Curiosity@Intelsense
Multidisciplinary learning is one of the best ways to improve our investment acumen. Here is a summary of some of the best learnings of the week. If you like this collection, consider forwarding it to someone who you think will appreciate it.
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Some Changes
You would have noticed that I am making certain small incremental changes to the weekend reading. Over the last few months, the format has changed, hopefully for the better, the content has also changed.
I will continue to make changes incrementally. Today I am trying out a new format. Instead of just putting the article extracts and links, I will try and put it in a narrative format and tell you what I liked about the article or what my takeaways were. I know this will actually make my work much harder but it will also enable me to focus on my clarifying own takeaways from the content that I go through.
Articles Worth Reading
We are dependent on electronic hardware for most things in life today. And I am not only talking of laptops or PCs or mobiles. All electronic devices like smartwatches to pacemakers to drones have chips. When it works, which is probably 99.99...99% of the time, we don't even think about it. But when there is a problem it can cause major issues. The stock market can crash because of a technical glitch, an aircraft fall off the sky, or a pacemaker can malfunction... you get the drift. And not always are the errors due to common software or hardware issues. This article from the BBC, speaks about incidents in space cause errors with computers.
When computers go wrong, we tend to assume it's just some software hiccup, a bit of bad programming. But ionising radiation, including rays of protons blasted towards us by the sun, can also be the cause. These incidents, called single-event upsets, are rare and it can be impossible to be sure that cosmic rays were involved in a specific malfunction because they leave no trace behind them.
And yet they have been singled out as the possible culprits behind numerous extraordinary cases of computer failure. From a vote-counting machine that added thousands of non-existent votes to a candidate's tally, to a commercial airliner that suddenly dropped hundreds of feet mid-flight, injuring dozens of passengers.
The other two articles relate to evolving as an investor. Survival is the main game played by professional money managers. If they don't survive, they don't have a job for long. Underperforming for a long is a major career risk. And that is why we see index hugging in mutual funds or large PMS funds. You will not be able to distinguish one fund from another just by looking at its constituents.
There is a major incentive problem at the heart of the asset management industry, where the interests of clients and the professional investors who run money for them are often poorly aligned.
The key to a ‘successful’ career as a fund manager is not long-term outperformance, it is survival. Making sure from quarter to quarter that your results are adequate so that you don’t find yourself in the firing line.
The power of the incentive to keep your job and progress your career increases through time. The risk of short-term failure becomes even more acute.
The development of this type of incentive structure means that the active fund management industry has evolved to a point where making high conviction, long-term decisions is irrational behaviour for many participants. Even though it should be one of its primary purposes.
The third and last article for this week is on how to improve the learning process in investing.
A long-term approach is critical for most successful investors, but – by definition – we only reap the rewards of this over time. We don’t get helpful instant feedback. We must wait and trust that we will get the right outcomes from the choices we make.
Feedback is most useful when the link between our actions and results is clear. We have no doubt that the consequence of touching the stove is the burn on our hand. Things become much trickier when there is blurring between our choices and their outcomes.
Measured, sensible and evidence-backed investment decisions will often appear the opposite. They will frequently be outshone by investors engaging in ill-informed, wild speculation. This is particularly problematic over short time horizons, where meaningless noise dominates outcomes.
Audio/Video of the Week
If there is one video or interview one should listen to as a long-term investor, this is it. Antony Deden is not a very well-known investor. Yet, the way he has sculpted his lifestyle to align with his life and investment philosophy is simply marvellous. He speaks about true long-term compounding and generational wealth creation. He also speaks about capital being irreplaceable and hence the need for risk management, a notion that I value tremendously.
Quote of the Week
Since this week we are looking at Antony Deden, let me share with you one of his quotes.
Savings accumulated over a lifetime is something precious and irreplaceable and that in order to protect it one must first respect it. And in seeking to deploy it one must acquire a sense of detachment from the noise of the dance hall and find what is valuable in the context of such irreplaceability.
The idea of a prudent man has been replaced with Microsoft Excel, financial calculus, risk officers and the compliance industry.
A prudent man must seek to satisfy himself about the means to an end. This demands that he must revisit, again and again, the very elemental principles of his craft independent of how others think and act. What is money? What is wealth? What is savings? What is time? What is scarcity? What is value? What is risk? What can we learn from failure? Or from history?
I became convinced that the basic framework of all these mechanistic value-finding ideas in practice, simply led to anticipating the anticipations of others.