#25- Why Sleep Is Important
On relevance of brands, stock splits and key ideas from Buffet's letter to shareholders - 1988
Hello,
Greetings from the Curious Cat.
Did you know that routinely sleeping less than six or seven hours a night demolished your immune system, doubled your risk of cancer, increased odds of developing Alzheimer’s disease, disrupted blood sugar levels to make you pre-diabetic and increased your odds of developing coronary heart disease ?
Matthew Walker, the director of UC Berkeley's Center for Human Sleep Science, builds a compelling case for how sleep enriches a diversity of functions including our ability to learn, memorize and make logical decisions and choices.
In today’s edition, we look at -
Twelve Tips For Improving Sleep Quality
Illusion, Perception and Reality: Stock Splits and Index Inclusions
Do Brands Really Matter ?
Key Ideas from Buffett’s letter to shareholders - 1988
Happy Reading.
Twelve Tips for a Great Sleep
A useful excerpt from the book “Why We Sleep" by Matthew Walker
1. Stick to a sleep schedule. Go to bed and wake up at the same time each day. As creatures of habit, people have a hard time adjusting to changes in sleep patterns. Sleeping later on weekends won’t fully make up for a lack of sleep during the week and will make it harder to wake up early on Monday morning. Set an alarm for bedtime. Often we set an alarm for when it’s time to wake up but fail to do so for when it’s time to go to sleep. If there is only one piece of advice you remember and take from these twelve tips, this should be it.
2. Exercise is great, but not too late in the day. Try to exercise at least thirty minutes on most days but not later than two to three hours before your bedtime.
3. Avoid caffeine and nicotine. Coffee, colas, certain teas, and chocolate contain the stimulant caffeine, and its effects can take as long as eight hours to wear off fully. Therefore, a cup of coffee in the late afternoon can make it hard for you to fall asleep at night. Nicotine is also a stimulant, often causing smokers to sleep only very lightly. In addition, smokers often wake up too early in the morning because of nicotine withdrawal.
4. Avoid alcoholic drinks before bed. Having a nightcap or alcoholic beverage before sleep may help you relax, but heavy use robs you of REM sleep, keeping you in the lighter stages of sleep. Heavy alcohol ingestion also may contribute to impairment in breathing at night. You also tend to wake up in the middle of the night when the effects of the alcohol have worn off.
5. Avoid large meals and beverages late at night. A light snack is okay, but a large meal can cause indigestion, which interferes with sleep. Drinking too many fluids at night can cause frequent awakenings to urinate.
6. If possible, avoid medicines that delay or disrupt your sleep. Some commonly prescribed heart, blood pressure, or asthma medications, as well as some over-the-counter and herbal remedies for coughs, colds, or allergies, can disrupt sleep patterns. If you have trouble sleeping, talk to your health care provider or pharmacist to see whether any drugs you’re taking might be contributing to your insomnia and ask whether they can be taken at other times during the day or early in the evening.
7. Don’t take naps after 3 p.m. Naps can help make up for lost sleep, but late afternoon naps can make it harder to fall asleep at night.
8. Relax before bed. Don’t overschedule your day so that no time is left for unwinding. A relaxing activity, such as reading or listening to music, should be part of your bedtime ritual.
9. Take a hot bath before bed. The drop in body temperature after getting out of the bath may help you feel sleepy, and the bath can help you relax and slow down so you’re more ready to sleep.
10. Dark bedroom, cool bedroom, gadget-free bedroom. Get rid of anything in your bedroom that might distract you from sleep, such as noises, bright lights, an uncomfortable bed, or warm temperatures. You sleep better if the temperature in the room is kept on the cool side. A TV, cell phone, or computer in the bedroom can be a distraction and deprive you of needed sleep. Having a comfortable mattress and pillow can help promote a good night’s sleep. Individuals who have insomnia often watch the clock. Turn the clock’s face out of view so you don’t worry about the time while trying to fall asleep.
11. Have the right sunlight exposure. Daylight is key to regulating daily sleep patterns. Try to get outside in natural sunlight for at least thirty minutes each day. If possible, wake up with the sun or use very bright lights in the morning. Sleep experts recommend that, if you have problems falling asleep, you should get an hour of exposure to morning sunlight and turn down the lights before bedtime.
12. Don’t lie in bed awake. If you find yourself still awake after staying in bed for more than twenty minutes or if you are starting to feel anxious or worried, get up and do some relaxing activity until you feel sleepy. The anxiety of not being able to sleep can make it harder to fall asleep.
Illusion, Perception and Reality: Stock Splits and Index Inclusions
Read the article here (Read Time ~ 9 mins)
Professor Aswath Damodaran argues that value and price, while used interchangeably by many, are different concepts, driven by different forces, and lead to different numbers. If you are an investor, no matter what your philosophy, this should not surprise you, since every philosophy is built around beliefs about the value and price processes.
A value-based investor believes that value and price can diverge, often by large amounts and for long periods, but that the price will eventually converge on value, delivering profits to those with the patience to hold on to the investment.
A trader, in contrast, has little interest in value and plays the pricing game, gauging momentum and mood shifts to make money, and using liquidity or the lack of it to magnify these gains.
An efficient marketer may agree that the price and value processes can diverge, creating gaps, but also believes that investors are incapable of finding and taking advantage of the gaps.
When an event occurs, whether precipitated by the company or an outside force, it can play out in one of three ways. A value event changes cash flows, alters expected growth and/or impacts the uncertainty/risk in these cash flows, and by doing so, change a company’s value. A gap event does not change value, but is designed to get markets to notice mistakes that cause price to diverge from value, and to correct those mistakes, closing the gap. A pricing event is one designed to either alter mood and momentum or to change the liquidity characteristics of a company, causing price to change, even if that price change widens the gap with value.
Without examples, these are abstractions, but before I cite examples for each, I want to emphasize that there are very few events that have only one effect, and that most have a dominant effect (on value, price or the gap) with secondary effects on the others.
Mostly value events: When a manufacturing company adds to its production capacity or a retailer opens new stores, the effects will almost entirely be on value. Since these actions are generally in the normal course of operations for these firms, they are unlikely to attract new market attention (which you need for gap events) or change market mood and momentum. Higher profile actions, though, almost always have spillover effects, and here are two examples. When Walmart recently announced its intent to partner with Microsoft to buy TikTok, there is clearly a value impact that this action will have, costing tens of billions in current cash flows, while promising to deliver higher growth and cash flows in the future. At the same time, though, this action, by attracting tech investors to buy Walmart, may alter momentum and have a secondary impact on pricing. When a California court ruled against ride sharing companies a few weeks ago, on the issue of drivers being employees rather than independent contractors, that decision had consequences for cost structure and value for Uber and Lyft, but it may have induced some investors to look at the gap between price and value at these companies.
Mostly gap events: Gap events can be initiated either by the companies that are being mispriced (or at least perceive themselves to be mispriced) or by investors with the same perception. In academic finance, these events are termed signals, and while there is no guarantee that they will work, the motivation is to try to close the perceived gap between price and value. The cleanest example that I can offer for a gap event is a spin off or a split up, where a multi business company spins off one or more of its businesses or splits itself up, with no consequential changes in how it is run as a company, but with two objectives. One is that the action will expose the disconnect between the underlying fundamentals and the pricing, by providing more transparency on cash flows, growth and risk of individual businesses. The other is that the action will draw investor attention to the company, and that the attention can lead to a repricing of the stock. Not all gap events originate with the company. When activist investors target a company either as a buy or a short sale, they are attempting to provide the catalysts for the pricing gap to close, though their end games may involve changing the way the company is run, thus affecting cash flows, risk and value.
Mostly pricing events: With mostly pricing events, the end game is altering mood and momentum or changing the liquidity in the stock, and by doing so, affecting the pricing of a stock. An emerging market company that lists its shares on a more liquid, developed market exchange, for instance, has clearly not altered its fundamentals through that action, but may benefit from higher liquidity pushing up price. There can be spillover effects from increased information disclosure, perhaps helping to close gaps between price and value, and perhaps even greater access to capital, allowing for a value effect.
Do Brands Really Matter ?
Read the article here ( Read Time ~ 10 mins)
What role does a strong brand name have in the decision to invest in a stock? A brand creates a distinctive identity for a product, helping it be differentiated in a crowded market. However, a brand name is only as strong as the product or service experience it promises and delivers. And yet, a strong brand name by itself neither assures pricing power nor runaway profits.
By helping build a distinct identity, a brand helps a business to differentiate itself, becoming its most effective customer acquisition tool. A strong brand also drives high switching costs.
A strong brand does not necessarily mean an unassailable market position – either in terms of market share or in terms of profitability. Several firms in India have historically built exceptionally strong brands but have found it hard to demonstrate the presence of pricing power in the face of fierce competition. Airtel is one of the most recognised brands in telecom services in India. Yet, it has struggled with pressures on tariffs every time a new firm gets a licence and starts services. Kingfisher Airlines did a great job of branding – combining the best of the founder’s personality and the association with an existing powerful brand. It even got the product experience right. But could not command any pricing power in a competitive and price-sensitive market. In fact, airlines around the world struggle with the same problem – the brand name or strength has nothing much to do with how much money the business makes.
True pricing power therefore comes from a host of competitive advantages other than just the brand name. What it takes is a business model that is difficult to replicate, which in turn helps leveraging the value of a brand in creating value for the business. So, when the next time someone makes an investment recommendation based on how strong a brand is, it would be worthwhile to dig deeper.
Key Ideas from Buffett’s letter to shareholders - 1988
While we summarize the key ideas in the letter, we encourage the readers to read the entire letter to capture the context in which the thoughts were expressed by Warren Buffett.
On GAAP accounting standards and key questions that investors must look through an accounting lens: Despite the shortcomings of generally accepted accounting principles (GAAP), I would hate to have the job of devising a better set of rules. The limitations of the existing set, however, need not be inhibiting: CEOs are free to treat GAAP statements as a beginning rather than an end to their obligation to inform owners and creditors - and indeed they should. After all, any manager of a subsidiary company would find himself in hot water if he reported barebones GAAP numbers that omitted key information needed by his boss, the parent corporation’s CEO. Why, then, should the CEO himself withhold information vitally useful to his bosses - the shareholder-owners of the corporation? What needs to be reported is data - whether GAAP, non-GAAP, or extra-GAAP - that helps financially-literate readers answer three key questions: (1) Approximately how much is this company worth? (2) What is the likelihood that it can meet its future obligations? and (3) How good a job are its managers doing, given the hand they have been dealt? In most cases, answers to one or more of these questions are somewhere between difficult and impossible to glean from the minimum GAAP presentation.
On a couple of ironies in business: One of the ironies of business is that many relatively-unprofitable industries that are plagued by inadequate prices habitually find themselves beat upon by irate customers even while other, hugely profitable industries are spared complaints, no matter how high their prices.
The supreme irony of business management is that it is far easier for an inadequate CEO to keep his job than it is for an inadequate subordinate. If a secretary, say, is hired for a job that requires typing ability of at least 80 words a minute and turns out to be capable of only 50 words a minute, she will lose her job in no time. There is a logical standard for this job; performance is easily measured; and if you can’t make the grade, you’re out. Similarly, if new sales people fail to generate sufficient business quickly enough, they will be let go. Excuses will not be accepted as a substitute for orders. However, a CEO who doesn’t perform is frequently carried indefinitely. One reason is that performance standards for his job seldom exist. When they do, they are often fuzzy or they may be waived or explained away, even when the performance shortfalls are major and repeated. At too many companies, the boss shoots the arrow of managerial performance and then hastily paints the bullseye around the spot where it lands
On arbitrage: Since World War I the definition of arbitrage - or “risk arbitrage,” as it is now sometimes called - has expanded to include the pursuit of profits from an announced corporate event such as sale of the company, merger, recapitalization, reorganization, liquidation, self-tender, etc. In most cases the arbitrageur expects to profit regardless of the behavior of the stock market.
To evaluate arbitrage situations you must answer four questions: (1) How likely is it that the promised event will indeed occur? (2) How long will your money be tied up? (3) What chance is there that something still better will transpire - a competing takeover bid, for example? and (4) What will happen if the event does not take place because of anti-trust action, financing glitches, etc.?
On arbitrage opportunity: The other way we differ from some arbitrage operations is that we participate only in transactions that have been publicly announced. We do not trade on rumors or try to guess takeover candidates. We just read the newspapers, think about a few of the big propositions, and go by our own sense of probabilities.
Arbitrage has looked easy recently. But this is not a form of investing that guarantees profits of 20% a year or, for that matter, profits of any kind. As noted, the market is reasonably efficient much of the time: For every arbitrage opportunity we seized in that 63- year period, many more were foregone because they seemed properly-priced. An investor cannot obtain superior profits from stocks by simply committing to a specific investment category or style. He can earn them only by carefully evaluating facts and continuously exercising discipline. Investing in arbitrage situations, per se, is no better a strategy than selecting a portfolio by throwing darts.
On the efficient market hypothesis: This doctrine became highly fashionable - indeed, almost holy scripture in academic circles during the 1970s. Essentially, it said that analyzing stocks was useless because all public information about them was appropriately reflected in their prices. In other words, the market always knew everything. As a corollary, the professors who taught EMT said that someone throwing darts at the stock tables could select a stock portfolio having prospects just as good as one selected by the brightest, most hard-working security analyst. Amazingly, EMT was embraced not only by academics, but by many investment professionals and corporate managers as well. Observing correctly that the market was frequently efficient, they went on to conclude incorrectly that it was always efficient. The difference between these propositions is night and day.
What We Are Reading
We decided to publish few links to interesting articles that we have found across the Internet. We hope you find them interesting.
Preparing Your Mind For Uncertain Times [The Atlantic]
Designing Better Compensation Models [Kitces]
Your Brain Is Not Made For Thinking [The New York Times]
Th Big Lessons From History [Collaborative Fund]
Why The Paradox Mindset Is Key To Success [BBC]
How Venture Capitalists Are Deforming Capitalism [The New Yorker]
The Synchronicity of Wolfgang Pauli and Carl Jung [Nautilus]
Why streaming devices and streaming networks are fighting over your eyeballs [Vox]
How Investing In Shares Of Art Compares With Stocks [Barron's]
The Idea Adoption Curve [Stratechery]
Afterthought
There is a time for many words, and there is also a time for sleep
-Homer (The Odyssey)
And that is a wrap for the week. We hope you enjoyed reading this edition. If you found this newsletter useful and worth your time, do share it with your friends.
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