Archives for 2017

How to Generate Stock Ideas: An Unusual Lesson from a 1939 Book

One of the best books I read before starting on my journey of building Safal Niveshak was James Webb Young’s A Technique for Producing Ideas, originally published in 1939. After all, I was trying to build my idea bank for things I wanted to do in life then.

In this book, Young lays out with brilliant simplicity the five essential steps for a productive creative process. Explaining how the production of ideas is largely a result of process than talent, he writes –

The production of ideas is just as definite a process as the production of Fords; that the production of ideas, too, runs on an assembly line; that in this production the mind follows an operative technique which can be learned and controlled; and that its effective use is just as much a matter of practice in the technique as is the effective use of any tool.

My limited experience in investing suggests that what is most valuable to know about idea generation is not just where to look for a particular idea, but how to train the brain in the method by which all ideas are produced and how to grasp the principles which are at the source of all ideas.

Being Lucky Vs Being Good

Let’s say you sponsor a contest to determine the “world’s best coin flippers.” About 100,000 people from across the world come together to participate in this contest. Everyone flips a coin at the same time.

After each coin flip, those who flip “tails” must leave, until the only people left have flipped 10 consecutive heads. Basic statistics suggests that we could expect about 98 coin flippers to remain at the end of the contest.

The odds of flipping heads 10 times in a row are 1/2^10 = 1/1024. So, for 100,000 participants, there will be 100,000/1,024 = 98 people who would have flipped 10 consecutive heads.

Then, these 98 “skilled” coin flippers would get thousands of likes on Facebook, and followers on Twitter. Those with the best smile and social media skills will write bestselling books about coin flipping, sharing their secrets of how to become a world-class coin flipper.

Anyways, let’s now consider investing. If just 50% investors outperform the stock market every year, the odds of one investor outperforming every year for 10 years would be 1/1024. That is, just one out of 1,024 investors would achieve this feat of outperforming the market every year for 10 years.

Safal Niveshak Stream – Three Magic Words for Investing Your Money

Some nice stuff I am reading, watching, and observing at the start of this weekend…

Beware of Charismatic CEOs

Guy Spier’s The Education Of A Value Investor is a book that reads like having a friendly conversation with a wise friend. It’s one of those very few books where the authenticity is reflected on each page and you can tell that every word has come out straight from the heart.

One of the most important things required for long term investing success, as I have learnt so far, is following a sound investment process. According to Guy, a sound process is a robust set of rules that makes our investment decisions smarter and less vulnerable to the distortions of our irrational brains.

Guy has developed eight such rules to bring an analytical rigour to his process. Here is one rule which made a lot of sense to me and cleared my dilemma about the need to talk to the management. He writes –

…my own experience is that close contact with management is is more likely to be detrimental to my investment returns. The trouble is, senior managers—particularly CEOs—tend to be highly skilled salespeople. No matter how their business is performing, they have a gift for making the listener feel optimistic about the company’s prospects…But this gift of the gab doesn’t necessarily make them a dependable source of information…This isn’t to say that CEOs, CFOs, and other top executives are malicious or immoral…They may be skewing information subconsciously, without any bad intent. But it doesn’t matter. Knowing my own rational limitations, I’d prefer not to expose myself to this potentially distorting influence.

If I want to assess the quality of the management, I’d rather do it in a detached and impersonal way by studying the annual reports and other public data, along with news stories.

So the rule is: Beware of CEOs and other top management, no matter how charismatic, persuasive, and amiable they seem.

And of course there are always some exceptions to every rule. Spier writes –

Exceptions to the rule: Berkshire’s chairman and CEO, Warren E. Buffett, and a small but growing minority of CEOs (at companies like Fairfax Financial, Leucadia National Corporation, and Markel Insurance) who take seriously the idea of sharing what they would like to know if they were in their shareholders’ shoes.

Meeting with management can seriously distort your view and mess up with your mind. Do that only if you’re confident about your ability to keep your mind insulated from a host of biases (Liking, Authority etc.) coming from the charismatic personality of the CEO.

One Powerful Success Secret from Ben Franklin that Changed My Life

When I tell people how I manage my entire business on my own – from website management, to reading, writing, sending mailers, to organizing workshops and also booking a lot of travel tickets – a lot of them are in disbelief.

They disbelieve me even more when I tell them that I work for just 5-6 hours a day and take a lot of family holidays.

Well, I do not have any Masters degree in time management, but one thing that has really helped me manage my time well is a simple secret I’ve learned from people like Ben Franklin and Warren Buffett.

That simple secret is that of…

Safal Niveshak Stream – Advice from Buffett, Munger, and Gates

Some nice stuff I am reading, watching, and observing at the start of this weekend…

Parenting Advice from Buffett & Munger

As parents, we often ask, then ask again, and ask again our kids to do something we desire they do. And if we are lucky, our kids cooperate after the fourth or fifth request or after a loud but otherwise harmless scolding. We complain that our kids never listen to us, and ask other parents how they get their kids to behave, eat healthy food, and go to sleep on time. If that’s not all, we consult the Internet and several books on bringing up well-cultured and disciplined children. Then, even as we apply all those techniques, our kids just don’t listen.

But, amidst all this, there’s something we often fail to notice with our kids. Even when they are not listening to us, they are busy observing us.

I have often noticed this with my kids. They would often not listen to what I have to tell them. But they would always be observing my actions. And that keeps me on my toes, simply because my kids are ‘watching’ me.

I found this thought reiterated in this wonderful book I am reading for the second time – Peter Bevelin’s All I Want to Know is Where I’m Going to Die So I’ll Never Go There. Here is an excerpt from that book where Warren Buffett and Charlie Munger, in conversation with a seeker of wisdom, share with him the best method of training children…

If you haven’t picked up this book, I suggest you do. It’s slightly expensive, but one of the best investments in seeking wisdom you would ever make.

How NOT to Teach Your Children about Money (A Personal Experiment)

“Kavya, what is money?” I asked my twelve-year old daughter recently, as she was deeply engrossed in a book.

Her answer stumped me, simply because I was not expecting it and in the way she said it.

She said, “Papa, money is something that, if we don’t waste, can get us bigger and better things in the future.”

“Wow!” I told her. “You deserve a hug for this.”

How Kavya defined money may not be its perfect definition, but it effectively contains almost the entire essence of how we must handle it (money).

It contains the importance of saving money by spending less money now, and letting the power of compounding grow that money so that we can maintain our purchasing power (and still have more money) in the future.

Latticework of Mental Models: Decision Fatigue

In January 2016, after two months of paternity leave when Mark Zuckerberg returned to work he asked his followers, showing off a picture of his wardrobe, for a suggestion about what he should be wearing to office. This is how his wardrobe looked.

Pretty drab collection, isn’t it? Zuckerberg has been wearing the same outfit, a grey t-shirt, for many years. The reminds us of Steve Jobs and his favourite black turtleneck.

So why do these billionaires who could afford almost anything in this planet, choose to stick to a simple attire?

The answer is – it’s their hack to simplify life.

According to Zuckerberg, making clothing decisions each day was a “frivolous” waste of time. I really want to clear my life, says Zuck, “to make it so that I have to make as few decisions as possible about anything except how best to serve this community.”

According to one estimate, we normally make somewhere around 35,000 decisions every single day. Many of those decisions are unconscious like walking, blinking, breathing and don’t need any extra mental effort. But the sheer volume of even those decisions that require at least some brain power like what to wear, where to eat, how to get to work, who to call when you get there, is staggering.

Investing Lesson from How Doctors (Don’t) Think

It was a summer afternoon. Sunnybrook Hospital in Canada received an accident case. A young woman driver had a head-on collision with another car. She had suffered broken bones everywhere.

The doctors found multiple fractures in her ankles, feet, hips, and face. Initially, they missed the fracture in her ribs that they later found out.

During her diagnosis, the doctors found something else that was not right with the woman. Her heart was beating unusually. The rhythm of her heartbeat had become wildly irregular. It was either skipping beats or adding extra beats.

The emergency room staff soon diagnosed the heart problem – or thought they had. The woman told them that she had a history of an overactive thyroid. An overactive thyroid can cause an irregular heartbeat. So the staff no longer needed any further investigations for the source of the irregular heartbeat but to treat it.

By this time, they had invited an intern named Don Redelmeier, whose job at the hospital was, in part, to check the understanding of the specialists for mental errors. In other words, Redelmeier’s job was to serve a check on other people’s, especially doctors’, thinking.

As the emergency room staff was about to administer the drugs for hyperthyroidism to the woman patient, Redelmeier asked them to slow down. To wait. Just a moment. Just to check their thinking – and to make sure they were not trying to force the facts into an easy, coherent, but ultimately false story.

Latticework of Mental Models: Zeigarnik Effect

“What is not started today is never finished tomorrow.” ~ Johann Wolfgang von Goethe

The most interesting and exciting thing about psychology is that you don’t need expensive lab instruments to experimentally test the validity of theories. The world is your lab and its inhabitants i.e., people, including yourself, are the test subjects (read guinea pigs).

So here is a simple experiment that you can try during your next visit to any restaurant.

You’d often find waiters who don’t need to write down your order. They seem to have this remarkable ability to accurately remember the order for each table. Even if there are half a dozen orders with every order consisting of many different dishes (including special request like – less sugar, no mushrooms in the Pizza etc.) these waiters rarely goof up.

Well, it’s a part of their job and with years of practice, they develop a super-sharp memory. But do they really have a great memory?

Try this – After you are done with your meals and have paid the bills (and a good tip), wait for ten minutes after you have left your table and then go back to the waiter who was waiting on you. Ask him to repeat your order. You’d expect him to rattle off your order without any difficulty. But don’t be surprised if he gives you the look – “I am sorry, who are you?”

It would seem, not just your order but your whole existence has evaporated from waiter’s memory. What happened to his super memory?

How to Survive the Next Stock Market Crisis

Note: I am not predicting a stock market crisis in the near term. But what follows below is a discussion on how an investor can survive a crisis that will certainly happen at some time in the future. That’s the nature of financial markets, you see.

“Hey Vishal, how are you doing today?” asked my friend Ravi as we met for lunch last weekend.

“I’m good, Ravi. How have you been?”

“Super, and more excited than ever!” he replied.

“Glad to know that,” I said. “You got a promotion at the job?”

“No, I’m excited for another reason.”

“Bull market?” I asked, almost knowing what was coming next.

“Yeah, yeah, you guessed it right this time!” Ravi exclaimed. His joy seemed to know no bounds.

“I just sold a five-bagger from my portfolio,” he said with great pride, “And three more stocks are almost hitting that level.”

“Great to know that Ravi. The last time I saw you this happy was in 2007.”

“Oh, don’t be a sadist Vishal,” Ravi said. “Don’t remind me of what happened then.”