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Berkshire annual meet 2022, Framework to pick winners, Finding alpha & More

  • Investing: Lessons from Berkshire Hathaway annual meeting 2022
  • Actionable: Framework to filter out winners & position sizing
  • Socioeconomics: Debating the fairness of subsidies on principle
  • Psychology: Saying “I don’t know” makes you smarter
  • Concepts: What is alpha anyway?
  • 🆕 Pop Quiz: A quiz question that can win you a little gift from us

Going 5×5: Five articles summarised in five lines 🌟 

Through this newsletter, our pursuit is to curate the best reads from the world of investment and finance. We will now, at least try to, summarise long-form articles into five sentences or less. Of course, reading a five-line summary is not as good as reading the whole thing – but hey – it’s much better than not reading the article at all.

Lessons from the Oracle of Omaha 😇

Buffett & Charlie observe that the gambling (or speculative) activity in stock markets is higher than ever. They talk about avoiding the ways in which investors generally lose money such as – gambling in stocks, trying to time the market, and thinking that things will turn out exactly the way they did last time.

Learning from mistakes and correcting course is important to ensure that you are on a path that makes more wealth for you in the future – there’s no shame in admitting you are stupid. A good hedge to Inflation is owning businesses that have the pricing power to generate inflation-beating profits for their shareholders.

[Read More] – Lessons from the 2022 Berkshire Meeting

Fishing in good waters! 🎯

Invest in businesses that have significant holdings of their owners. Skin in the game ensures that these businesses survive difficult times (longevity), incentives to growth are aligned (no agency problem) and the focus is on long-term growth. Of course, this approach misses out on professionally managed companies with lower (diluted) owner stakes – which is ok – because it is better to fish in the good waters than try to find a good fish in the whole sea.

Active investors should research thoroughly and invest in up to 12 businesses rather than investing in 50. It is always a prudent idea to keep investing capital in your top 12 businesses than putting fresh capital in your number 30 business.

[Read More] – A Good Filter For Finding Winners

The fairness of subsidies 🎭

Capitalism thrives on pragmatism. Ayn Rand introduced the traders’ principle that explains that fair exchange of value is the sustainable way to trade material and spiritual properties. Fair exchange incentivizes innovation, and hard work, and creates a self-fulfilling positive loop.

Subsidies are aimed to redistribute wealth by giving disproportionately higher value to one party for moral, social, or political reasons. While “redistribution” does sound like a fair thing to do socially, in a capitalist system, these subsidies break the balance of traders’ principle and do more harm than good in the long term.

[Read More] – Are Subsidies Capitalist?

Embrace the unknown 🍀

For your own good be humble to accept that you don’t know where’s the market going next. People who are certain about the future are usually overconfident enough to bring on costly mistakes – such as overtrading and losing – to themselves. Data clearly reflects that there is no telling which asset class or industries or stocks are going to do well this year or the next.

True wealth creation comes from doing the basics right, not chasing “exciting ideas”, thinking long term, and humbly admitting to oneself – “I don’t know”.

[Read More] – I Don’t Know

Outperforming the market 🚀

We are fascinated with generating higher percentage returns on our capital while we should think about growing our capital higher. They both are co-related but aren’t the same things. You may earn $10,000 (or 20%) a year on your investment of $50,000 through day trading but you can do much better – earn $50,000 a year if you can code on python or learn a new skill.

Alpha is not just the outperformance of your investment to the benchmark. Alpha is making the most of your skillset because the goal always has been to make more money.

[Read More] – A New Definition of Alpha

Pop Quiz ⚡️

Hit reply to this email and send in your answers. If you are not reading this in your mailbox, please subscribe to the newsletter to get next the one (with the next Pop Quiz) in your inbox!

Question: The concept originated in French civil law and is an accepted standard in many jurisdictions that derive their legal systems from the Napoleonic Code. French law applies three tests for whether a _____________ defense is applicable— the event must be unforeseeable, external, and irresistible.

Identify this french term used in most (if not all) contracts.

(Hint: It gained significant attention during Covid19)

Last week’s quiz results💡

Answer: GPS – Global Positioning System.

Quiz Winner – Akhilesh Bagri 🎉

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