Thanks so much @phreakv6. This was very insightful and helpful .
Part #2 of my Notes from Poor Charlieâs Almanac
Same caveats apply. Some summarized, some para-phrased, some as is.
We try more to profit from always remembering the obvious than from grasping the esoteric
If you can generate float at 3% and invest in businesses that generate 13%, thatâs a pretty good business
Economic progressions, as they grow larger, forge their own mathematical anchors (WB, on law of large numbers with reference to Berkshire Hathawayâs size and growth)
When it runs up, we try to talk it down (on BRKâs share price) which is in strong contrast to what most promoters do, in terms of talking up fiction
Berkshireâs full of synergies - we donât avoid synergies, just claims of synergies (on the abuse of the word)
I donât feel like I sold FlightSafety; I just traded my FlightSafety stock cert for a BRK cert (Al Ueltschi, founder of FlightSafety on selling to BRK and how non-intrusive WB and CM are)
Its wonderful to generate billions of dollars of float at a cost way below Treasury notes (CM on BRKâs insurance business)
Lumpy results and being willing to write less insurance business if market conditions are unfavorable⌠that is one of our advantages as an insurer - we donât give a damn about lumpy results. Everyone else is trying to please Wall St. This is not a small advantage.
Liquidity of tradable common stock is a great contributor to capitalism is mostly twaddle. The liquidity gives us these crazy booms, so it has as many problems as virtues. (On not splitting BRK stock)
Why donât more companies and investors copy BRK? They have low overhead, donât have quarterly goals and budgets or a standard personnel system, with investing more concentrated than average.
If you say âNoâ 90% of the time, you are not missing much in the world (CM, as the Abominable No-man)
A thing not worth doing, is not worth doing well
Stock volatility as a measure of risk is crazy
What is a better business? Not the one that earns 12% and returns it to shareholders but one which can reinvest all of that excess cash back and can do so for a long, long time.
There are some things you should pay up for - like quality businesses and people
The most extreme mistakes in BRKâs history are mistakes of omission, than of commission
Opportunity costs donât show up on financial statements
Iâd work with very small stocks, searching for unusual mispriced opportunities (advise to small investors)
On short selling - Being short and seeing a promoter take the stock up is very irritating. Its not worth it to have that much irritation in your life.
On Cost of Capital & Opportunity Costs - CM & WB donât know their cost of capital. They measure everything against their alternatives. They have never seen a Cost-of-capital calculation that made sense. They consider Cost of Equity Capital as an amazing mental malfunction 
Future Market returns & Rembrandt Effect - On Japan when stocks traded at 50-60 times earnings, it lead to 10 year depression
Japan is worldâs largest creditor nation ($1 trillion in net surplus external assets, when the book was published. Should be higher now)
Macros? No. Just staying abreast of BRKâs subsidiaries and reading business newspapers and magazines.
Serpico Effect - Where everyone rationalizes a bad thing, because everyone else is doing it (On Earnings Manipulation)
Flawed Incentives in Money Management - Money management today requires people to pretend to do something they canât do and like something they donât. Its a terrible way to spend your life, but its very well paid.
Indexing canât work well forever, if everybody turns to it
The culture now is that anything that can be sold for a profit, will be
We didnât deserve to get it back (On getting repaid from a bad investment)
You have to control this if guys can make money by bringing dubious things in the door. (On Investment bankerâs earnings and poor lending standards)
Once you start doing something bad, then its easy to take the next step - and in the end, its a moral sewer (On lack of ethics among Major Accounting firms)
In a democracy, it often takes a scandal to trigger reform (akin to whatâs happened here now)
EBITDA = Bullshit Earnings
Subconsciously they believe it because they want to believe it. It makes earnings good so they can promote the stock (On Pension Fund accounting at IBM)
How many legs does a dog have, if you count the tail as a leg? Four. Calling a tail a leg, doesnât make it one (Lincoln).
Black-Scholes works for short-term options, if its a long-term option, its insane to use Black-Scholes (Especially, if you know something about the underlying asset. Black-Scholes is a know-nothing system).
Financial institutions make us nervous when theyâre trying to do well
Weâve left a lot of money on the table through early fretting (On avoiding leveraged financial institutions, with poor risk management)
A man who carries a cat by the tail learns something he can learn in no others way - Mark Twain
Years can elapse before the actual day of reckoning occurs with respect to loss or gain on individual transactions (On long tail of derivatives and insurance)
âDo you really understand your derivatives book?â Anyone who answers yes is either crazy or lying
Most of the derivatives of major banks cannot be liquidated for anything close what they are carried in the books at
The system discourages the best companies from entering certain businesses (On certain lines of businesses which expose themselves to a lot of legal liability)
People calculate too much and think too little (On the dangers of computers)
If youâre comfortably rich and someone else is getting richer faster than you by investing in risky stocks, so what? Someone will always be getting richer faster than you. This is not a tragedy.
Envy is a really stupid sin because its the only once you could never have any fun at.
Spend each day trying to be a little wiser than when you woke up, Discharge your duties faithfully and well. Step by step you get ahead, but not necessarily in fast spurts. But you build discipline by preparing for fast spurts. Slug it out one inch at a time, day by day. At the end of the day, if you live long enough - most people get what they deserve.
I have always imagined that paradise will be a kind of a library.
You canât get ahead paying 18% (On avoiding personal debt)
Part #3 later
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Liarâs Poker, Michael Lewis, 1989 - I was a bit skeptical so had postponed reading this for sometime. It was surprisingly good mainly because of the way it was told. The narrative was part autobiographical and told with a lot of self-deprecating humour which was absolutely hilarious. Some parts made laugh out loud like I havenât in years while reading a book. That reminds me I havenât read a PG Wodehoue in years.
The book tracks the story of Salomon Brothers through their rise in the 80s trading municipal & govt. bonds, and onto mortgage. It helped understand what was the tailwind that caused (Volcker) this mortgage bond boom and how people at the right place at the right time cashed in, and misattribtued their luck to skill and suffered. It also helped understand junk bond boom and consequently takeovers and LBOs that followed and the machinations that caused such a boom and how everything was linked to one another. This was a knowledge I did not possess, so the takeaway was worth the effort spent reading the book. Another thing I enjoyed digging into after reading the book was about IO/POs, CMO/CDOs and how risk was abstracted, obfuscated away at each level and how aggregated junk was suddenly palatable. Coincidentally, got this Dogbert strip in a whatsapp fwd after reading the book 
The other part that was very good about the book was the fleshing out of characters, especially of Lewie Ranieri. The ultimate failures of the firm were human failures and it cannot be told without understanding the individual biases that drew them to it and this part was reasonably portrayed here. I found this book to be an unputdownable read and I enjoyed it as much as I did âMore money than Godâ. 9/10
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Ubiquity, Mark Buchanan, 2002 - Whatâs common between earthquakes, forest fires, stock market crashes, scientific discoveries, rise and fall of empires, revolutions, wars and a simple sandpile? They are all complex systems with several interacting components that are always poised on the brink of instability (non-equilibrium physics) where a single event can trigger an avalanche along the fingers of instability. Historians and storytellers looking for simple cause-and-effect will attribute the catastrophe or phenomenal success, as the case may be, to a single event or a great man but to accurately tell or foretell, one must accurately account for all past accidents in the history of that system which becomes an impossibility. A great man might just be a product of his time.
Another interesting thing about these seemingly disconnected subjects is the extent to which they all follow power laws and are scale-invariant. That is to say, the larger the earthquake or forest fire, the rarer it is in a non-linear fashion - double the size of the event and it could be 6 or 8 times rare, owing to the variable nature of the power lawâs exponent. A common aspect of these systems is that there is several layers of interactions (think of an interconnected graph of objects) and there is an inherent friction in each of the nodes that delays the passage of force through the system until a large instability builds up. For scientific discoveries, think of it as the tussle between intellectual friction and intellectual curiosity that leads to stagnation in progress until that one idea shows up (like theory of relativity) and an avalance of related discoveries follows.
I think this book should be essential reading as it crosses disciplinary boundaries between history, physics, mathematics, geophysics, finance and provides a very strong mental model that can be applied to various day-to-day scenarios. Considering most of what we talk on a routine basis is related to cause-and-effect and perpetrators of such causes, be it to attribute blame or give credit, this book could help you keep sane. 10/10
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Part #3 of my Notes from Poor Charlieâs Almanac
Same caveats apply. Some summarized, some para-phrased, some as is.
Addiction can happen to any of us in a subtle process where the bonds of degradation are too light to be felt until they are too strong to be broken.
Avoid Envy, resentment & ingesting chemicals to alter mood
No manâs life should be accounted a happy one until its over - Solon
Invert, always invert - Jacobi
How to create X by turning the question backward to see how to create non-X (Carson). Mungerâs inversion comes from Jacobi and Carson. Many hard problems are solved only when addressed backward
You couldnât squeeze a dime between what they already know and what they will never learn (Philip Wylie) - On avoiding dis-confirming evidence so original conclusion remains intact
Einsteinâs successful theories came from âCuriosity, concentration, perseverance, and self-criticismâ. Self-criticism - testing and destruction of well-loved ideas
While quantum mechanics is unlearnable for a vast majority, reliability can be learned to great advantage by almost anyone.
Grandmaâs rule - you have to eat the carrots before you get to the dessert
You have to hang experience on a latticework of models in your head (on mental models)
If you have just one or two that youâre using, youâll torture reality so that it fits your models, or at least youâll think it does
Some useful models - compound interest, permutations & combinations, simple algebra, probability theory, statistics, decision tree theory, accounting, double-entry bookkeeping, quality-control, backup systems, breakpoints, critical mass, cost-benefit analysis, psychology, rationality, microeconomics, advantages of scale, network effects, informational advantage, social proof
Limitations of crude approximations in accounting - Depreciation rate expressed in neat numbers may not reflect the useful life of a jet plane
Five Ws - Who, What, Where, When & Why. In Braun Company, anyone who missed the âWhyâ could get fired. Telling âWhyâ increases compliance as people understand it better and consider it more important.
Two-track analysis - factors that govern interests, rationally considered and subconscious influences where brain at a subconscious level does things automatically
In terms of which businesses success and which fail, advantages of scale are ungodly important. Just doing something complicated in more and more volumes enables human beings, who are trying to improve and are motivated by incentives of capitalism to do it more and more efficiently
Some advantages of scale come from simple geometry. If youâr building a great circular tank, obviously, as you build it bigger, the amount of steel you use in the surface goes up with the square and the cubic volume goes up with the cube. So as you increase the dimensions, you can hold a lot more volume per unit area of steel
Worldwide distribution setup which is slowly won by a big enterprise, gets to be a huge advantage
In some businesses, the very nature of things is to sort of cascade toward the overwhelming dominance of one firm (Newspaper - more circulation - more ads - more info - more circulation)
What you measure is what you get - Jack Welch
Give a project visibility, put great people on it and give them plenty of money - best formula for success (Jack Welch)
Never allow anyone to get between you and your customers or suppliers. Those relationships take too long to develop and are too valuable to lose (Jack Welch)
Weâre either going to be #1or #2in every field we are in or weâre going to be out (Jack Welch)
Disadvantages of scale - where a narrow specializing small agile business is nimble enough to carve a niche for itself. Occasionally scaling down and intensifying gives you a big advantage. Bigger is not always better. As you get bigger, you get the bureaucracy and with it comes territoriality. Layers of management and associated costs that nobody needs. Slow decision making eventually kills the business.
Life is an everlasting battle between advantages of scale and a tendency to become large and unwieldy bureaucracy (Eg. Sears Roebuck)
They pretend to pay us, and we pretend to work - social workerâs lament
On Westinghouse - They blew billions of dollars on a bunch of dumb loans to real-estate developers. They put some guy whoâd come up by some career path - refrigerators or something- and all of a sudden, heâs loaning money to real-estate developers building hotels. Its a very unequal contest. (Reminds me of Piramal making money in pharma and doing similar mistake of getting into a field he had no clue in)
If people tell you what you donât want to hear - whatâs unpleasant - thereâs an almost automatic reaction of antipathy. You have to train yourself out of this Pavlovian association.
I didnât just learn from reading every retail publication I could get my hand on, I probably learned the most by studying what my competitor was doing across the street - Sam Walton of WalMart
The concept of a chain store was a fascinating invention. You get huge purchasing power - which means that you have lower merchandise costs. You get a whole bunch of little labs out there in which you can conduct experiments. And you get specialization. If one little guy is trying to buy across 27 different merchandise categories influenced by traveling salesmen, heâs going to make a lot of dumb decisions.
He played the chain store game harder and better than anyone else. Walton invented practically nothing. But he copied everything everybody else ever did that was smart - and he did it with more fanaticism and better employee manipulation. So he just blew right by them all (Munger on Walton)
Many markets get down to two or three big competitors - or five or six. And in some of those markets, nobody makes any money to speak of. But in others, everybody does well. Why does competition in some markets gets sort of rational from investorâs point of view so that shareholders do well, while in other markets thereâs destructive competition that destroys shareholder wealth? What distinguishes airline seats and cereal? Brand identity. In some businesses like cereal, participants have learnt to not fight for market share while in others they do - No perfect way to figure out.
Patents are quite interesting. Long back, more money went into patents than came out. They changed all that with the change in administration, so that it all goes to one patent court. Court is now much more pro-patent so people are making money out of owning patents.
In terrible textile business, one day people came to Warren and said âTheyâve invented a new kind of loom that we think will do twice as much work as our old onesâ and Warren said, âGee, I hope this doesnât work - because if it does, Iâm going to close the millâ. We are not going to put huge amount of capital in a lousy business. A better machine introduced into production of a commodity product would all go to the benefit of the buyers. There are all kinds of wonderful new inventions that give you nothing as owners except the opportunity to spend a lot more money in a business thatâs going to be lousy.
Competitive destruction - The finest buggy whip factory is killed by the little horseless carriage.
When a new business comes in, there are huge advantages for the early birds. They can catch the wave and surf along for a long, long time.
In a long life, you can expect to profit heavily from at least a few of those opportunities if you develop the wisdom and will to seize them.
Circle of competence - If you play games where other people have the aptitudes and you donât, you are going to lose.
Its better to be a plumbing contractor in Bemindji than aspire to win worldâs chess tournaments, as the former competence is attainable with enough discipline for most of us. (Munger on not investing in tech businesses like Intel or Microsoft, they dont understand)
Pari-mutuel system - The odds change based on whatâs bet. If you look at the damn odds, the bad horse pays 100 to 1, whereas the good horse pays 3 to 2. Then, its not clear which is statistically the best bet using the mathematics of Fermat and Pascal. So bet only occasionally when there was a largely mispriced bet available. The wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they donât. Its just that simple.
a story about the guy who sold fishing tackles. I asked him âMy God, theyâre purple and green. Do fish really take these lures?â and he said âMister, I donât sell to fishâ. (On the idiocy in investment management)
Ben Graham used to buy business selling below their working capital per share. In those days as WC belonged to shareholders, if employees were no longer useful, they got sacked and WC was pocketed by owners. Now accounting is not realistic as the minute business starts contracting, significant assets vanish from the balance sheet due to all the liabilities owed.
Trouble with Ben Grajam concept is that gradually world wised up and real obvious bargain disappeared. Some company selling at 2-3 times book could still be a bargain because of momentums implicit in its position, sometimes combined with unusual managerial skill. What we thought as better businesses would have horrified Graham. Much of the first $200-300 million came from scrambling around with Grahamâs Geiger counter and a great bulk of the money from âgreat businessesâ.
If youâre investing for 40 years in some pension fund, what difference does it make if the path is more bumpy and volatile?
Lot of talented people in a socially useless activity (on investment managers)
It makes sense to load up on the few good insights you have instead of pretending to know everything about everything at all times.
Its not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change. - Darwin
If a business earns 6% return on capital over 40 years and you hold it for 40 years, youâre not going to make much different than a 6% return - even if you originally buy it at a great discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, youâll end up with one hell of a result.
Itâs made one hell of a difference to GE that Jack Welch came in instead of the guy who took over Westinghouse. So management matters too.
You do occasionally get an opportunity to get into a wonderful business thatâs being run by a wonderful manager. Thatâs hog heaven day of course. If you dont load up when you get those opportunities, its a big mistake. However averaged out, betting on quality of business if better than quality of the management.
Since its obvious that investing in great companies works, it gets horribly overdone at times (on the Nifty-50 great companies trading at 50-60-70 times earnings and ending in disaster)
There are some businesses where there is large untapped pricing power that they are not yet using. That is an ultimate no-brainer.
Spend less than you make; always be saving something. Put it in a tax-deferred account. Over time, it will amount to something.
3 basic rules for a career - dont sell anything you wonât buy yourself. dont work for anyone you dont respect or admire. work only with people you enjoy.
You donât have to be brilliant, only a little bit wiser than the other guys, on average, for a long, long time.
Part #4 when time permits.
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The Unusual Billionaires, Saurabh Mukherjea, 2016 - The author quantifies greatness as businesses that deliver revenue growth of 10% and return on capital employed of 15% every year for last 10. It is a simple but effective criterion for picking businesses to hold for another 10. There are some holes to this, as there are some commodity businesses that go through a long tailwind or some financials with poor underwriting that can creep in that can last a decade only to turn in the next (PnB & DHFL for eg. were part of CCP for 2010). This notion of greatness hence works only when coupled with a coffee can portfolio (buy and forget) which includes not 1 or 2 but all matching businesses for that year to be held for next 10, so that overall performance still beats the indices. Another caveat is that of pari-mutuel betting when same strategy is going to be used by a lot of people making it completely ineffective.
What I liked in the book though is the discussion on 7 businesses - HDFC Bank, Asian Paints, Astral Poly, Axis Bank, Berger Paints, Marico and Page Industries. I picked up bits and pieces of information about these businesses which I did not know - for eg. the early days of HDFC Bank and the way talent was harnessed to set it up, the distribution might of Asian Paints and how it was built as well as the fact that Asian Paintsâ penchant for hiring top talent from IIMs, the innovation in tinting machines by Berger, the battle between Marico & HUL where Marico successfully held its own and beat the behemoth and the origins of the Genomals before they setup Page. There were also lot of things in common between these businesses in the Promoters empowering professional managements and getting out of the way.
Some of the interviews made for engaging reading as well and these alone was worth the price of the book, although Mukherjea is a bit too fond of his Coffee Can portfolio idea. He should have kept it to himself and it would have worked well for him. Now that he has encashed it with a couple of books, they are bound to underperform, as an idea, though some of the strong franchises that come up in the filters will still outperform. There may be no substitute for analysing business models and distinguishing price and value. 8/10
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Factfulness, Hans Rosling, 2018 - This is one of the most optimistic books I have read, probably alongside âThe Rational Optimistâ. As someone who is very fond of numbers and visualization of trends, I really loved this book. Did you know that world poverty is reducing dramatically over the years (halved in the last 20)? Did you know that tree cover of the planet has actually improved along with industrialization? Or that population is actually flat-lining with children per woman reducing drastically in the last 100 years? Similar good trends are seen in Education, vaccination, per capita incomes, life expectancy, protected species and the bad stuff like hiv infections, slavery, ozone depletion, plane crashes, nuclear arms, hunger, deaths from disaster etc are all coming down.
Why then do we perceive the world with such negativity as we usually do? The author(s) uncover so many biases in our thinking - from the gap instinct - where we see only extremes of rich and poor when a large majority like 90% could be in the middle. The negativity instinct driven my media (canât survive reporting good news) that ignores long-term trends (things can be both better and bad at the same time!). the straight-line instinct that extrapolates short-term trends forever, especially the negatives (Ebola outbreaks) when most things are S-curves or slides, humps or doubling-lines. Fear, Urgency, Blame (very much in the lines of the book âUbiquityâ) and Generalisation instincts are self-explanatory. Another big bias is that most things are changing while our knowledge isnât (the Destiny instinct). Combine this with single perspective instinct (man with a hammer syndrome) and our lack of perception of size - For eg. last year 4.2 million babies died - Thatâs definitely bad right? But did you know that this number was 14 million in 1950 and 4.5 million couple of years back? Wouldnât the right way to compare a lot of these things per person and as trends than as standalone numbers that are anchorless?
What is shocking is that the misinterpritation of reality is done not just by illiterate or the average person but by experts and almost everyone (lot of survey statistics in the book). So what then is the right way to view the world? Seek numbers and seek the truth. One of the biggest takeaways for me in this book was the 4 levels of income and how thats a better way to view the world than by country or culture. What are the 4 levels? Using finger as a brush to sharing a toothbrush with the family to having an individual brush to having an electric toothbrush. This applies to a lot of things in the levels from water, cooking, transport, bedding etc. What a useful way to slot the world, when a bulk of the world - 5 billion out of 7 billion alive lives in levels 2 and 3 and all of them are constantly moving up the levels (check out gapminder website). You must know where they live and what they are going to be buying in the coming decades, than having preset notions about countries, cultures and politics. What a useful mental model to have! Needless to say at this point that I loved this book. 10/10
(The author was (died last year) a doctor, professor, adviser to WHO and UNICEF and has traveled the world extensively over the decades in the poorest neighborhoods of Africa and India and worked alongside people like Al Gore on climate change to Fidel Castro in Cuba and this book is one of the favorites of Bill Gates and Barack Obama. Adding this just to see if the Authority bias will make you want to pick it up)
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Thanks for the Gods debris.
Iâam currently reading a book named " Subscribed" https://read.amazon.in/kp/embed?asin=B07CNTX11N&preview=newtab&linkCode=kpe&ref_=cm_sw_r_kb_dp_jRZLDbVD21QKP
Part #4 of my Notes from Poor Charlieâs Almanac
Same caveats apply. Some summarized, some para-phrased, some as is.
The incessant concentration of thought upon one subject, however interesting, tethers a manâs mind in a narrow field - Osler
The very first step towards success in any occupation is to be interested in it
I have never let my schooling interfere with my education - Mark Twain
Get the needed models in your head and think it through, forwards and backwards
The only company that Munger knows of that gets paid royalty on something that canât be patented or copyrighted - International Flavours and Fragrances
Graphs were invented by Monks in the Middle ages
If you draw a straight line through data points on a graph on log paper, it will tell you the rate at which compound interest is working for you
Carnation company - marketed its dairy products with âContented cowsâ (something Hatsun appears to be doing). There was already a company that used the Carnation brand name to sell Fish and despite repeated attempts to buy them out, Carnation company failed. So they put their own quality inspectors and paid for their costs in âCarnation Fishâ to ensure the brand name stayed reputed. That companies could take such moves should be enough reason to protect trademarks.
Human language ability is not just learned, its deeply buried in the genome - Steven Pinker. Munger thinks Chomsky despite being a genius, had ideological bias that prevented him from acknowledging this.
Heavy ideology is one of those extreme distorters of human cognition.
You can have heavy ideology in favor of accuracy, diligence and objectivity. But heavy ideology that makes you absolute sure that the minimum wage should be raised or shouldnât - and its kind of a holy construct where you know youâre right - makes you a bit nuts.
What a man wishes, that also will he believe - Demosthenes
Authority could be used to persuade people to do awful things - Milgram expt.
No pilot takes off without going through his checklist
Misery caused mental mis-function - Pavlov demonstrated this by torturing dogs for 10 years. The means made this untenable to fit in psychology textbooks.
Captain Cookâs genius in preventing scurvy among sailors by making them eat sauerkraut - brilliant tale on using elementary psychology to achieve goal
A very significant fraction of people in the world will steal if (A) its very easy to do and (B) thereâs practically no chance of being caught
Its very, very important to create human systems that are hard to cheat. Otherwise, youâre ruining your civilization because these big incentives will create incentive-caused bias and people will rationalize that bad behavior is OK.
If enough people are profiting in a general social climate of doing wrong (Incentive-caused bias + Social proof), then theyâll turn on you and become dangerous enemies if you try and blow the whistle - Serpico effect
Its much better to let some things go uncompensated - to let life be hard - than to create systems that are easy to cheat.
98% of the time, our attitude towards market is that we are agnostics. We donât know. Is GM valued property vis-a-via Ford? We donât know.
We are always looking for something where we think we have an insight which gives us a big statistical advantage. We only find a few - maybe one or two a year. We have no system on automatic good judgement on all investment decisions that can be made. We look for no-brainer decisions. We dont leap seven-foot fences. Instead we look for one-foot fences, with big rewards on the other side. So weâve succeeded by making the world easy for ourselves, not by solving hard problems.
Warren and I are very good at changing our prior conclusions. We work at developing that facility because, without it, disaster often comes.
If you try to succeed in what youâre worst at, youâre going to have a very lousy career. I can almost guarantee it.
Failure to handle psychological denial is a common way for people to go broke.
Deprival-super reaction syndrome - sending good money after bad
Disney is an amazing example of autocatalysis - They had all those movies in the can. They owned the copyright. And just as Coke could proper when refrigeration came, when the videocassette was invented, Disney didnât have to invent anything or do anything except take the thing out of the can and stick it on the cassette.
Waltâs (then 26) new creation was a little mouse in red velvet pants named âMortimerâ. Waltâs wife Lilian felt that was too pompous a name for such a cute character and suggested âMickeyâ instead. The rest is Disney history.
I like the independence of a capitalist. And Iâd always had sort of a gambling personality. I like figuring things out and making bets. So I simply did what came naturally.
Buffett on the only 3 ideas you need for Grahamâs Intelligent Investor - 1. The Mr. Market analogy 2. A stock is a piece of a business 3. Margin of safety
If losses are going to make you miserable - and some losses are inevitable - you might be wise to utilize a very conservative pattern of investment. You have to adapt it to your own nature and talents. Mine works for me, in part because I am good at taking losses.
The wealth of the world will compound at no such rate - On returns of 10-11% after inflation for many years. Bonanza effects of such scale canât last forever.
You must have the confidence to override people with more credentials than you whose cognition is impaired by incentive-caused bias or some similar force. When you have no wisdom to add, its best to trust some expert. You have got to know what you know and what you donât know.
When you donât know and you donât have any special competence, donât be afraid to say so. Nobody expects you to know everything about everything.
Grant McFayden treats his employees right, customers right and his problem right. If he gets involved with a psychotic, he quickly walks over to him and works out an exit as quickly as he can. Therefore, he doesnât have enough remunerative law business to keep you in Coca-Cola. But a Mr.X is a walking minefield of wonderful legal business. (On Munger asking his father about why he doesnât work for wonderful people like Grant McFayden)
Sell your services once in a while to an unreasonable blowhard if thatâs what you must do to feed your family. But run your own life like Grant McFayden.
Munger thinks the above advice stuck with him for decades because he had to âreachâ for it. Commitment and consistency tendency - If you had to reach for it, the ideaâs pounded in better.
Appealing to oneâs interest is bound to work better - on persuasion.
An undertaker, of course would look very unseemly if he was jumping up and down and playing his fiddle during the plague. So law firm partners say âOh isnât sad - all this complexity, all this litigation, all this unfairnessâ.
Operant conditioning - people will repeat what worked for them the last time
A behavior is followed by a consequence, and the nature of the consequence modifies the organismâs tendency to repeat the behavior in the future - B.F. Skinner
A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it. - Max Planck
Warrenâs never going to spend any money. Heâs going to give it all back to society. Heâs just building a platform so people will listen to his notions
I believe in the discipline of mastering the best that other people have figured out.
âThese are sad days in literature. Homer is dead. Shakespeare is dead. And I myself am not feeling all that wellâ - Mark Twain (This book is filled with these hilarious gems)
A man who doesnât read good books has no advantage over the man who canât read them - Twain
It you want it done, go. If not, send - Ben Franklin (on getting things done)
Practical thought about practical thought - on how a business like Coca Cola can be created - strong legally protected trademark, product having universal appeal, creating and maintaining conditioned reflexes, operant conditioning - maximise rewards on beveragesâ ingestion- minimise possibilities that desired reflexes once created by us, will be extinguished by competing products. food value in calories, flavor, stimus and cooling effect (rewards). For as long as we are in business, our beverage and its promotion must be associated in consumer minds with all other things consumers like or admire. advantages or scale and ability to buy advertising will create virtuous cycle effects to help gain and retain market share. it will be wise to have our beverage look like wine instead of water (premium product effect). imitative consumption at the mere sight of consumption (social proof). this will lead to autocatalytic reaction. 40% of sales will go towards advertising to maintian pavlovian effects and social proof. we will always set first sale price and our bottlers will be subcontractors and not vendees of syrup. Make a hoopla about our secrecy, which will enhance Pavlovian effects. We will be so far ahead, with strong trademarks and complete worldwide distribution that good flavor copying wonât bar us from our objective.
The best way to avoid envy is to deserve the success we get - Aristotle
No great discovery was ever made without a bold guess - Newton
If I have seen farther than others, it is because I was standing on the shoulders of giants - Newton
The company that needs a new machine tool and hasnât bought it, is already paying for it
In my life there arenât many questions I canât properly deal with using my $40 adding machine and dog-eared compound interest table
I read everything: annual reports, 10Kâs, 10Qâs, biographies, histories, five newspapers a day. On airplanes, I read the instructions on the backs of seats. Reading is key. Reading has made me rich over time - Buffett
The ethos of hard science does not say âtake what you wishâ but âlearn it to all fluency, like it or notâ
Take a simple basic idea and take very seriously
Any book, which is at all important, should be reread immediately - Schopenhauer
Part #5 later today to wrap up the book
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Part #5 and final part of my Notes from Poor Charlieâs Almanac
Same caveats apply. Some summarized, some para-phrased, some as is. This is a fairly long one. I made these notes for myself so that from next year, I can read my notes intead of the whole book, which is fairly large. I have chosen these notes based on what appealed to my sensibilities. Your takeaways can be much different as the book is quite an ocean with enough fish to feed all appetites
The accountant takes the easy thing that comes before him, while failing to reach for the things that count. - Carl Braun
Smart, hardworking people arenât exempted from professional disasters from overconfidence. Often, they just go aground in the more difficult voyages they choose, relying on their self-appraisals that they have superior talents and methods.
Indexing, is a wiser choice for the average foundation
There is no limit to what a man can do or where he can go if he doesnât mind who gets the credit - Woodruff
Febezzlement - the functional equivalent of embezzlement - to explain how wealth is stripped away by layers of unnecessary investment managers and consultants.
Spending proclivity is influences in an upward direction when stock prices go up and in a downward direction when stock prices go down. And second, the proclivity to spend is terribly important in macroeconomics. Increased spending drives up stock prices while stock prices are concurrently driving up spending - Wealth effect
Whatâs happened in Japan is recession from âWealth effectsâ in reverse
Japan for many years, not only ran an immense govt. deficit but also reduced interest rates to a place within hailing distance of zero and kept them there. Nonetheless, the Jap economy, year after year, stays stalled, as Jap proclivity to spend stubbornly resists all tricks of the economists, and Jap stock prices stay down.
Top 1% of households probably hold about 50% of common stock value and bottom 80% probably hold about 4%
Bezzle (term coined by Galbraith) - Increase in any period of undisclosed embezzlement. Undisclosed embezzlement, per dollar, has a very powerful stimulating effect on spending. The embezzler spends more because he has more income, and his employer spends as before because he doesnât know any of his assets are gone.
Pushing the idea of bezzle further - In a native economy relying on earned income, when the seamstress sells a coat to the shoemaker for $20, the shoemaker has $20 less to spend, and the seamstress has $20 more to spend. There is no lollapalooza effect on aggregate spending. But when the govt. prints another $20 bill and uses it to buy a pair of shoes, the shoemaker has another $20 and no one feels poorer. And when the shoemaker buys a coat, the process goes on and on, not to an infinite increase, but with what is now called a Keynesian multiplier effect, a sort of a lollapalooza on spending. Similarly, an undisclosed embezzlement has stronger stimulative effects per dollar on spending than a same-sized honest exchange of goods. (This is phenomenal stuff and explains years like 2017 and related effects like the Panama pump)
Bezzle could not grow very big because discovery of massive theft was nearly inevitable and sure to have reverse effects in due course. Thus, increase in private âbezzleâ could not drive economies up and up, on and on, like govt. spending can.
One should recognize reality even when one doesnât like it - especially when one doesnt like it. One should cheerfully endure paradox that canât be removed by good thinking.
It is an unfortunate fact that great and foolish excess can come into prices of common stocks in the aggregate. They are valued partly like bonds, based on roughly rational projections of use value in producing future cash. But they are also valued partly like Rembrandt paintings, purchased mostly because their prices have gone up so far. This situation, combined with âWealth effectsâ, at first up and later down, can conceivably produce much mischief.
If half of all stock value became a consequence of mania, isnât the situation much like the case half of pension assets are ancient art?
Your mistaken professors were too much influenced by âRational manâ models of human behavior from economics and too little by âfoolish manâ models from psychology and real-world experience. âCrowd follyâ, the tendency of humans, under some circumstances to resemble lemmings, explains much foolish thinking.
It is sad that today each institutional investor apparently fears most of all that its investment practices will be different from practices of rest of the crowd.
Our present prosperity has had a stronger boost from common-stock-price-related âWealth effectsâ. What was greater on the upside in the recent boom could also be greater on the downside at some time of future stock price decline. When stock market advances and declines are regarded as long-lasting, there is more downside force on optional consumption per dollar of stock market decline than there is upside force per dollar of stock market rise.
When the financial scene starts reminding you of Sodom & Gomarrah, you should fear practical consequences even if you like to participate in what is going on.
An organisation foolish in one way in dealing with a complex system is all to likely to be foolish in another.
When stock prices rise say 200%, and the earnings do not rise, at some point the distributable earnings can get less than the frictional costs and no money at all net of costs, can reach the shareholders. The only way the party can go on is through new money and a ponzi scheme.
Regard your good name as the richest jewel you can possibly be possessed of - Socrates
Whose bread I eat, his song I sing (on Accountants, auditors)
It is difficult to get a man to understand something when his salary depended on his not understanding it - Upton Sinclair (on Agency costs)
A useful technique in assessing the veracity of reported earnings is to compare the purported good news in the annual report with the start reality of income taxes actually being paid.
All manâs desired geometric progressions, if a high rate of growth is chosen, at last come to grief on a finite earth. (applies to compounding, projections in DCF, manipulated earnings and so on)
We all agree that pessimism is a mark of super intellect - Galbraith
Meetings are indispensable when you dont want to do anything - Galbraith
The only function of economic forecasting is to make astrology look respectable - Galbraith
Do you understand, âit is far, far better thing to have a firm anchor in nonsense than to put out on the troubled seas of thoughtâ - Galbraith
In any great organisation, it is far, far safer to be wrong with the majority than to be right alone. - Galbraith
A profession and a nation that allow unsound accounting for management cost are learning in the same moral direction as the group that leaves most of the steel out of the concrete in erecting high-rise apartment buildings. Except, bad accounting will more easily spread than the defective construction.
Great many people conclude that something canât be evil if they are profiting from it.
Practically everybody (1) overweighs the stuff that can be numbered because it yields to the statistical techniques theyâre taught in academia and (2) doesnât mix in the hard-to-measure stuff that may be more important.
Economics should pick up the basic ethos of hard science, the full attribution habit, but not the craving for unattainable precision (physics envy)
If a thing canât go on forever, it will stop (Herb Stein)
Luxury goods: Raising prices can improve volumes as it improves the utility as a show-off item. Purchases may also mistakenly assume that higher price = higher quality. (Eg. Rolex)
Theory of comparative advantage explains why it can be beneficial for two countries to trade, even though one of them may be able to produce every kind of item more cheaply than the other (Ricardo)
Adam Smithâs pin factory - Only 10 workers were about to produce 48,000 pins per day because of divided and specialized labour. If each worker handled all the steps required to make a pin, he could only make 20 per day, for a total factory output of two hundred pins daily.
The best solution you can get is messy and uncertain (Max Planck on why he gave up economics)
The jackpot machine with higher ratio of near misses always does well
Keep grinding out of your system as much removable ignorance as you can remove
If we stop trading with China, the other advanced nations will do it anyway, and we wouldnât stop the ascent of China compared to us, and weâd lose the Ricardo-diagnosed advantages of scale - George Shultz
If directors were significant shareholders who got a pay of zero, youâd be amazed what would happen to unfair compensation of corporate executives as we dampened effects from reciprocity tendency
Tolerating a little unfairness to some to get a greater fairness for all is a good model
South sea bubble - Publicly traded stock was banned for decades and economy did well despite that
Envy was a great driver of proclivity to spend - so this terrible vice that is forbidden in the Ten Commandments is driving all these favorable results in eocnomics.
You cannot have a mathematical system without a lot of irritating incompleteness in it (Godel)
Godelâs first theorem holds that one can use the mathematical system to construct a statement that can be neither proved nor disproved within that system. The second theorem, arrived at by proving the first, states that no consistent system can be used to prove its own consistency.
Life is interesting with some paradox. When I run into paradox, I think either Iâm a total horseâs ass to have gotten to this point, or Iâm fruitfully near the edge of my discipline.
The parable of Leibowitzâs nails and Planckâs chauffeur - Hilarious (look it up if you have forgotten. Too long to type)
Its not bringing in the new ideas thatâs so hard. Its getting rid of the old ones - Keynes
Better to be roughly right than precisely wrong - Keynes
Altruism harms the state and its intellectual progress and self-interested human vice is the real engine of progress. Paradox - private vices are public benefits - Mandeville in poem âFable of the Beesâ penned in 1705
Where there is no bread, there is no law; where there is no law, there is no bread - Rabbi Elizar Ben Azariah
Capitalism works best when there is trust in the system
Ethical practices arenât good because they pay; they pay because they are good
Acquisition of wisdom is a moral duty
Go to bed a little wiser than when you woke
A man who doesnât know what happened before heâs born goes through life like a child - Cicero
I am not entitled to have an opinion unless I can state the arguments against my position better than the people who are in the opposition.
Maximise non-egality like John Wooden - Wooden would choose and play the best repeatedly. You donât choose a brain surgeon to operate on your child by drawing straws!
Every mischance in life, however bad, created an opportunity to behave well - Epictetus
Wealth consists not in having great possessions, but in having few wants - Epictetus
Shoe button complex - named for the condition of a family friend who spoke in oracular style on all subjects after becoming dominant in the shoe button business
Of what use is a philosopher who never offends anybody? - Diogenes
We are too soon old and too late smart - German folk saying
Many an academic is like a truffle hound, an animal so trained and bred for one narrow purpose that it is no good at anything else. - Jacob Viner
A dead ant pheromone painted on a live ant could mislead live ants to drag a useful live ant out of the hive - on the harmfulness of programmed responses. Experiment by E.O.Wilson
The brain of an ant contains a simple behavioral program that directs the ant, when walking, to follow the ant ahead. And when these ants stumble into walking in a big circle they sometimes walk round and round until they perish.
Perception is easily fooled by contrast - if stimulus is kept below threshold, it doesnât get through.
Different situation often cause different conclusions, even when the same person is thinking in the same general subject area.
Psychology of Human misjudgement - Tendencies - reward & punishment superresponse, liking/loving, disliking/hating, doubt-avoidance, inconsistency-avoidance, curiosity, kantian fairness, envy/jealousy, reciprocation, influence-from-mere-association, simple, pain-avoiding psychological denial, excessive self-regard, over-optimism, deprival-superreaction, social-proof, contract-misreaction, stress-influence, available-misweighting, use-it-or-lose-it, drug-misinfluence, senescence-misinfluence, authority-misinfluence, twaddle, reason-respecting, lollapalooza
Prompt rewards work better than delayed rewards (in reinforcing behavior)
Thereâs two special classes of loans that naturally cause much trouble to lenders. The first is 95% of value construction loans to any real-estate developer. second is any kind of construction loan on a hotel.
a sales force living only on commissions will be much harder to keep moral than one under less pressure from compensation arrangement. OTOH, a purely commissioned sales force may well be more efficient per dollar spent
man tends to âgameâ all human systems, often displaying great ingenuity in wrongly serving himself at the expense of others. Anti-gaming features, therefore, constitute a huge and necessary part of almost all system design. Avoid as much as you can, rewarding people for what can be easily faked.
Around the time of Caesar, there was a European tribe that when the assembly horn blew, always killed the last warrior to reach the assigned place, and no one enjoyed fighting this tribe. Illegal price-fixing greatly reduced in America after a few prominent business executives were sent to prison (Incentives)
Politics is the art of marshaling hatreds (old maxim)
Mediation between Israelis and Palestinians are hard because there is very little overlap of facts in the history of the two sides.
person making big sacrifices in the course of assuming a new identity will intensify his devotion to the new identity. (initiation in cults, made-men of mafias etc)
When one is maneuvered into deliberately hurting a person, they will disapprove or even hate that person - inconsistency avoidance - (Prison guards for eg)
Follow behavioral patterns that, if followed by everyone will make the surrounding human system work best for everybody - Kantian fairness - (Queues, allowing lane changes, letting the other driver go first in narrow bridges)
You can always tell the man off tomorrow, if it is such a good idea - Tom Murphy (Deferring reaction)
Weird pauses occur in the middle of long wars, triggered by some minor courtesy by one side, followed by a favor reciprocation (reciprocation tendency)
Always tell us the bad news first. It is the good news that can wait (Berkshire way)
It is not necessary to hope in order to persevere (Psychological denial)
90% of Swedish drivers judge themselves above average (Excessive self-regard tendency)
Once owned, the thing is worth more than what he would have paid for when it was offered for sale - Endowment effect
Man makes excuses for his fixable poor performance instead of providing the fix (Tolstoy effect)
Never underestimate the man who overestimates himself
When Iâm not near the girl I love, I love the girl Iâm near - Availability bias. An idea or a fact is not worth more merely because it is easily available to you.
â
fin
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A Feast of Vultures, Josy Joseph, 2016 - Its common knowledge that there is significant self-censorship in our news outlets. A lot of things from the way business gets done, the clout some business houses have, the dirty methods used and so on donât get talked about directly as most of these are impossible to âproveâ, at least in a fashion acceptable in a court - still we know it exists and the author digs up some of these from his two decades of experience as a investigative journalist.
For someone like me who is an illiterate in politics and Indian business history, there were lot of things to pick up - like Naresh Goyalâs Jet Airways links with Dawood Ibrahim, the downfall of East Wast airlines and the way it was carried out, the power of the middleman - from the small towns to 10, Janpath and so on. There is also a powerful juxtaposed narrative on Ambaniâs Antilia, almost filmy to a fault that it makes for great reading but felt too fictional.
I consciously picked this book up after the overtly optimistic Factfulness, to temper my optimism. I still remain optimistic for the long term future of the country because the transition from the license raj to a somewhat open economy has brought with a lot of remnants which will all die its natural death in due course of things - take the way Jet has gone down for example and the way Indigo has risen up and the prospect of Air India getting privatised, or the way the co-operative bank, underworld and political nexus is brought to the limelight with PMC bank downfall which will hopefully give rise to better regulations. Do we even need colonial era co-op banks in this era where there is sufficient banking penetration? Maybe PSU Banks and Co-op banks will get wiped out in the next decade with them getting merged with better run private banks. I see this as efficiency and honesty getting rewarded over cronyism and corruption.
We need more of these books that vault the hurdle of self-censorship but we need it in a tone that doesnât get disregarded as left-wing tripe. 7/10
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The Warren Buffett Portfolio, Mary Buffett & David Clark, 2011 - The book starts off well talking about Buffettâs transition from Grahamian bargains to paying fair price for businesses with long-term durable competitive advantage and how he likes his businesses (Old), consistency in earnings (compounding consistently) and looking at valuing equities like bonds, and projecting future returns and using long-term growth in book value per share to identify consumer monopolies. All good so far, nothing much new here.
The next part of the book was what I was looking forward to, as it promised case studies on American Express, BNY Mellon, Coca-Cola, Conoco-Phillips, Costco, GSK, J&J, Kraft, Moodyâs, P&G, Sanofi, Torchmark, Union Pacific Railway, U.S Pacific Bancorp, Walmart, Washington Post, Wells Fargo and also a brief study on Munger, Combs and Weschler picks. The businesses themselves are discussed very briefly, more from mere stating of easily available facts from the Companyâs profile and financial statements. The actual dissection of the moat, study of their competitive advantage and the durability of it, how it was built and expanded - the things that tell us what makes these great businesses and how they became great - this part is sorely missing and left me disappointed. A bulk of the case studies on valuation looks to have been auto-generated by a robot, almost trivializing Buffettâs intellect. 6/10
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Wonderful book, that exposes the dark side of Indian crony capitalism, that either we donât know or just choose to ignore. I think the paragraphs below from the book sums it up.
Every time a scandal breaks, there is outrage and public debates, but when the studio lights go off, the participants of the show sit down to sketch out the next conspiracy. For almost every reported scandal, there is a bigger, far worse story behind the scenes.
The unsaid and unreported, the stories that lay bare the reality of modern India, are a key reason why I set out to write this book. Intelligence agencies that manufactured a terrorist threat to the prime minister and framed innocents; a Union government that accepted forged bank guarantees at the behest of a billionaire to shower his crony with massive favours; a leader who launched high-decibel campaigns against black money on resources provided by a man accused of humongous money laundering: there are innumerable stories in every newsroom that never see the light of the day for various reasons, but those news graves chillingly capture the true face of this nation state of 1.25 billion people.
Must read, highly recommended.
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Anybooks is an android app which has 1000s of free books both fiction and non-ficion. Some of the books discussed on this forum are also available.
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The God Delusion, Richard Dawkins, 2006 - Dawkins starts by discerning the difference between Hawkins/Einsteinâs God and the supernatural, omnipotent, omniscient, prayer-loving, wish-granting, sin-punishing Gods of several belief systems. He makes it clear that he has bones to pick with Monotheistic, Sky-god, patriarchal Abrahamic religions and sets out exploring arguments âforâ a Godâs existence - from teleological (design and purpose), ontological, of beauty, of scripture and so on and in the process breaks every single one of them rationally and proceeds to explain why there is almost certainly no God.
The next part of the book deals exclusively with religion, exploring its roots, trying to build a scientific case for its necessity using several arguments for it (only to debunk each one of them). Dawkinsâ love for Darwin and the scientific method is well-known and he brings Darwinian natural selection into several of these arguments which makes it a stimulating read. The one concept I found very useful was the âconsciousness-raisingâ as Dawkins calls it - For eg. putting Australia in the middle of the map to Canadian school children to teach how entrenched perspectives can make it hard to see other viewpoints.
The problem if any, I had with this book is that I learnt nothing new as my beliefs (or lack thereof) were already in-line with Dawkins and I value books that teach me something new and in the process change my worldview (Dawkinsâ The Selfish Gene was one such for me). Its not the bookâs fault though that it fed my confirmation bias. 8/10
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Bulls, Bears and Other Beasts, Santosh Nair, 2016 - This was a fairly fun and informative read on the history of the Indian equity markets and its many frauds and quirks. Harshad Mehta scam can be summarised as a scam with bank receipts - essentially, a receipt for easy exchange of physical securities between banks was abused to such an extent that there were BRs being issued for BRs - essentially a case of object-reference misuse which has happened many times since in our markets (Financial Technologies/MCX). Only highlight here is how the BRs were used to fund HMâs stock market purchases (The BRs were good for 90 days) which is where the fraud went to epic proportions.
Thereâs then Ketan Parekh, Co-operative bank scams (still going on), EM crisis, tech bust, global financial crisis, Satyam, Microfinance bust, P-notes and round-tripping and the biggest of all - IPO rigging through grey market premiums (which would in turn be funded by the companies themselves). Essentially margin funding of equity purchases, with the margins themselves lent by some NBFCs mean that things are built on a house of cards, ready to collapse at the slightest breeze. It was interesting to note how promoters play with their own stock price through benami holdings. This should be essential reading for someone new to the Indian markets. It was a surprisingly easy page-turner, which shows how well-written the book is. 9/10
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Against the Gods, Peter L. Bernstein, 1996 - This is a remarkable book on the remarkable story of Risk. There really canât be anything more comprehensive than this on the subject. While there are brief references of dice and related games running back thousands of years, a bulk of the understanding and work has happened only in the last 450 years. It is interesting to note that without the carrying over of the zero and the Hindu-Arabic numbering system to the Western world, there may have never been any progress, because without zero, the Roman number system couldnât lead to natural number sequences - For eg. what comes after I,X and C? In the Hindu-Arabic system with zero, you know that after 1,10 and 100 comes 1000. How elegant! It took Fibonacciâs Liber Abaci to overcome the hurdle posed by the church to let the âinfidel symbolsâ to be adopted for mainstream use. Looks like this happened in th 9th century but then the middle ages followed - when you believed that everything in the future was dictated by a higher power, the impetus to look towards a future that was pliable by mortals was never there, which might explain the lack of any sort of progress in the middle ages. Risk management after all requires us to behave as free agents who could manipulate outcomes.
The earliest reference of probability happens only in 1500s with Cardano the gambler/polymath from Italy having used it in games of dice where he figured out the odds of favourable outcomes to unfavourable ones. Some of the more concrete work was done by Pascal and Fermat when they tried to solve a problem of a half-finshed game where one player was leading the other and they had to figure about the likelihood of either one winning the game in the 16th century. Pascalâs Triangle was an older version of the modern âpermutations and combinationsâ in 7th grade math. Pascal wrote something on the lines of âfear of harm ought to proportional not just to the gravity of the harm, but also to the probability of the eventâ - with that Pascal probably was the first to link probability and expected value. We are still in 1662. Graunt follows as the man who unwittingly pioneered statistics as field when he was compiling births and deaths in London during the great plague of 1665.
Statistics and the mathematics of odds, naturally lead to insurance in the unlikeliest of places - at Lloyds coffee shop where sailors from the ships used to hang out where the earliest underwriting was done. âThe value of an item must not be based on its price, but rather on the utility that it yieldsâ was the theme of an essay in 1731 - sort of the earliest version of Bernoulliâs utlity theory which followed shortly. Bernoulli had a problem with âExpected valueâ computed with probability because the utility is dependent on the particular circumstances of the person making the estimate. There is no reason to assume that the risks anticipated by each individual must be deemed equal in value - which was phenomenal leap in the understanding that Risk depended on perspectives of the individual - He essentially understood that âGut rules the measurementâ!. With this he formulated his pivotal idea - âUtility resulting from any small increase in wealth will be inversely proportional to the quantity of goods previously possessedâ.
de Moivre, Gauss, Laplace follow with binomial distribution, ubiquitous normal distribution and the Gaussian functions for representing the probability density. Galton (Darwinâs half-cousin) with a deep interest in peapods, stumbled upon the concept of regression (larger peas donât produce larger and larger peas forever and neither do small peas produce smaller and smaller peas, forever) and correlation (taller parents had taller children). Examples of these today are all over the place - we know the economy will recover when its going through a slowdown (doesnât imply recovery is around the corner but we know that eventually, it will) - high performing fund manager of today will be the mediocre one of tomorrow and so on.
Since the war and afterward, significant contribution to the subject has come from Keynes - who junked the peapod analogy as he found it applicable to nature but not to human beings. He also took a dim view in modeling the future against the past and built on Popperâs wisdom in saying âWe simply do not knowâ in trying to calculate probabilities of uncertain events like war or interest rates 20 years into the future. Two more groundbreaking innovations since 1950 are Game theory and Markowitzâs modern portofolio theory, both of which are excellent subjects on their own, the latter despite the brickbats it has received, since it was the first one which tried to manage risk with mathematics instead of flying seat-of-the-pants.
More modern developments in risk include works in chaos theory and in the field of behavioural finance by Kahnemann, Tversky and Thaler (Things that Kahneman expands on in Thinking fast and slow are already here in this book). When reading Kahnemanâs Prospect Theory with the backdrop of Bernoulliâs Utility theory, the dramatic improvements made in marginal utility, reference points and framing etc. show how far we have come in the recent years. I may have missed Bayes, Newton and Einstein but they have played a significant secondary role in a lot of these developments above.
The last 3 chapters of the book stick to current financial markets and discuss the crash of 1987 which was triggered by portfolio insurance (and of course how it came about), derivatives and the reason for their existence despite the caveats and so on. This is already becoming a long review, so I think its better I stop here and say this book is essential reading for anyone remotely interested in the fascinating subject of Risk. 11/10
P.S. This was a used book. Looks like it was previously owned by an Insurance company. Appeared unused though
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An Elegant Defense by Matt Richtel
This book very elegantly explains how our immune system has evolved over thousands of years and has contributed in the survival of human species. It describes how the science of immune system has progressed in last 70 years and how contributions from the scientists all over the world has helped understand this complex topic.
Author carefully illustrates with the hep of five different characters how nowadays common diseases such as rheumatoid arthritis, irritable bowel syndrome (IBS), Chronâs disease, diabetes and cancer is caused due to the immune system going to war against the body, same immune system which is supposed to defend it. It happens when the immune system fails to apply break after fighting an infection, goes on over drive damaging organs or fails to detect growth of malignant cells (cancer) and protecting it as if it were a healthy new tissue.
Billions of bacteria cells live inside our bodies without causing harm. In fact, as few as 1 percent are likely to make you sick. And thereâs a very good chance that you have cancer inside you at this moment, but it is essentially harmless.
Four major factors of day-to-day life that impact auto immunity and immunity are sleep, stress, the gut and hygiene.
Sleep and exercise play such a key role in keeping the immune system in check, partly by keeping the adrenal system from firing too intensely; when it does become too intense, adrenaline released, leading to inflammation, sending the system further out of balance, even leading to more sleeplessness and more adrenaline.
In stressful situation, there is a surge of adrenaline. This precedes the release of steroids which dampen the immune system. Same steroids are used to fight autoimmunity which has significant side effects. No wonder why as a child we felt sick after exams and now after continuous stressful days (yearend targets, continuous travel, etc.)
Prednisone (steroid) described as âbeing like a big hammer. It shuts a lot of things down.â
Another factor that can throw the immune system out of whack is infection. The immune system responds and succeeds in eliminating the pathogen. But this response can spur autoimmunity when the immune system doesnât fully shut down and remains in hyperdrive, even after the infection is cured.
The logic comes again from evolution. If our ancestor was under sudden and profound stressâsay, fearing a bear or lion attackâit would be problematic for inflammation to create fatigue or fever. For most of human history, stress meant imminent threat, and imminent threat meant the body needed to be alert, fully functional, even a bit superpowered. This is where the hormone cortisol, secreted by the adrenal gland, comes in. In times of acute stress, if thereâs a virus in our system, the virus fight can wait. The bigger threat has teeth and runs a 3.5-second forty-yard dash.
The hygiene hypothesis stated that our environment has become so clean that it has left our immune system insufficiently trained, starving our immune systems of training and activity by an excessive obsessive focus on cleanliness.
One great way to keep your immune system in balance is to . . . eat the food you drop on the floor. We need to stop over sanitizing our world so that our immune systems are introduced to lots of bacteria, parasites, and other pathogens and can react to them as millions of years of evolution have refined them to do. Our immune system needs a job. Now they donât have anything to do. Our elegant defense has grown restless.
Regarding nutrition, a simple conceit: The less toxic the things you put into your body, the less likely your body is to create, or need to create, an inflammatory response.
Another interesting book about how our digestive system works. Gut: The Inside Story of Our Bodyâs Most Underrated Organ by Giulia Enders
Our immune system is constantly seeking to maintain harmony, not just by limiting its attacks to all but the most necessary ones, but also by cooperating with the organisms that surround and invade it. At its core, it tries to discern self from other, but having done so, it doesnât just destroy what is alien. For us to have a fully effective immune system, we need regular engagement with bacteria in our environment and in our gut.
Xenophobia, blind nationalism and racism, is an autoimmune disorder. A culture, tone-deaf in its own defense, attacks so aggressively that it puts itself at serious risk. Biologyâs lessons teach us that cooperation with our speciesâ diversity is undeniably key to harmony and survival.
Conflict has its inevitable place. Societies and people will collide, just as at times our immune system must play a vigorous defense. But the immune system cautions us to take the least destructive path possible to a livable balance. When we donât cooperate, when we err too easily on the side of warâliteral and proverbial, physical and verbal, armed and politicalâwe emulate one of the most self-destructive of our traits: an overheated defense system.
The biggest misconception is that it is better to have a superpowered immune system. The advertisements urging âBoost your immunity!â is such as fallacy. It assumes our immune system needs boosting, which it very likely doesnât. If we do successfully boost our immune system, we might boost it to do something bad. The immune system teaches us to err on the side of cooperation and acceptance. In our quest to build a perfect and efficient world, we have overcorrected.
Author cautions: You tinker with the immune system at your own risk
The more active you stay, body and brain, the more you signal your internal systems that you continue to play a vital role in your own survival and the survival of the species. This leads to a virtuous cycle in which key internal mechanisms continue to regenerate, allowing you to play a vital role and, when you do that, pushing the cycle on. By contrast, if you grow stagnant, physically and mentally, the system is signaled that you are calling it quits and it need not âwasteâ resources on your survival.
We must distinguish between lifespan and health-span. You donât want to live forever, but you do want to be healthy when youâre old.
Dr. Ephraim Engleman, who was an immunology giant who by most standards lived forever. At one hundred and four, he got his driverâs license renewed. His self-professed secrets for longevity: Avoid air travel, have lots of sex, keep breathing, and most appropriately, enjoy your work, whatever it is, or donât do it. I think the last one about work is very important.
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