Hi, Welcome to the 13th Special Edition
Brief Overview of What We will cover in this Issue
Detailed Key Takeaways from the book I am reading Currently
5 Decent Articles to read and Key Takeaways from them.
Great Compounder stock vs Growth stocks (Video Clip)
How to pick a multi-bagger stock (Video Clips from FM)
Wealthiest Investor Vs Greatest Investor of all time (Video Clip)
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Investing: The Last Liberal Art (Part-2)
The Curious Case Study of Amazon
On May 15, 1997, Amazon.com (Amazon) became a publicly-traded company. 9 The target price set by the underwriters was $ 18 per share. It finished its first full day of trading at $ 23— a 28 percent one-day gain. By December 1999, in the midst of the technology bubble, the stock traded at over $ 100 per share. Unfazed, a few analysts predicted Amazon.com would soon be a $ 300 stock. The company was founded in 1994 by Jeff Bezos. One year later, Amazon went live on the Internet as an online bookstore. During the technology bubble and the collapse afterward, so many Internet companies were born and soon buried that it was hard to keep track. But Amazon made it through to the other side. When the NASDAQ Composite, home for many of the Internet newborns, finally bottomed on October 9, 2002, down 78 percent from its 1999 high, Amazon was still standing.
You might think investors would have congratulated the company for surviving the tech crash. But soon analysts were claiming Amazon was still massively overpriced. Although the company had sidestepped the guillotine, they said, its days were numbered. By year-end 2002, Amazon was trading ninety times cash flow and posted a $ 2.4 million earnings loss. The bear case rested on the fact that as a book retailer, Amazon appeared massively overpriced relative to brick-and-mortar bookstores. Even when the company diversified into DVDs, CDs, computer software, video games, electronics, apparel, furniture, toys, and food, the brick-and-mortar description stuck.
The bears first compared Amazon to Barnes & Noble then later to Walmart. In both cases, Amazon’s price to earnings and price to cash flow were significantly higher than the traditional retailers. Conversely, the Amazon bulls looked at the company and saw something different. To them, Amazon did not look like Barnes & Noble or Wal-Mart but instead resembled Dell Computer (Dell). Initially, the bears were shocked by the comparison. Dell was a direct distributor of personal computers and computer products. It was one of the best-performing stocks during the 1990s. Between 1995 and 1999, the stock was up 7,860 percent compared to the S& P 500 Index, which gained 250 percent. The bears quickly chided the Amazon bulls for latching on to a proven winner..
Does it make sense to compare Amazon to Wal-Mart? It is true that they sell essentially the same merchandise to customers, but the similarities stop there. Wal-Mart has 9,500 brick-and-mortar stores with over 2.1 million employees, each of whom helps to generate about $ 200,000 in sales. Amazon has 69 distribution centers with 51,000 employees, each of whom helps to generate over $ 950,000 in sales.
As a side note, Wal-Mart is expected to grow sales annually at 9 percent over the next five years. Over the same time period, Amazon is expected to grow sales annually at 28 percent.
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Storytelling and Narrative (How it affects our investing)
The words we choose give meaning (description) to what we observe. In order to further explain and/ or defend our description, we in turn develop a story about what we believe is true. There is nothing wrong with storytelling. In fact, it is a very effective way of transferring ideas. If you stop and think, the way we communicate with each other is basically through a series of stories. Stories are open-ended and metaphorical rather than determinate.
And yes, investors use narratives. There is a narrative about the economic recovery following the financial crisis. There is a narrative about inflation following the massive printing of money used to combat the financial crisis. There is a narrative for deflation, which tells the depressing story of how the massive debt levels accumulated over the past decade will take years to pay down, causing prices and wages to fall.
Paulos tells us people are very good at storytelling. They are also decent at statistics. But rarely does the storyteller import a statistical defense for the story. Likewise, people are capable of citing good statistics but rarely can they put the statistical revelation into proper context.“ Unfortunately, people generally ignore the connections between the formal notions of statistics and the informal understanding and stories from which they grow,” says Paulos. “They consider numbers as coming from a different realm than narratives and not as distillations, complements, or summaries of them. People often cite statistics in bald form, without the supporting story and context needed to give them meaning.”
When we listen to stories we have the tendency to suspend disbelief in order to be entertained, says Paulos. But when we evaluate statistics, we are less willing to suspend disbelief in order that we are not duped. Paulos goes on to describe the two types of errors in formal statistics. Type I error occurs when we observe something that is not really there. A Type II error occurs when we fail to observe something that is actually there. According to Paulos, those who like to be entertained and wish to avoid making a Type II error are more likely to prefer stories over statistics. Those who do not necessarily yearn for entertainment but are desperate to avoid Type I errors are apt to prefer statistics to stories.
For investors, it is important to realize the slippery slope of narratives. Storytelling inadvertently increases our confidence in propositions as the story itself becomes its own proof. “The focus of stories is on the individual rather than the averages, on motives rather than movements, on context rather than raw data,” explains Paulos. Because investors primarily use storytelling to explain markets and economies, the absence of statistical evidence weakens the description.
The right description is critical for providing the right explanation. However, there is often more than one obvious description. Even so, we go to great lengths to defend our chosen description, constructing elaborate and entertaining stories in order to make our point despite the risk of statistical inconsistencies.
One of the most difficult intellectual confessions is to admit you are wrong. Behaviorally we know we are subject to confirmation bias. Eagerly we wrap our minds around anything and everything that concurs with our statement. Too often, we misjudge stubbornness for conviction. We are willing to risk the appearance of being wrong long before a willingness to personally confess our own errors.
In investing, no one is perfect. Some of our mistakes will be minor and easy to overcome. Others will be intransigent. It is difficult to navigate our faults, particularly if they are steadfast and deeply held beliefs. To be a successful investor we must be prepared for redescriptions.
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What we know about modeling is that models have a tendency to work for a while and then unexpectedly stop working. Suddenly, the model no longer has an explanatory value, but some people still insist it is an accurate representation of how the world works. How are we to know?
The stock market is a giant discounting mechanism that is constantly repricing stocks. There are occasions when the stocks that offer the greatest discount to the company’s cash flows (the DCF model) are stocks with low price-to-earnings ratios; at other times the greatest discounts can be found in those stocks with high price-to-earnings ratios. No one metric is absolute; none is always right. Pragmatic investors can, and should, apply any second-order model that is fruitful and discard any that are worthless, all without violating the first order.
It can be best thought of as a Rubik’s Cube approach to investing. The successful investor should enthusiastically examine every issue from every possible angle, from every possible discipline, to get the best possible description— or redescription— of what is going on. Only then is an investor in a position to accurately explain.
The only way to do better than someone else, or more importantly, to outperform the stock market, is to have a way of interpreting the data that is different from other people’s interpretations. To that I would add the need to have sources of information and experiences that are different.
In studying the great minds in investing, the one trait that stands out is the broad reach of their interests. Once your field of vision is widened, you are able to understand more fully what you observe, and then you use those insights for greater investment success.
We live and work in a world in which the pace of change is staggering; just when you think things can’t possibly move any faster, the pace once again accelerates.
Once you commit yourself to philosophy, you find that you have set yourself on a course of critical thinking. You begin to look at situations differently and to approach investing in a different manner.
You see more, you understand more. Because you recognize patterns, you are less afraid of sudden changes.
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Literature (Whole New Insights about Reading)
In this chapter, you will learn ways to analyze a book (or other material) and critically evaluate its contents. That will tell you whether the material has value and whether it is worth your time to study it in depth. The process is not unlike analyzing a potential investment and has similar goals: to facilitate an informed, clear-headed decision.
we must educate ourselves. The key principles, the truly big ideas, are already written down, waiting for us to discover them and make them our own.
The vehicle for doing so is a book—or rather, a whole library of books— supplemented with all other media both traditional and modern: newspapers, magazines, broadcast commentaries, technical journals, analyst’s reports, and all the digital material on the Internet, to name the most obvious. It’s not merely a question of quantity. No one would be foolish enough to suggest that you try to read everything ever written on physics, biology, or other areas addressed in this book. Even if you could somehow manage to do so, I’d be willing to wager that from the sheer volume of ideas, you would end up more confused than enlightened. So we are talking about learning to be discriminating readers: to analyze what you read, to evaluate its worth in the larger picture, and to either reject it or incorporate it into your own latticework of mental models.
Yes, I know; you already have too much to read as it is. But I ask you to consider for a moment whether you might be emphasizing the wrong material. I suspect much of what you currently read regularly (the material about which you think “but I have to read that”) is about adding facts rather than increasing understanding.
We can all acquire new insights through reading if we perfect the skill of reading thoughtfully. The benefits are profound: Not only will you substantially add to your working knowledge of various fields, but you will also at the same time sharpen your skill at critical thinking.
Charlie Munger and Warren Buffett stress the importance of understanding the fundamentals of a company— the business model you invest in. And they mean real understanding, not mere data gathering; the sort of understanding that comes only from careful study and intelligent analysis. Thoughtfully choosing investments requires the same mental skills as thoughtfully reading a book.
In the course of developing this chapter, I talked to several “Johnnies” who after graduation entered the investment world. All of them said that the number one thing they learned in college was how to be a better thinker rather than a better trader, investment banker, financial advisor, or analyst— and that being a better thinker invariably made them better at their jobs.
If you don’t know how to think, you’ll always lose money.”
Most managers that generate alpha are just leveraging beta. What I want to understand is the manager’s core principles and how those core principles work to generate excess returns.”
There are other books describing a “how to read” system, some more recent than Adler’s but I know of none better. My copy of How to Read a Book is yellow-highlighted to a fare-thee-well and the margins are filled with notes, arrows, and exclamation points— and every time I open it I find something new. Even though the original concept of Adler and VanDoren’s book is seventy years old, the lessons it holds for us as investors are timeless, and I believe it is well worth our time to explore them in-depth.
The central purpose for reading a book, Adler believes, is to gain understanding. (For the time being, we will set aside the idea of reading for pleasure.) That is not the same as reading for information. The distinction is extremely important, and I believe it is especially important for investors.
The Wall Street Journal, Financial Times, the New York Times, Fortune, Forbes, and The Economist, as well as all the other newspapers, magazines, professional journals, and analysts’ reports that cross our desks, contain new information but not necessarily new insights. When we read this material, we collect more data, but our understanding of the matter does not generally increase. Clearly, information is a prerequisite for enlightenment, but the trick, says Adler, is not to stop at just being informed.
There is a simple way to tell the difference between collecting information and gaining understanding. Any time you read something and find you can easily “get it,” chances are you are just cataloging information.
But when you come across a work that makes you stop, think, and reread for clarification, chances are this process is increasing your understanding.
Using this as a litmus test, think about how much of the reading you have done over the past year was for information and how much was for increased understanding.
The process of moving from understanding less to understanding more is a critical journey for anyone who wishes to gain wisdom. It is not a simple matter of reading one book, setting it aside, and reaching for the next one. Achieving real understanding requires you to work, to think. To the degree that your reading involves subjects that are new to you, you as a reader start out on unequal footing with the writer— the writer knows more about the subject than you do. The more unfamiliar you are with the material, the more effort you will need to overcome this inequality.
Also, some writers are, by their style of writing, simply more difficult to grasp; their works, too, take more effort on our part. Adler compares it to the relationship between a pitcher and a catcher in baseball. Pitchers, like some writers, can be wild and out of control, which requires the catcher (the reader) to work harder. Therefore, if you are going to become a good reader, you will sometimes have to make an extra effort to catch a loosely pitched idea.
Adler proposes that all active readers need to keep four fundamental questions in mind: 1. What is the book about as a whole? 2. What is being said in detail? 3. Is the book true, in whole or part? 4. What of it?
No matter how long the material, its format (fiction or nonfiction), or the immediate purpose for reading it (to gain information, to enhance broader knowledge, or for sheer pleasure), you should always be evaluating the material from the perspective of these four fundamental questions if you want to read intelligently.
To determine, as quickly as possible, what the book is about (question 1), Adler suggests a fast review. First, read the preface. Here the author typically gives a brief explanation of the book, the rationale for writing it, and perhaps an outline of what to expect. Next, look carefully at the table of contents; it will give you a good overview of what the book is about. Then turn to the back and run through the index, looking for familiar as well as unfamiliar terms. This will give you a sense of the book’s major topics. You can also learn much about the book from its bibliography. Do you recognize the names of the authors referenced and have you read any of their work? Then read a few paragraphs here or there, perhaps from a section that discusses a topic you are somewhat familiar with. After that systematic skimming, turn to the very end and read the author’s summation of the book, if there is one.
This entire exercise, from reading the preface, table of contents, index, and bibliography to systematically skimming, should take at most thirty minutes to an hour. You can do this standing in a brick-and-mortar bookstore or online, taking advantage of the “peek inside” benefit available from many online booksellers. At the end, you should know what the book is about as a whole, and that will tell you whether you wish to take your valuable time to read
constantly looking for clues that will tell us if the book deserves a deeper examination.
Analytical reading has three goals: (1) to develop a detailed sense of what the book contains, (2) to interpret the contents by examining the author’s own particular point of view on the subject, and (3) to analyze theauthor’s success in presenting that point of view convincingly.
You may find it helpful at first to approach analytical reading the way you would approach assigned reading in a college class. Have a notepad at hand, and make your own outline of the key topics, chapter by chapter. Write down, in your own words, what you deduce is the author’s main purpose in writing the book. List what you think are the author’s main primary arguments, and then compare that list against the outline of contents. Decide for yourself whether the author has fulfilled the original goals, defended the arguments, and convinced you of the main thesis. Ask yourself whether the author seems illogical or presents material that you know from other sources is inaccurate. If something seems incomplete or unsatisfactory, does the author candidly acknowledge that a full answer was not possible, rather than trying to bluff the readers? After you have read several books in this detailed way, you will very likely find that your analytical skills are improving and that you can proceed without the notepad by your side. You will, however, always be concerned with answering these fundamental questions: What is the book about in detail, and is it true?
The first step in comparative reading is to locate the relevant passages in each book. You are not doing a full analysis of each book individually but finding the important parts of each separate book that relate to what you need to know. This is a fundamentally different approach from analyzing a book in its entirety. In analytical reading, you accept information from the author as it is given; in comparative reading, your investigation must serve your own needs.
Any book that lists a set of rules or steps that you should follow to reach a goal is a practical book; how-to books are the most familiar example. Of course, many practical books also have a theoretical component. Typically, they first present general principles that are then transformed into action steps.
Practical books are very much about a process—step-by-step rules— and an end result. To analyze a practical book, you must focus on both the set of rules (the means) and the goal (the end). The rules have to make sense to you, and they have to appear doable.
Reading a theoretical book is an entirely different matter. Here we are not concerned with rule sets and end results; we simply want to learn something about history, or science, or philosophy, or some other discipline where we believe our knowledge is incomplete. The author’s goal is also different: not to provide an action road map but, by explanation and reason, to convey knowledge.
The challenge for us as readers is to receive that knowledge and integrate it into our latticework of mental models. How well we are able to do so is a function of two very separate considerations: The author’s ability to explain, and our skills as careful, thoughtful readers. We have little control over the first, other than to discard one particular book in favor of another, but the second is completely within our control.
Then, try to understand the vocabulary used to describe the questions. This can sometimes be tricky because the words are usually in common language but may have been given special meaning. Finally, and most importantly, make up your own mind using common sense and your own observations of the world around you. “It is, indeed, the most distinctive mark of philosophical questions that everyone must answer them for himself,”
Generally speaking, the most popular and easily understood expository books can be found in the social sciences. Oftentimes, the experiences described in these works are familiar to us all, and we have already formed our beliefs about them. But paradoxically, it is these same beliefs that make reading social science difficult. Don’t forget that your goal as a reader is to determine whether the book is true, not whether it supports what you already think.
Good readers are good thinkers; good thinkers tend to be great readers and in the process learn to be even better thinkers.
So the very act of reading critically improves your analytical skills. At the same time, the content of what you read adds to your compendium of knowledge, and this is enormously valuable.
Finally, you must consciously try to discern how much of what you are reading is fact and how much is opinion. If you have already found that some of the facts are shaky, that’s a good clue that much of what you’re reading might be opinion. But even if the facts are correct, it’s quite possible that much of the other commentary is one person’s opinion. Then you must stop and think about what is behind that opinion. Is there some vested interest at work? Does the analyst have a longstanding personal bias that creeps in? Has the analyst’s opinion changed from opinions expressed in prior reports, and if so, is there is a legitimate reason for the change? Every time you read a report in this fashion you are perfecting your critical-thinking skills.
Reading imaginative material is, Adler believes, far more difficult than reading expository books. Expository books convey knowledge, he explains. When we are reading them, our goal is to determine their truth.
Have you ever found, when reading a work of fiction or poetry, that you are stopped cold by a sentence that perfectly expresses something you have felt but have never been able to put so clearly into words? The thought is not new, but suddenly it seems stronger and more real. The recognition of truth can be as strong and sudden as a shot of electric current, and the insight you gain will stay with you. This is the power of imaginative literature: it helps us more poignantly know what we know, feel what we feel, and believe what we believe.
why allocate your valuable time to fo reading? because we learn from experiences— and not only from our own. Just as we learn from our daily experiences how to become better mates, parents, citizens, and investors, so too can we learn from the fictional experiences that fine writers place in our imagination.
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Excerpts and Learning from Articles/Blogs
Hunker down
I have been following this drama closely and by mid of 2021, felt it was getting crazy. Valuations of profitless growth companies in the US went through the roof, Crypto was all rage and then we had the NFTs.
Some of these innovations could change the future, but why would I pay for a promise? If you are a buy & hold buyer (as many claims), then you should be paying a price that doesn’t discount the future. On the contrary at height of the mania, buyers were paying for the most optimistic future
My thinking is colored by my experience after the dot-com bust. As liquidity was pulled back, it took the markets years to normalize and start growing again. The current events are not the end of the world. At the same time, we should not expect that market will turn suddenly and resume their upwards trend
My Bear Market Survival Guide
Many people assume successful investing comes from picking winners.
The way you win is by producing alpha and outsmarting the market.
There is an infinitesimal percentage of the population that can do this consistently over the long haul.
For the rest of us, success looks more like survival. Those investors who can survive their own mistakes, avoid blowing themselves up and generally stick to a reasonable investment process have a higher probability of success in the markets.
You don’t have to be learning or hustling all the time.
It can be poisonous to allow your investments to consume you.
Your life is not defined by your portfolio or the securities you own. Net worth is a poor definition of success in life.
The market won’t notice if you aren’t paying attention to it all the time.
We all feel like geniuses when markets are rising and idiots when they’re falling but the truth is always somewhere in the middle.
The problem is trying harder does not guarantee better results. Doing more offers the illusion of control but often hurts performance more than it helps, especially when emotions are running high.
Bear Markets and Recessions Happen More Often Than You Think
Despite policymakers’ best efforts, history shows that both bear markets and recessions are about as common as severe storms in New York. Learn to live with them, much as you do bad weather.
Stocks don’t always go up. Risk is always present.
This may seem a banal insight, yet it is never entirely understood until market declines hurt, only to be ignored or forgotten when the next boom rolls around.
In the past, after big declines, the stock market has always come back. Over 10-year periods, if you had put money into the entire S&P 500 you would have lost money only 6 percent of the time. Over 20-year periods, you would never have lost money.
Economists are great at many things, but predicting recessions isn’t one of them. “Recessions are very difficult to predict,” Ellen Gaske, lead economist at PGIM Fixed Income, said in an interview on Tuesday. “Even if you get one right, chances are you won’t get the next one.” (Don’t listen to those who predicting Recessions Now)
How to Stand Up to a Bear Market
For just about everyone, whether you buy or sell a particular investment right now may matter less to your future wealth than a few durable behavioral changes that can keep you on the right track.
Investors who plunk all their money down at once are more likely to feel regret and bailout in a bear market. Those who invest like clockwork tend to worry less about buying at the wrong time, making it easier for them to stay the course.
Sticking to a plan is especially important for young investors, whose horizons are long. A plan can help them perceive falling markets, not as calamity but opportunity.
I like to say that the problem with stocks is that they contain the letter T. If they were called socks instead, people would treat a 20% decline in price not as a selloff but as a sale.
Keep It Going
Compounding is just returns to the power of time. Time is the exponent that does the heavy lifting, and the common denominator of almost all big fortunes isn’t returns; it’s endurance and longevity. “Excellent returns for a few years” is not nearly as powerful as “pretty good returns for a long time.” And few things can beat, “average returns sustained for a very long time.”
That’s the biggest but most obvious secret in investing: Average returns for an above-average period of time leads to magic.
Carl Richards once made the point that a house might be the best investment most people ever make. It’s not that housing provides great returns – it does not. It’s not even the leverage. It’s that people are more likely to buy a house and sit on it without interruption for years or decades than any other asset. It’s the one asset people give compounding a fighting chance to work.
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Small Video Clips
Difference between Great Compounder stock vs Growth stocks (10:24 to 12:59 )
Why Mohnish Pabrai invested in Funeral Business (Damn Cheap Valuation + Moat) (16:39 to 19:10)
The biggest mistakes investors make is being too active, Investing should be like watching paint dry (41:50 to 43:54)
Wealthiest Investor Vs Greatest Investor of all time (3:07 to 5:27)
The Magic of Compounding (Longevity/Time) (7:12 to 9:36)
Insights on the Manufacturing sector, Competitiveness, China +1 Factor, Opportunities (14:30 to 25:39)
Should we buy the dip or Wait for the more down move? With detailed reason (11:04 to 17:01)
How to pick a multi-bagger stock with 2 case studies and which type of companies investors should avoid (19:52 to 33:33)
Using Too Much Leverage will ruin you (Edward Thorp) (13:41 to 15:00)
Why Index fund (Passive Investing) is better for average investors (Edward Thorp) (26:52 to 28:13)
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