Things we’re reading today-30th November: Learning the wrong lessons

Look under the hood

Brilliant article on just how dangerous survivorship bias can. We keep seeing companies and individuals trying to blindly mimic the actions of someone or some company just because they were successful. But in all aspects of life, context is king. There’s nothing wrong trying to learn from the success of other individuals or companies. But you need to be aware that a lot of success can be chalked to luck, just as it can be to brains. More importantly, just superficially co-opting behaviours is a recipe for disaster. You are better off trying to understand the underlying principles, processes and systems that can or might lead to success people you look up to. Which also leads to the question how do you figure if someone is worth looking up to? I don’t have an answer :sweat_smile: Case in point is Elon Musk.

Learning the wrong lessons by focusing on symbols of success rather than harder-to-identify systems and processes is called superstitious learning. It is like trying to replicate the success of Amazon by having people write 6 page memos before every meeting, even though the memos are definitely not the main reason why Amazon has succeeded, or even why its meetings might work better. Instead, they are just easy-to-copy and heavily reported on rituals, not the deeper seeds of success.

This reminds ofthis famous paper by Andrea Frazzini, David Kabiller and Lasse Pedersen over at AQR, the systematic investing giant. They looked at the factors that ca explain Warren Buffett’s genius. Here’s what they found:

If his Sharpe ratio is very good but not superhuman, then how did Buffett become among the richest in the world? The answer is that he stuck to a good strategy—buying cheap, safe, quality stocks—for a long time period, surviving rough periods where others might have been forced into a fire sale or a career shift, and he boosted his returns by using leverage. We estimated that Buffett applies a leverage of about 1.7 to 1, boosting both his risk and excess return in that proportion. Thus, his many accomplishments include having the conviction, wherewithal, and skill to operate with leverage and significant risk over a number of decades.

We identified several general features of Buffett’s chosen portfolio: He buys stocks that are safe (with low beta and low volatility), cheap (i.e., value stocks with low price-to-book ratios), and of high quality (profitable, stable, and growing stocks with high payout ratios). Interestingly, stocks with these characteristics tend to perform well in general, so these characteristics help explain Buffett’s investment.

The reason I bring this up is because, at the risk of sounding arrogant, it’s easy to invest like Warren Buffett for less than 0.5%, and I am not joking. All you have to do is invest in Low Volatility, Value and Quality ETFs or funds, but you can lever them up like he does. Instead of looking at his Buffett’s success, if you looked at what drove his success, you would’ve discovered that Warren Buffett is a factor investor (smart beta).


Francine McKenna had a brilliant piece looking at the role of auditors in the FTX fraud. I highly recommend it.

Related read

The bull case for India


A brilliant post on the protests in China

These protests surely weaken Xi’s hand regionally, as slowing growth and domestic troubles will call into question China as a model and economic partner. We’ve already seen Beijing reach out to the US to try to cool down tensions, an effort which culminated in the recent Xi-Biden summit. Even before the protest, I didn’t think any serious US-China cooperation was in the offing. That prospect has gotten even slimmer, though given the economic and social troubles at home I’d be surprised if Xi used this as a moment to escalate abroad. I’m not entirely sure whether the sort of deal the Chinese side proposed in the track II dialogue last week has gotten more or less attractive thanks to the protests.

Avoidable regrets

While most people regret not saving more, it’s not just limited to savings. People also regret not having enough health insurance and retiring early. The ironic thing is that, these are things in our control. One thing that constantly surprises me is just how avoidable bad financial outcomes are, just how simple it is to fix most issues. But human inertia (fancy word for laziness) is a force to behold.

Whether older Americans also regret not having insured better, claimed benefits and quit working too early, and becoming financially dependent on others. Using a controlled randomized experiment conducted on 1,764 respondents age 50+ in the Health and Retirement Study, we show that providing people objective longevity information does alter their self-reported financial regret. Specifically, giving people information about objective survival probabilities more than doubled regret expressed about not having purchased long term care, and it also boosted their regret by 2.4 times for not having purchased lifetime income.