they can follow six forms of media at the same time. When neuroscientists studied this, they found that when people believe they are doing several things at once, they are actually juggling. “They’re switching back and forth…”


Imagine, say, you are doing your tax return, and you receive a text, and you look at it – it’s only a glance, taking three seconds – and then you go back to your tax return. In that moment, your brain has to reconfigure, when it goes from one task to another. When this happens, the evidence shows that your performance drops. You’re slower.


This is called the “switch-cost effect”. It means that if you check your texts while trying to work, you aren’t only losing the little bursts of time you spend looking at the texts themselves – you are also losing the time it takes to refocus afterwards, which turns out to be a huge amount.



4. Always be prepared for a correction in equities

Investing in the stock market is a challenging mental exercise.


Among other things, investors have to cope with two seemingly conflicting realities: In the long-run, things almost always work out for the better; but in the short-run, anything and everything can go very badly.


Unfortunately, it is incredibly difficult to predict when stocks will fall. And exiting stocks in an attempt to avoid short-term losses can prove incredibly costly to long-term returns.


So, whether or not you can comprehensively identify and balance all of the potential bullish and bearish market catalysts, it’s probably a good idea to just always be prepared for stocks to experience some big dips on their long upward journey.


If you’re not able to stomach short-term volatility or if your portfolio can’t handle short-term unrealized losses, then investing in the stock market might not be for you.


These short-term challenges are the price investors pay for long-term riches.



5. Size helps. Before it hurts.

Body size in biology is like leverage in investing: It accentuates the gains but amplifies the losses. It works well for a while and then backfires spectacularly at the point where the benefits are nice but the losses are lethal.


Take injury. Big animals are fragile. An ant can fall from an elevation 15,000 times its height and walk away unharmed. A rat will break bones falling from an elevation 50 times its height. A human will die from a fall at 10 times its height. An elephant falling from twice its height splashes like a water balloon.


The most dominant creatures tend to be huge, but the most enduring tend to be smaller. T-Rex < cockroach < bacteria.


Size is nature’s leverage. Sought after for its benefits straight up to the point that it ferociously turns against you.


Same thing applies to companies and investments.


The important point here is that these companies didn’t get big because of greed or ego. They got big because economies of scale made them more efficient. Economic evolution pushed them that direction, naturally and rationally, so they could do their job better. Cope’s Rule in action. But that same force pushes them straight up to a level of self-destruction that can undermine all the previous gains, even put them out of business. That sounds crazy, but it’s been happening in nature for hundreds of millions of years.



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