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Friday 18 February 2022

Weekend Reading - 18-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. Beliefs are the new luxury goods!

Human beings become more preoccupied with social status once our physical needs are met. In fact, research reveals that sociometric status (respect and admiration from peers) is more important for well-being than socioeconomic status. Furthermore, studies have shown that negative social judgment is associated with a spike in cortisol (hormone linked to stress) that is three times higher than non-social stressful situations. We feel pressure to build and maintain social status, and fear losing it.


Material goods have become more affordable and, thus, less reliable indicators of social class. Status has shifted to the beliefs we express. And beliefs are less expensive than goods because anyone can adopt them.


Luxury beliefs are similar to luxury goods, but present new problems. Attaching status to luxury goods or financial standing meant there were limits to how much harm the leisure class could do when it came to their conspicuous displays. For example, fashion is constrained by the speed with which people could adopt a new look. But with beliefs, this status cycle accelerates. A rich person flaunts her new belief. It then becomes fashionable among her peers, so she abandons it. Then a new stylish belief arises, while the old luxury belief trickles down the social hierarchy and wreaks havoc.




2. Public Vs Private Blockchains: How Do They Differ

Blockchain technology is the fulcrum of the ‘next internet’. At a granular level, every ‘block’ is a part of a database that records information. Blockchain is divided into two types: Public and private. While public blockchains are decentralised peer-to-peer networks, the ledger is controlled by a centralised authority in private blockchains: Meaning, the main difference lies in the level of access given to users.


Also known as permissionless blockchains, public blockchains are completely open. Bitcoin and Ethereum are both examples of public blockchains. Anyone in the network can access the chain and add blocks. Public blockchains are also largely anonymous, unlike private blockchains, where the identity of the people involved in the transaction is not kept hidden.

Advantages of public blockchains: Security, Transparency, Anonymity.

Disadvantages: Power consumption, Scalability, Security.


Private blockchains like Ripple and Hyperledger have the advantage of speed because a smaller set of users means less time to reach a consensus to validate a transaction. Private blockchains can process thousands of transactions every second and are easily scalable.


A private blockchain has a centralized network that quickens the transaction process. Having a centralized network also raises the issue of trust, which is resolved in a public blockchain. A transaction’s validity cannot be verified on private networks and relies on the authorised nodes’ credibility. 



3. Smartphones Are the New Cigarettes

If you think about it, our attention is the only thing we truly own in our lives. Our possessions can go away. Our bodies can be compromised. Our relationships can fall apart. Even our memories and intellectual capacity fade away.


But the simple ability to choose what to focus on—that will always be ours.


Unfortunately, with today’s technology, our attention is being pulled in more directions than ever before, which makes this allocation of our own attention more difficult—and more important—than ever before.


To be happy and healthy, we need to feel as though we are in control of ourselves and we are utilizing our abilities and talents effectively.2 To do that, we must be in control of our attention.



4. Developing a process to challenge your own beliefs

My favorite quote from Seneca is “Time discovers truth.” My goal is to discover the truth before time does. I try to divorce our stock ownership from our feelings.


Let me give you this example. If you watch chess grandmasters study their past games, they look for mistakes they have made, moves they should have made, so in the future they won’t make the same mistake twice. I have also noticed they say “white” and “black,” not “I” and “the opponent.”


This little trick removes them from the game so that they can look for the best move for each side. They say “This is the best move for white”; “This is the best move for black.”



5. How many stocks to own in a portfolio?

There is another important point that sometimes gets overlooked: If you want to run a concentrated portfolio, then certain stocks must be off-limits (for example, highly-leveraged businesses) or you risk disaster. Your focus needs to be: “don’t lose money.” And you can do that by raising the quality of what you own. Search out wonderful businesses as Warren Buffett has often said, and ignore everything else.


If you have a really wonderful business, it is very well protected against the vicissitudes of the economy over time… And three of those will be better than a hundred average businesses. And they'll be safer incidentally. There is less risk in owning three easy to identify wonderful businesses than there is owning 50 well-known big businesses. It's amazing what has been taught over the years in finance classes.


Everyone will have to find their own answer to the question of “how many stocks?” And there’s more to think about than what I have addressed here.


For me, I love the idea of owning about a dozen wonderful businesses that I get to know really well and then leave them alone. No trimming. No “trading around positions.” No fretting during drawdowns. As long as the businesses continue to perform, I just let them be.




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