Archives for 2023

In his thought-provoking book “Fooled by Randomness,” Nassim Taleb presents a compelling analogy that sheds light on how we perceive risk and reality. He writes –

First, reality delivers the fatal bullet rather infrequently, like a revolver that would have hundreds, even thousands of chambers instead of six. After a few dozen tries, one forgets about the existence of a bullet, under a numbing false sense of security.

Second, unlike a well-defined precise game like Russian roulette, where the risks are visible to anyone capable of multiplying and dividing by six, one does not observe the barrel of reality. One is capable of unwittingly playing Russian roulette – and calling it by some alternative “low risk” game.

• Why it matters: What Taleb has done is compare the infrequency of life’s critical risks to a revolver with hundreds, even thousands, of chambers, rather than the mere six of Russian roulette. His analogy encapsulates a significant problem in human psychology, and that is our tendency to underestimate risk due to its infrequent occurrence, which ultimately leads us to a dangerous false sense of security.

After 20 years in the stock market, and through a few cycles where I have sensed such false security myself and have suffered due to it, I can completely vouch for what Taleb has written.

You see, when we engage in activities or make decisions, like in the stock market, where the consequences of our decisions will be seen a few years or decades later, we often overlook the potential risks involved. This oversight is not because these risks are nonexistent, but because they are infrequent.

The rarity of a fatal outcome, like the rare chance of a bullet being fired from a gun with thousands of chambers, leads us to complacency. Like when it comes to investing, you may become overconfident after a few years of favorable market conditions, forgetting the possibility of a steep or prolonged market decline. Or when it comes to health, you might ignore the risks of a sedentary lifestyle or unhealthy diet because the consequences are not immediate.

The Invisible Barrel of Reality

Taleb also delves deeper into the human psyche. Unlike the clear and present danger in a game of Russian roulette, where the risks are obvious and quantifiable, real-life risks are often hidden or misunderstood.

We might be engaging in risky behaviors without even realizing it, thinking we are playing a “low risk” game. This lack of awareness is a critical factor in many of the poor decisions made in various fields, from finance to personal health.

Now, our understanding of probability plays a significant role in how we perceive risk. We are notoriously bad at assessing probabilities, especially when it comes to rare events. We either overestimate the likelihood of extremely rare events like plane crashes, or underestimate more common but less sensational risks, like market crashes or even car accidents. This miscalculation is compounded by the fact that our perception of risk is heavily influenced by personal experiences and emotions, rather than objective analysis.

The Illusion of Control

Another factor contributing to the false sense of security is the illusion of control. We tend to believe we have more control over events than we actually do. This belief leads to an underestimation of risk.

For example, a stock market trader or investor might think his skill is the main reason for his success in the stock market, ignoring the role of luck and external factors. Similarly, someone might believe their good health is solely due to their lifestyle choices, discounting the influence of genetics and environment.

History is replete with examples where a false sense of security led to disastrous outcomes. The financial crises of the past few decades, including the 2008 global financial crisis, serve as stark reminders of what can happen when risks are underestimated.

In these scenarios, what was perceived as a low-risk environment turned out to be a game of Russian roulette with dire consequences.

Applying Taleb’s Insights

To apply Taleb’s insights in our lives and investing, the first step for us is to acknowledge and accept our tendency to underestimate risk.

We should also strive to improve our understanding of probabilities and be aware of our psychological biases. This awareness can help us make better decisions that may lead us to better long term outcomes.

The key takeaway from Taleb’s analogy is the importance of acknowledging and preparing for the improbable. Just because a risk is infrequent does not mean it is nonexistent.

By recognizing the potential dangers in our decisions and actions, no matter how unlikely they seem, we can better prepare for the uncertainties of life.

This preparation does not mean living in fear but rather embracing the unknown with a balanced perspective.

In doing so, we can navigate the complexities of the world of investing or otherwise with a more realistic and prudent approach, enhancing our ability to make informed decisions and, ultimately, leading a more resilient and fulfilling life.

I recently announced admission to the January 2024 batch of my most comprehensive classroom course in Value Investing titled – Value Investing Blueprint.

This residential course is scheduled to be held from 11th to 14th January 2024, at the campus of Pune-based FLAME University. The last date to apply is 10th December, 2023.

Click here to read more and apply if you are interested in joining this course.

Since it’s a classroom course, seats are limited.

The course will take you through the entire process of practicing value investing to identify long term wealth creating stocks. This includes helping you:

• Create the right value investing mindset and build a behavioural framework to avoid biases and create the right investment thought process.
• Assess business quality – separating good from gruesome
• Analyze financial statements to find well-performing businesses
• Calculate intrinsic valuations using various methods
• Identify competitive moats and whether they are sustainable
• Build a portfolio of sound, wealth-creating businesses

Click here to read more and apply if you are interested in joining this course.

I have started work on a series of short videos – titled The Inner Game – to share my thoughts around investing, decision making, learning, and just the practice of trying to live a good life. You can watch them on my YouTube channel, including these recent ones –

• How to ‘Never’ Fail in #Life or #Investing (English)
• How to Escape the Hedonic Treadmill and Be Happier (Hindi)
• Your Path to Financial Freedom: Let’s Start from the Start (Hindi)
• The Light of Humility (Hindi)

You can also find these and all past sessions on Apple Podcasts, Spotify, Google Podcasts, and Amazon.

Hope you like these and find some value. Please let me know your feedback and/or suggestions for improvement. Thank you.

That’s about it from me for today.

If you liked this post, please share with others on WhatsApp, Twitter, LinkedIn. Or just email them the link to this post.

If you are seeing this newsletter for the first time, you may subscribe here.

Stay safe.

Regards, Vishal

It’s almost always an –

• I don’t know who I am problem
• I don’t know how much pain I am willing to take problem
• I don’t have the patience to give my stocks time to grow problem
• I bought on the tip of that popular social media influencer and did not do my homework problem
• I did not diversify well problem
• I bought the stock just because it dipped problem
• I cannot resist my friends getting rich problem
• I love to fall in love with my stocks problem
• I cannot differentiate between stock price and intrinsic value problem
• I suffer from a buy at any price problem
• I borrowed to invest problem
• I invested the money I needed soon problem
• I don’t have time on my hands to see through market cycles problem
• I trade too much and too often problem
• I keep watching and worrying about stock prices problem
• I will watch the market and my portfolio again after reading this post problem

And so, I must remind myself this at all times –

A market crash is ‘never’ the problem. ‘I’ am the problem, and I must sort myself out, because that is only what I control. And if I can control the ‘I’ better, a market crash will never be a problem.

I recently announced admission to the January 2024 batch of my most comprehensive classroom course in Value Investing titled – Value Investing Blueprint.

This residential course is scheduled to be held from 11th to 14th January 2024, at the campus of Pune-based FLAME University. The last date to apply is 10th December, 2023.

Click here to read more and apply if you are interested in joining this course.

Since it’s a classroom course, seats are limited.

The course will take you through the entire process of practicing value investing to identify long term wealth creating stocks. This includes helping you:

• Create the right value investing mindset and build a behavioural framework to avoid biases and create the right investment thought process.
• Assess business quality – separating good from gruesome
• Analyze financial statements to find well-performing businesses
• Calculate intrinsic valuations using various methods
• Identify competitive moats and whether they are sustainable
• Build a portfolio of sound, wealth-creating businesses

Click here to read more and apply if you are interested in joining this course.

Read a newspaper headline – “Blood on street for sixth day in a row.”

My first reaction? Blood? Already?

The headline reminded me of my younger self, utterly scared of injections (still am). I started wailing even before the doctor pulled out the syringe. For people already seeing “blood” on the street, just the syringe is out for now. “Blood” is still some time away. Stop wailing.

I have started work on a series of short videos – titled The Inner Game – to share my thoughts around investing, decision making, learning, and just the practice of trying to live a good life. Have published ten videos so far, which you can watch on my YouTube channel, including these recent ones –

• The Power of Changing Your Mind (and Four Things I Have Changed My Mind on in Investing)
• The 10 Demons of Investing
• How to Win At Investing (And At Anything in Life)
• What Nobody Told You About Financial Freedom
• The Baggages We Carry

Hope you like these and find some value.

Here’s a nice note from Byron Wien, American investor and vice chairman of Blackstone Advisory Partners, who passed away just two days back. I came across this note recently, and immediately thought of sharing with you. It contains Wien’s lessons that he learned in his “first 80 years” (he died at 90). These are more a set of life principles, one of which is –

Every year try doing something you have never done before that is totally out of your comfort zone.  It could be running a marathon, attending a conference that interests you on an off-beat subject that will be populated by people very different from your usual circle of associates and friends or traveling to an obscure destination alone. This will add to the essential process of self-discovery.

Starting a solo podcast – The Inner Game, as mentioned above – is that act I have undertaken to push myself out of my comfort zone. I also see it as part of my process of self-discovery. Let’s see how far I go with it.

Anyways, here’s a second nice lesson from Wien –

When your children are grown or if you have no children, always find someone younger to mentor.  It is very satisfying to help someone steer through life’s obstacles, and you’ll be surprised at how much you will learn in the process.

That’s about it from me for today.

If you liked this post, please share with others on WhatsApp, Twitter, LinkedIn. Or just email them the link to this post.

If you are seeing this newsletter for the first time, you may subscribe here.

Stay safe.

Regards, Vishal