06 December 2020
Thanks for your messages regarding the newsletter last week. Do keep them coming or better still – share your thoughts in the comments section below!
In this newsletter, I’m continuing the format adopted last week and have shared five curated reads with some of my thoughts. Enjoy.
“The keys to life are Running and Reading.
When you’re running, there’s a little person that talks to you and says, “Oh I’m tired. My lung’s about to pop. I’m so hurt. There’s no way I can possibly continue.” You want to quit. If you learn how to defeat that person when you’re running. You will how to not quit when things get hard in your life.
For reading: there have been gazillions of people that have lived before all of us. There’s no new problem you could have — with your parents, with school, with a bully. There’s no new problem that someone hasn’t already had and written about it in a book.”
~ Will Smith
Starting up is hard! Steve Schlafman shares his personal journey of giving up a VC career to become a solopreneur over the last year. I relate to this article on multiple fronts – you could be in the mindset to start but there’s a lot in between that needs to be experienced.
Find a calling: this is an important one and few people know what their calling or purpose is. Frameworks such as Don McVeigh’s Personal Shield or Ikigai are a good resource to identify your calling. Once you are clear on your calling, it gets easier to decide between options and focus on execution.
Invest in mind, body, and spirit: it changed Steve’s life and it has changed my life since my journey to improve my mind, body, and spirit since last August. Get started and invest in these three critical things to be a better human.
Define your box: I’ve struggled to say ‘NO’ to opportunities and with so much things to do in this life, it is important to define your box. Steve got himself a coach to help define his box.
Marc Rubinstein breaks down the history, operations, and economics of hedge funds in this article. A must-read if you are curious about investments.
There are two types of business: those that suffer from diminishing returns to scale, and those that benefit from increasing returns to scale. The first group comprises most companies—they reach certain limitations as they grow, and eventually reach a predictable equilibrium in market share. The second group uses technology to extract increasing returns to scale, often because of the network effects they possess.
Invariably, problems of agency occur between asset managers and asset owners, too. Like in all the other cases, asset managers and asset owners may have different perspectives on a whole range of issues. Aligning these interests presents a challenge.
Mutual fund investors design their contracts to go heavy on limitations. They impose risk limits, demand high levels of disclosure, and restrict the range of investment decisions they allow their managers to make. In contrast, hedge fund investors allow a lot more latitude and even turn the restrictions on themselves by agreeing to lock up funds for longer periods. In place of restrictions, they use fees as the central pillar of their contract, together with some “skin-in-the-game”. Hedge fund investors pay fees linked to performance and often require co-investment by the manager; mutual fund investors pay a fixed fee and tend not to ask managers to invest in their funds.
Arthur Clifford, an independent investment advisor based in Pasadena, California, began offering fixed fees for his services in 1915. On the other side of America, in Boston, Theodore Scudder of Scudder, Stevens, and Clark (since subsumed into Deutsche Bank) chose instead to charge 1% of assets in 1919. The East Coast won out. In the late 1960s the Morgan Bank extended the practice to institutional money, charging 0.25% of assets. Under cover of asset appreciation, those fees edged up over the years to the rates they are today.
The first hedge fund is said to have been created by Alfred Winslow Jones in 1949. It would be nice to say that Jones saw his fee structure as a solution to an agency problem, but the truth is that he saw it as a solution to a tax problem. At the time, marginal tax rates on personal income were 91%; capital gains rates were just 25%. Charging only incentive fees allowed him to keep more of his earnings. Of course, he didn’t tell clients this—he told them his profit share was modeled after Phoenician sea merchants who kept a fifth of the profits from successful voyages. Marketing investment management services have always been about telling a good story!
Academic research estimates that $314 billion of performance fees were paid on total hedge fund returns of $633 billion over a 22 year period, equivalent to an incentive fee rate closer to 50%.
Abhijit Chokshi from Stockifi shares this goldmine of resources to conduct your own research on companies. I use about 4-5 of the recommended tools, though they are primarily for the Indian market.
Do you use any of these tools or have a set of other resources that have helped you conduct your own research? Share them by adding them in the comments below.
In this post, Shuvi Shrivastava does a great job in unbundling ‘first principles thinking’. While the term itself is now becoming a jargon-word, Shuvi explains how one can know themselves/conditioning and overcome hurdles to deliberately practice first-principles thinking.
Challenge all assumptions, complete the thought by five ‘how’ approach, and build a counter view.
‘Fear’ of looking stupid when your initial answer doesn’t tally with what further digging might reveal; ‘Greed’ towards incentives that lie when a certain approach is followed or a certain answer is arrived at; ‘Envy’ that can unconsciously change the goalpost from doing what is right for you to attaining what someone else has. While these are symptoms of being driven by your own ego, another common slip is ‘Deference’ or giving undue weightage to other people’s ego: not critically questioning people we greatly admire or not voicing our disagreement because ‘X would know better’.
Most of the irrational beliefs can be traced back to conditioning: the religious beliefs in the household we grew up in, the ideological make-up of teachers, friends, relatives, the books we read and the movies/TV we consumed, perhaps even our genetic disposition. And this is truly fascinating because it implies that the most important decisions we make in life are not based on obvious data implications but on leaps of faith that we take basis influences we had little control over or intentionality about.
Sports & Fitness
Ankur Warikoo shares his ‘extreme’ fitness routine to go from 26% body fat to under 10% body fat in this article. While I don’t endorse such an extreme routine, I do admire him for having done it. I’ve recently experienced the hardship followed by the satisfaction when you get there and posted my own fitness journey from 30% body fat to 12% body fat in about 12 months with the help of a trainer.
The best part about bodybuilding is that it is not a team effort. It is just YOU. You can’t blame anyone for your failure so no one gets the credits for your victory. What I told you all through is something easily available on the Internet and I have shared it with several others. You have to believe and know for a fact that it is only you who decides what happens to it now.
The power of knowing that you alone control this – is a powerful one. Because it’s really the same with everything else as well.
Coming soon… I’ve got a great lineup of guests joining me on my podcast and here’s a shot of the equipment that’s going to help me capture the incredible moments.
Want me to cover a topic or have a suggestion on a guest that you’d like me to interview on my podcast? Drop a message in the comments section below.
Cheers and stay safe!