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The Digest #43
Dissenting Voices, Cybersecurity, Portfolio Turnover, Making Software Fun
"The ability to do what you want, when you want, with who you want, for as long as you want, is priceless. It is the highest dividend money pays."
-- Morgan Housel, The Psychology of Money, Chapter 7
The Power of the Dissenting Voice by Lawrence Yeo, October 1, 2020. The pressure of social conformity is a constant in life starting in early childhood. Almost everyone wants to fit in with their peer group and avoid nonconforming behavior. Pluralistic ignorance can be especially pernicious when the stakes are high. The majority of the members of a group might privately reject a dominant view but simply assume that almost all of their peers accept it. Reluctance to be the lone dissenting voice is natural but sometimes there is a moral responsibility to dissent. Chances are that there are others in the group who silently disagree and would be emboldened to speak out. Lawrence Yeo explores these topics in another well done illustrated essay. (More To That)
The Perils of Ignoring Cybersecurity Shane Parrish interviews Matthew Holland, Founder and CEO of Field Effect Security. Holland is one of the leading experts in the field of cybersecurity and what he has to say is not likely to make you feel better about the risks that we constantly take with our personal and corporate data. Holland urges companies, even the smallest operations, to take cybersecurity seriously because failure to do so can be a company-killing error. Ransomware plots have resulted in the destruction of businesses when the cost of paying hackers exceeds the value of the business. Individuals also need to pay attention to precautionary steps they should be taking in an age of proliferating connected devices. (Farnam Street)
Portfolio Turnover is the Price of Progress by Ian Cassel, October 3, 2020. Having a low portfolio turnover is a point of pride for many value investors. Buying and holding great companies for years or decades can harness the power of tax deferred compounding and create great fortunes. However, investors must always remain vigilant in terms of monitoring their holdings and not being too rigid about selling when a business falters or valuations reach extreme levels. Ian Cassel provides his thoughts on portfolio turnover and believes that there has been an element of "over-glorification" of buy and hold investing among active managers. (MicroCapClub)
The Art of Good Stock Research: How to Go Beyond the 10K In this brief podcast, Geoff Gannon and Andrew Kuhn discuss their research process with a focus on how they approach deeper dives once they have reviewed annual reports. The reality is that reading a company's financial statements and recent reports are only starting points in a long road that must be traveled before an investment commitment can be made. Financial statements are necessarily backward looking and explanations provided by management are not always candid and are almost always couched in public relations jargon. As Gannon says, investors should heavily mark up a 10K report with questions for further independent research. (Focused Compounding)
Write While You Walk by David Perell, October 2, 2020. It is difficult to come up with original insights while sitting in front of a computer all day. Interesting writing is a product of the author's intellectual journey and life experiences. Getting into the world promotes clear thinking and can generate ideas. David Perell develops ideas for his articles and essays while on the move. His brief article reminded me of Nassim Nicholas Taleb's concept of being a flâneur. Taleb is known to walk, slowly, through urban areas pondering various topics and perhaps stopping in a cafe to put pen to paper. The important point is that writers need to find the environment in which they are most productive and sometimes work does not look like "work". In my case, idea generation often comes during the final miles of a long run, but sometimes a run is just a run. There is an element of serendipity when it comes to writing. (Perell.com)
No, This Isn’t a Repeat of the Dot-Com Bubble by Nick Maggiulli, September 29, 2020. The market recovery from the March lows has taken many investors by surprise. A pandemic and economic depression would normally be associated with a sustained bear market, but government interventions have changed the situation considerably. The rise of speculative activity cannot be denied but does it approach the level of the dot-com bubble that took place around the turn of the century? Nick Maggiulli looks at the data and concludes that the current market environment is not as frothy. The strongest point is that the earnings yield on stocks, while quite low by historical standards, must be viewed in light of today's ultra-low interest rates. The dot-com bubble formed during a time of much higher interest rates. The Fed's interest rate policy has had its intended effect, at least for now, but if inflationary pressures force rates to normalize, the picture is likely to look very different. (Of Dollars and Data)
Using Emotion to Design Great Products Patrick O'Shaughnessy interviews Rahul Vohra, founder of Superhuman. Vohra used the concepts of game design to create a compelling experience with a task as mundane as email, seeking to make the process fun for users: "Well, at Superhuman, we build software like it is a game, and that has been core to why people fall in love with it. But most software companies don't do this. Most software companies worry about what users want, or what they need. But if you think about it, nobody needs a game to exist. There are no requirements. When you make a game, you don't worry about what users want or what they need, you obsess over how they feel. When your product is a game, people don't just use it, they play it. They find it fun, they tell their friends, they fall in love with it." (Founder's Field Guide)
Common Causes of Very Bad Decisions by Morgan Housel, October 1, 2020. Having to face the consequences of bad decisions is unavoidable, yet too many people fail to discover the common denominator behind a series of bad outcomes. In many cases, there are common errors that we repeat again and again. One of several examples mentioned by Morgan Housel is the presence of "tribal instincts". No one wants to be kicked out of the tribe so they go along with ideas they know are bad, or they rationalize that the ideas might not be so bad after all. This ties in nicely to Lawrence Yeo's essay on the power of dissenting voices linked to earlier in this newsletter. (Collaborative Fund)
Birch Forest in Autumn
Birch Forest by Gustav Klimt (1902)
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