51 Ideas from 2019

Dear Tribe Member,

Trust 2019 treated you well. It certainly was good for Safal Niveshak. The tribe crossed 60,000 members.

Anyways, right before the year ends, I thought I’d share a handful of ideas I’ve learned, re-learned, and wrote about in the past twelve months. Here are 51 of them categorized under the subjects of investing, learning, and life. I hope you find these useful, as much as I did.

I. INVESTING
1. Don’t Be Blind to Alternative Histories
Nassim Taleb writes in Fooled by Randomness –

…one cannot judge a performance in any given field (war, politics, medicine, investments) by the results, but by the costs of the alternative (i.e., if history played out in a different way). Such substitute courses of events are called alternative histories. Clearly, the quality of a decision cannot be solely judged based on its outcome, but such a point seems to be voiced only by people who fail (those who succeed attribute their success to the quality of their decision).

We are blind to alternative histories – those silent events that could have happened but didn’t. In the language of behavioural finance this irrationality is known as Survivorship Bias. The outcome which is visible, ‘survived’ and the ones which didn’t survive are hidden. As Taleb writes –

Imagine an eccentric (and bored) tycoon offering you $10 million to play Russian roulette, i.e., to put a revolver containing one bullet in the six available chambers to your head and pull the trigger. Each realization would count as one history, for a total of six possible histories of equal probabilities. Five out of these six histories would lead to enrichment; one would lead to a statistic, that is, an obituary with an embarrassing (but certainly original) cause of death.

The problem is that only one of the histories is observed in reality; and the winner of $10 million would elicit the admiration and praise of some fatuous journalist (the very same ones who unconditionally admire the Forbes 500 billionaires).

Like almost every executive I have encountered during an eighteen-year career on Wall Street (the role of such executives in my view being no more than a judge of results delivered in a random manner), the public observes the external signs of wealth without even having a glimpse at the source. Consider the possibility that the Russian roulette winner would be used as a role model by his family, friends, and neighbors.

In effect, the general belief is that if the outcome is good, the process and decisions made to arrive at that outcome must have been sound. Alas, life doesn’t follow such straight patterns. The randomness and ‘external factors’ play a defining role in life and investing.

2. Give Due Credit to Luck
The world of investing, like most things in life, produces success stories and failures. It’s human nature to wish to copy success. However, the ironic truth is this: To accept success at face value without acknowledging the role of luck is a strategy for failure.

But it’s also important to note that luck, like love, is a verb. It requires dedication and effort and the conviction and courage to act. Like the father of value investing, Ben Graham, wrote –

…behind the luck, or the crucial decision, there must usually exist a background of preparation and disciplines capacity.

3. Avoid Ruin
You or me are not the market. Earning the long-term returns of the market, of the past or the future, is not in our control. Managing our risks and avoiding ruin, mostly is.

“Rationality is avoidance of systemic ruin,” Nassim Taleb writes.

Trying to avoid the ruin the stock market system enforces upon people who disregard its workings is rational. Believing that you can beat the system at it, by playing the game mindlessly, isn’t.

Peter Bernstein writes in his brilliant book Against the Gods –

Survival is the only road to riches. Let me say that again: Survival is the only road to riches.

4. Obsession with Outcomes is Damaging
Most investment experts selling their services always highlight the outcome – so much return in so many months or years – and never the process they used to get this outcome. This is simply because, while the outcome is there for everyone to see (availability bias), investors rarely ask the question whether that outcome was due to the skill of the expert (a proper investment process) or merely luck.

This is not to say that results don’t matter; obviously they are extremely important in measuring success. But if the results have been largely thanks to luck, they may not come in as expected in the future.

What is more, if you focus only on the outcome, you are less likely to achieve it. Instead, if you focus on the process, the outcome will take care of itself.

But then, as published in here –

Despite the problems of using results as a barometer of decision quality, it remains endemic in investment. We use outcomes as a simple indicator and then weave narratives around these views. We take a difficult problem, simplify it (are results good or bad?) and then create a story to justify the outcome. This pattern of behaviour is evident in a range of poor investment decisions, such as: susceptibility to financial frauds, participation in investment bubbles, performance chasing and excessive short-term trading.

5. Seek Wealth, Not Money or Status
Here’s an excerpt from an insightful discussion that Naval Ravikant had with Babak Nivi –

Nivi: What’s the difference between wealth, money, and status?

Naval: Wealth is the thing that you really want. Wealth is assets that earn while you sleep. Wealth is the factory, the robots that’s cranking out things. Wealth is the computer program that’s running at night, that’s serving other customer. Wealth is… even money in the bank that is being reinvested into other assets, and into other businesses. Even a house can be a form of wealth because you can rent it out, although that’s probably a lower use of productivity of land than actually doing some commercial enterprise. So, my definition of wealth is much more businesses and assets that can earn while you sleep. But really the reason you want wealth is because it buys you your freedom.

So, you don’t have to wear a tie like a collar around your neck. So, you don’t have to wake up at 7:00 AM, and rush to work, and sit in commute traffic. So, you don’t have to waste away your entire life grinding all the productive hours away into a soulless job that doesn’t fulfill you.

6. Warren Buffett’s Checklist
I recently came across a video of Warren Buffett talking to a few B-School students on his trip to India in 2011.

The host asked him this question – What exactly goes through your mind when you’re actually making an investment?

Buffett’s reply to this question was brilliant for it contained the crux of everything he has said over the years about how to evaluate a certain business and it’s future economic potential (text in bold and brackets are mine) –

Well, if I drive by a McDonald’s stand or a Kentucky Fried Chicken stand I will automatically think to myself “What is this business worth?”

You know, how many customers can walk in the door (demand, scalability, growth potential)? What kind of gross margins (profitability, pricing power) can they have? How many people do they need (scalability)? How likely is it that another chicken stand opens across the street (competition, entry barriers, moat)?

I mean, all of those things. And that’s true of the chicken stand and it’s true of Google or you name the business. I mean, it’s all about evaluating the economic potential, the economic future of a given business. And most of them you don’t know the answer on (say no to most businesses, because you really don’t understand them).

But every now and then you run into one where you know the answer (simple businesses). But that’s all business is.

It’s what Aesop said a long time ago: “A bird in the hand is worth two in the bush.” (well, that’s the definition of discounted cash flow) You know, that was said in 600 BC and that’s now what’s called discounted cash flow and all that sort of thing. But he saw that and figured it out, you know, twenty-six hundred years ago. And all I’m trying to figure out is if I could take that dollar in my hand: When do I get the two dollars out of the bush (timing of future cash flows)? How sure am I of getting it out of the bush (certainty of future cash flows)? Is there some other bush where I can get three dollars out of it instead (opportunity costs, better alternatives)?

I mean, it’s very basic stuff (investing is simple, you see, but only if you keep it simple). And a lot of times you look at it and you say “I don’t know how many birds there will be in the bush.” (complex businesses, or those that undergo a lot of changes due to nature of industry, competition, etc.) So you go in to the next one until you find the answer (you just need a few good ideas in a lifetime).

Buffett, once more, makes it clear that rather than obsessing with the bewildering fusion of news and noise, you should concentrate on a few key elements in stock selection.

7. Know Thyself
Taleb again from Fooled by Randomness –

It certainly takes bravery to remain skeptical; it takes inordinate courage to introspect, to confront oneself, to accept one’s limitations – scientists are seeing more and more evidence that we are specifically designed by mother nature to fool ourselves.

One of the most underrated but among the most valuable skills required to succeed in stock market investing is resilience i.e., the ability to properly adapt to stress and adversity – either in the market or in the businesses one is owning.

How easily can you bounce back from a market crash? What would be your reaction to a sharp decline in your stocks’ prices? How many ‘surprises’ can you withstand in quick succession? How safe are your overall finances in light of extreme stress on the equity component of your portfolio?

As Taleb says, we are anyways designed by mother nature to fool ourselves. But don’t forget what the noted financial writer George J.W. Goodman – who used the pen name of Adam Smith – wrote in his wonderful book, The Money Game –

If you don’t know who you are, this is an expensive place to find out.

8. Keep It Simple, Please
In stock investing, often we focus so much on trying too hard that either we never start working on the process of picking up great businesses (seeing the enormity of the task), or we start believing that our immense hard work and knowledge gives us great control over the future of stocks we own.

The reality is that, no matter how hard we try to analyze the intricacies of business, we may not be as important to the results as we’d like to think we are.

Like Seth Klarman wrote in Margin of Safety –

Investors frequently benefit from making investment decisions with less than perfect knowledge and are well rewarded for bearing the risk of uncertainty.

The time other investors spend delving into the last unanswered detail may cost them the chance to buy in at prices so low that they offer a margin of safety despite the incomplete information.

9. Investing’s False Positives
The field of medicine has a term called “false positive.” It is an erroneous result that indicates that a given condition is present when it is not. An example of a false positive would be if a medical test designed to detect cancer returns a positive result (that the person has cancer) when, in reality, the person does not have cancer.

While medicine’s false positives often create panic about things that turn out to be nothing to worry about, investing’s false positives create euphoria about things that should have been worrisome in the first place.

And the underlying reason is that most people out there in the stock market judge the quality of their investment decisions by one single factor – the short-term price movement of the underlying security. And that’s exactly what they are looking forward to while making the investment, even while talking about the virtues of long-term investing and the need to ignore short-term price movements.

Noted French writer and philosopher Voltaire said –

It is dangerous to be right in matters where established men are wrong.

10. Doing Nothing is Hard
The idea of buying and holding high-quality businesses over a long period of time is simple. Everyone knows that, and even those who don’t practice it appreciate that this works with most high-quality businesses as history has proven time and again.

But then, it’s important to understand that the action of not doing anything over such a long period of time involves hundreds of decisions over months and years that lead to such inaction.

Of course, one way is to buy stocks and forget for 20 years and hope to end up with a fortune. There are quite a few such fairy tales you may have heard of. But the other side of the picture is that countless people have also ended with duds in their portfolios, or vanished companies, when they realized their father or grandfather had bought some stocks and forgot about them for 20 or more years.

11. Being Prepared
In one of his lectures published in Poor Charlie’s Almanack, Charlie Munger said this –

Our experience tends to confirm a long-held notion that being prepared, on a few occasions in a lifetime, to act promptly in scale, in doing some simple and logical thing, will often dramatically improve the financial results of the lifetime.

A few major opportunities, clearly recognizable as such, will usually come to one who continuously searches and waits, with a curious mind, loving diagnosis involving multiple variables.

And then all that is required is a willingness to bet heavily when the odds are extremely favourable, using resources available as a result of prudence and patience in the past.

What Charlie says here is that it pays to be prepared in your investing life – prepared not just for the risks that may be lurking around the corner, but also for opportunities that may appear anytime.

Ironically, we are often prepared for none, and that is what causes us grief during the market’s ups (when we keep sitting on the sidelines) and downs (when we are enjoying the madness of the party).

Roman Stoic philosopher Seneca wrote in Letters from a Stoic –

Everyone faces up more bravely to a thing for which he has long prepared himself, sufferings, even, being withstood if they have been trained for in advance. Those who are unprepared, on the other hand, are panic-stricken by the most insignificant happenings.

12. Seek Uncertainty
Mohnish Pabrai wrote in his brilliant book The Dhandho Investor –

Wall Street sometimes gets confused between risk and uncertainty, and you can profit handsomely from that confusion. The Street just hates uncertainty, and it demonstrates that hate by collapsing the quoted stock price of the underlying business. Here are a few scenarios that are likely to lead to a depressed stock price:

High risk, low uncertainty
High risk, high uncertainty
Low risk, high uncertainty

The fourth logical combination, low risk and low uncertainty, is loved by Wall Street, and stock prices of these securities sport some of the highest trading multiples. Avoid investing in these businesses. Of the three, the only one of interest to us connoisseurs of the fine art of Dhandho is the low-risk, high-uncertainty combination, which gives us our most sought after coin-toss odds. Heads, I win; tails, I don’t lose much!

While value investors are typically averse to taking high risks, that’s more a reflection of the price they’re willing to pay for any given investment than the types of situations they most often pursue, which are often fraught with uncertainty.

As businesses constantly evolve and change in response to challenges and opportunities, the lack of clarity around those changes. And the risks inherent in the potential outcomes can cause share prices to diverge widely from underlying business values.

The ability to recognize and capitalize upon that dynamic, and understand whether it’s temporary or permanent, is a key element of what sets the best investors apart.

13. Why Most People Will Never Be Good at Investing
…because most people in the stock market, most of the time, don’t do investing, which is…

• Thinking how markets work,
• Understanding how people behave,
• Studying businesses,
• Sticking only with what is simple and what they understand, and
• Buying stocks at appropriate valuations.

Instead, they are busy…

• Envying (others making money fast or losing money slow),
• Cloning (others’ stock ideas mindlessly),
• Predicting (future of markets, stock prices, and economy),
• Fearing (missing out on future gains),
• Regretting (past mistakes),
• Avoiding (accepting current mistakes),
• Denying (reality, especially when it’s harsh), and
• Indulging (in useless information and noise)

And if that’s not all, these often lead us to –

• Trading (frequently, which adds to our costs),
• Averaging down (on bad businesses),
• Boasting (about our lucky short-term gains), and sometimes
• Trolling (other investors on social media, who have not performed as well as us in the recent past).

With such a busy schedule, where is the time to practice investing?

14. Pay Attention
In the story The Adventure of Silver Blaze, Sherlock Holmes asked Inspector Gregory to consider a curious incident involving a dog. Gregory replied that nothing happened, and Holmes proclaimed, “That was the curious incident.” This clue enabled Holmes to deduce that the culprit must have been someone familiar to the victim’s dog. Most people would miss this important clue because most people, like Gregory, pay little attention to nonevents.

Now, some information is always available, but some is always silent – and it will remain silent unless we actively stir it up. In investing, such information that remains silent – or that you fail to notice – can be dangerous to your capital.

To pay attention means to pay attention to it all, to engage actively, to take everything around us, including those things that don’t appear when they rightly should. It means asking important questions and making sure we get answers.

Even when you do this, you may not be able to emerge with the entire situation in hand, and you may end up making a choice that, upon further reflection, is not the right one after all. But it won’t be for the lack of trying.

15. Be a Curator of Stocks, Not Warehouse Manager
We spend the first half of our lives adding things, and the second half subtracting most of them.

Investing follows life, and this is also what a lot of investors end up doing. They create crowded warehouses of portfolios in the initial years of their investment careers, realize most of their choices were mistakes, and then they start subtracting vigorously.

Lest you lose out on the positive compounding timeframe, you will do yourself a world of good by respecting and practicing this lesson – of saying no to most things, of not adding a lot of unwanted stocks to your portfolios – early.

In other words, be a curator of stocks, not a warehouse manager.

16. Bharat Shah on Investing Successfully
One of the best theories I have read on the importance of investing in high-quality businesses in the Indian context comes from Bharat Shah of ASK Group, who has written a book (sad, it’s not available publicly) titled “Of Long Term Value and Wealth Creation from Equity Investing.”

I recently came across his old interview where he shared his insights on value investing and how he formed his investment process and principles. A passage from the interview reads thus (emphasis mine) –

…successful long-term investing calls for two vital technical capabilities or craft and two personality traits. While craft can be honed and refined by observing and absorbing, character traits have to come from within and be developed.

The two essential skills are: ability to comprehend and grasp the true character and the innards of diverse businesses as well as the ability to value them. Till these abilities are developed, one cannot become a good investor.

The two vital character traits are: discipline (or temperament) and wisdom. Discipline lies in investing only into quality businesses and the temperament of not getting carried away by the fads of the markets and buying such quality businesses only at a meaningful margin of safety.

17. Biggest Financial Regrets
One of my favourite financial writers, Barry Ritholtz, wrote about the biggest financial regrets people have. This was based on a survey of over 2000 people by American life insurer giant New York Life, and found these as the biggest financial regrets –

Image Source: Biggest Financial Regrets – Barry Ritholtz
Barry concluded thus, and I completely agree with this –

The sooner you begin to accept mistakes are inevitable, stop beating yourself up over them, and just fix what is not working, the faster the compounding can start.

18. No Stock is Safe
The bulls may want you to believe this, but no stock is safe.

There are businesses that may remain good (earning return on capital greater than cost of capital) for some time, maybe a long time, but you must not attach infinite values to them.

This is because high returns attract competition, generally causing return on capital to move towards the cost of capital. While such companies may still earn excess returns, but the return trajectory is down.

Everything in this world, after all, is momentary. So, your best bet is to just stick with quality (even that is momentary, just for longer moments that allows time for compounding to work its magic).

The good thing about high-quality stocks is that you can pay up for them (never overpay), expensive looking prices, and still do well till the underlying businesses remain good.

With poor quality, most probably, you have no hope.

19. Businesses will Die
Death will happen to all of us and to all of our businesses, and that must not worry you. It’s the stagnation and gradual decline that diseases (bad management, capital misallocation, etc.) bring along, that you must watch out for (and try working backward now so as to avoid them, except for bad luck).

20. Equanimity and Investing
When it comes to investing, making money in stocks when everyone is making money in stocks isn’t a big deal. Rather, it’s the ability to handle good and bad times with equanimity, combined with courage and decisiveness, that really matters in the long run.

Of course, most of us simply aren’t wired to be equanimous at most of the times, and it’s terribly difficult to rid ourself of the emotions of ecstasy (when things are looking up) and misery (when things are looking down).

And that’s why ensuring that we avoid all of those ways that can cause us wealth destruction – trading, timing, high fee, inadequate diversification, and leverage – is paramount.

Everything, including our triumphs and disasters, anyways shall pass. But the equanimity with which we allow them to pass will keep us sane always.

As Lord Krishna taught Arjuna, as we wade through the ocean of life, it throws up all kinds of waves that are beyond our control. If we keep struggling to eliminate negative situations, we will be unable to avoid unhappiness. But if we can learn to accept everything that comes our way, with equanimity and without sacrificing our best efforts, that will be true Yog.

So, give equanimity a shot, and see what happens.

21. Five Ways We Destroy Our Wealth
It’s common if you are wealthy to worry about losing your fortune due to forces beyond your control. Like market meltdowns or economic stagnation.

But what many of us don’t realize is that our own behavior may be the root of significant losses.

“The road to hell is paved with good intentions,” goes a proverb. The road to investing hell is paved with bad behaviors, and here are the five roads which initially look like paved with gold, but which often take us towards wealth destruction.

Daniel Kahneman was right when he said this –

A human being is a dark and veiled thing…and whereas the hare has seven skins, the human being can shed seven times seventy skins and still not be able to say: This is really you, this is no longer outer shell. So said Nietzsche, and Freud agreed: we are ignorant of ourselves.

We certainly are.

22. Avoid Stress
I recently read this passage from Nassim Taleb’s Fooled by Randomness that tells something about why we must avoid stress –

…people who look too closely at randomness burn out, their emotions drained by the series of pangs they experience. Regardless of what people claim, a negative pang is not offset by a positive one (some psychologists estimate the negative effect for an average loss to be up to 2.5 the magnitude of a positive one); it will lead to an emotional deficit.

…people in lab coats have examined some scary properties of this type of negative pangs on the neural system (the usual expected effect: high blood pressure; the less expected: chronic stress leads to memory loss, lessening of brain plasticity, and brain damage). To my knowledge, there are no studies investigating the exact properties of trader’s burnout, but a daily exposure to such high degrees of randomness without much control will have physiological effects on humans (nobody studied the effect of such exposure on the risk of cancer).

…wealth does not count so much into one’s well-being as the route one uses to get to it.

23. Why Value Investing Works
Jack Schwager, the author of Market Wizards series, when answering a question on whether value investing works, turned to the wisdom of Joel Greenblatt, one of the foremost experts on the subject.

Schwager quoted this from his interview with Greenblatt –

Value investing doesn’t always work. The market doesn’t always agree with you. Over time, value is roughly the way the market prices stocks, but over the short term, which sometimes can be as long as two or three years, there are periods when it doesn’t work. And that is a very good thing.

The fact that the value approach doesn’t work over periods of time is precisely the reason why it continues to work over the long term.

24. Patience Wins
Most people participating in the stock market don’t really understand what they are doing. This is especially when making money gets quick and easy, and they are doing great at it.

Like Aesop’s wolf in sheep’s clothing, they play a role contrary to their real character, which often leads them to the slaughterhouse.

However, the lack of patience of such people to invest with a long-term horizon creates the opportunity for the few committed to long-term holding periods.

In the battle between impatience and patience, the latter wins.

25. Eternity and Investing
The Heilbrunn Center for Graham and Dodd Investing created a wonderful video in 2013 titled ‘Legacy of Ben Graham,’ which contains bytes from some of his students on how Graham’s teachings changed their lives.

Marshall Weinberg, one of the students from Graham’s class said that the biggest lesson he drew out of that class was on long-term thinking. Here’s what he said –

One sentence changed my life…Ben Graham opened the course by saying: ‘If you want to make money in Wall Street you must have the proper psychological attitude. No one expresses it better than Spinoza the philosopher.’

When he said that, I nearly jumped out of my course. What? I suddenly look up, and he said, and I remember exactly what he said: ‘Spinoza said you must look at things in the aspect of eternity.’ And that’s what suddenly hooked me on Ben Graham.

Spinoza actually said, “Sub specie aeternitatis,” which translates to “under the aspect of eternity,” or “from the perspective of the eternal.”

Critics of this idea may believe that with such thinking, there is no reason to believe that anything matters. But where Spinoza may be coming from is the idea that, in the larger scheme of things, nothing matters, which leads us to put our pains and struggles – including, as investors – into perspective.

26. Types of Managements
People come in different shades, and managers are people.

Here are three different types of management (there may be more, but let’s go with these three for now), and my thoughts on how you may want to deal with them when it comes to investing in the businesses they manage.

Most of us overlook the human aspect of operating a business, yet, in most cases, the future success of a business is directly tied to the quality of the people managing its affairs.

27. Skin in the Game
Having skin in the game means being exposed (equally as other stakeholders) to both positive and negative consequences of an outcome which was made possible by your decisions/actions/approval.

Superficially, the concept of ‘skin in the game’ may look like a case for morality in human transactions but if you go deeper, you will find that it’s a wonderful trick for improving our own decisions.

When you own 50 stocks and one goes to zero, your portfolio isn’t going to move down by more than 2 percent (assuming you had equal allocation for each stock). Which means you’re not really bothered about a couple of bad decisions for it’s not going to create meaningful damage to your net worth. However, when you run a relatively concentrated portfolio of 10 stocks, you’d be more careful about choosing those stocks. Won’t you?

28. It’s Not Supposed to Be Fair
Warren Buffett had high regards for David Sokol. Over the years Sokol established a reputation inside Berkshire Hathaway as Mr. Fixit. Buffett often referred to Sokol as a terrific manager, a brilliant dealmaker and a huge asset to Berkshire.

In 2011, Sokol abruptly resigned. It was speculated that his resignation was because of insider trading allegations. For a second put yourself in Buffett’s shoes and imagine how you would feel when one of your most trusted business partners who has worked with you closely for decades behaves in a totally unexpected and undesired way? Like Sokol did.

When asked in one interview if he had felt betrayed by Sokol’s behaviour, Munger replied —

It’s not my nature … when you get little surprises as a result of human nature … to spend much time feeling betrayed. I always want to put my head down and adjust. I don’t allow myself to spend much time ever with any feelings of betrayal. If some flickering idea like that came to me, I’d get rid of it quickly. I don’t like any feeling of being victimized. I think that’s a counterproductive way to think as a human being. I am not a victim. I am a survivor.

The world around us is largely a soup of random events loosely connected by a few broad patterns. And one of those patterns is that the universe doesn’t care for any individual’s personal agenda.

If your investment journey has thrown a few bad apples your way, if you feel that the world is not fair then be reminded that the world is not supposed to be fair. It’s not supposed to be fair in your favour or in anyone’s favour.

29. Avoid Multiplying by Zero
Two academicians were debating on the superiority of their respective fields of study.

“What would you do if I brought Alexander The Great’s army in front of you?” The history professor challenged.

The mathematician rolled his eyes and replied, “I’ll enclose the army in a bracket and multiply by zero.”

In an additive system, each component adds on to one another to create the final outcome. Such systems are unaffected when they encounter a zero. Multiplicative systems, on the other hand, are non-linear because anything times zero must still be zero, no matter how large the string of numbers preceding it. A zero can wreak havoc on multiplicative systems. Like it did to Alexander’s army.

Shane Parrish, on his excellent blog, explains the functional equivalent of multiplicative system in the world of business –

Most businesses, for example, operate in a multiplicative system. But they too often think they’re operating in additive ones: Ever notice how some businesses will add one feature on top of another to their products but fail at basic customer service, so you leave, never to return? That’s a business that thinks it’s in an additive system when they really need to be resolving the big fat zero in the middle of the equation instead of adding more stuff… General Motors, founded in 1908 by William Durant and C.S. Mott, came to dominate the American car market to the tune of 50% market share through a series of brilliant innovations and management practices, and was for many years the dominant and most admirable corporation in America. Even today, after more than a century of competition, no American carmaker produces more automobiles than General Motors. And yet, the original shareholders of GM ended up with a zero in 2008 as the company went into bankruptcy due to years of financial mismanagement. It didn’t matter than they had several generations of leadership: All of that becomes naught in a multiplicative system.

Benefit of looking at the downside or what can go wrong is efficiency, writes Peter Bevelin, “Take investments as an example – If you first eliminate what doesn’t work or what won’t achieve what you want, you don’t have to spend a lot of time and attention of analyzing the company. If there is a huge downside – for example a catastrophe risk of the key factors that are needed for success aren’t there or any other disqualifying factors like no sustainable advantage, bad and untrustworthy management of something else – just say ‘no thank you.’”

II. LEARNING
30. Being Average in the Age of Alpha
Our society and culture values high achievement in every area of our lives. We want to become alpha men and women, have the brightest careers, accomplished children, ideal bodies, investment performances that beat everyone, and financial prosperity that leads us to possess more stuff than others.

Amidst this, being satisfied with having “enough” is considered shameful. Being unambitious is considered lazy. Thinking “I have enough” is a sin. “Average” is a dirty word.

I recently read an article written by one Krista O’Reilly, which echoed exactly what I have felt about being average all my life –

The world is such a noisy place. Loud, haranguing voices lecturing me to hustle, to improve, build, strive, yearn, acquire, compete, and grasp for more. For bigger and better. Sacrifice sleep for productivity. Strive for excellence. Go big or go home. Have a huge impact in the world. Make your life count.

But what if I just don’t have it in me? What if all the striving for excellence leaves me sad, worn out, depleted? Drained of joy. Am I simply not enough?

31. Two Big Lessons from History
I believe there are two things that have stood the test of time, and that apply to everything we do in life, investing, work, everywhere –

1. We have much less control over the future than we hope, and that it will always surprise us (surprisingly!). We can’t control what would happen to us or our investment portfolios, we can’t control what people around us would say or do, and we can’t even fully control our own bodies, which would get damaged and sick and ultimately die without regard for our preferences. In fact, much of our unhappiness is caused by thinking that we can control things like these that, in fact, we can’t.
2. We have far more ability to make an impact than we expect. And this ability is more important than we can imagine. All it requires for us is to be learning and adapting machines, be sensible in our decision making, keep things simple, and trust the role of sincere hard work. Some people are aware of it; most are not. Frankly, it is easier to sit on the sidelines and whine about the stuff we can’t control (like stock prices) than to own up to what we do control (like our process of investing).

In short, while we can’t control the future, we can be courageous enough to jump into life with both feet and take responsibility for how we would like to mold it (without trying to control it), and how we would react to what happens to us on the way.

No success guarantees here, but history proves that’s how the world has always worked.

32. A More Beautiful Question
Since early childhood, most of us learned that our parents did not like us asking many questions and that only authority figures – most grown-ups – had the right to ask them. The result was that we stopped questioning things and accepted what we saw, heard, and were told with meek acceptance.

Sadly, this approach worked well in the industrial era, but proves futile in the knowledge era, because it compromises our ability to think and understand deeply.

In his book, A More Beautiful Question, which I glanced through recently at a bookstore, Warren Berger led me to the importance of asking thoughtful, ambitious “beautiful questions” — the kind that can help us grow into happier and more useful human beings. An insightful passage from the book reads thus –

We’ve transitioned into always transitioning…In such times, the ability to ask big, meaningful, beautiful questions – and just as important, to know what to do with those questions once they’ve been raised – can be the first step in moving beyond old habits and behaviors as we embrace the new.

In the modern era, we must use unfamiliar tools in our attempt to take on new challenges without clear instructions, and with the clock ticking. In such times, Berger writes –

…questioning…will be even more important in helping us figure out what matters, where opportunities lie, and how to get there.

“Judge a man by his questions rather than his answers,” said Voltaire. Now, more than ever, the quality of our lives depends on the quality of our questions.

33. How Not to Bet
90-year-old Jeanne Louise Calment struck a deal with a forty-seven-year-old lawyer named André-François Raffray. Raffray agreed to pay a low monthly subsistence payment of 2,500 francs to Jeanne in exchange for the right to own Jeanne house when she dies. The ninety-year-old French woman had already exceeded the French life expectancy by more than ten years. She could die any day.

Ms. Calment turned out to be the biggest outlier in human history. When she died aged 122, her age at death exceeded the lawyer’s age at this death by forty-five years. He ended up paying Calment the equivalent of €140,000. That was more than double the apartment’s value.

Where did Raffray go wrong? His blunder was in taking the statistics and applying it to a sample size of one.

Legendary investor, Howard Marks relates a funny story his father told him about a gambler who bet everything on a race with only one horse in it. How could he lose? “Halfway around the track, the horse jumped over the fence and ran away. Invariably things can get worse than people expect.”

Jeanne and Raffray’s story has a valuable lesson for investors. Never bet the farm on a single stock no matter how certain you are about the outcome. You never know when the luck hands you the equivalent of a crazy horse or a supercentenarian.

34. Possessing Vs Pursuing
I believe our lives are not defined by what we possess, but by what we pursue. History has ample proof that it is not what people (like Alexander and Hitler) have tried to possess, but what people (like Einstein and Gandhi) pursued that brought meaning to their lives and to those around them.

“I enjoy life,” Seneca said, “because I am ready to leave it.”

In his book On the Shortness of Life, Seneca wrote this –

As far as I am concerned, I know that I have lost not wealth but distractions. The body’s needs are few: it wants to be free from cold, to banish hunger and thirst with nourishment; if we long for anything more we are exerting ourselves to serve our vices, not our needs.

Imagine if we can unburden ourselves of 90% of our worldly goods, it should not be difficult to leave the remaining 10% behind?

35. What Stories Do You Believe?
A story is a very effective tool to package any message or an abstract idea. Stories themselves are unimportant. What’s more important is the idea the construct of a story is enclosing inside it. An idea doesn’t stick well if it’s not packaged in the form of a story.

Our experience of the world is almost completely derived from the stories we have told ourselves.

Celebrated historian Yuval Noah Harari writes —

Over the years, people have woven an incredibly complex network of stories. The kinds of things that people create through this network of stories are known in academic circles as ‘fictions’, ‘social constructs’ or ‘imagined realities’. An imagined reality is not a lie. Unlike lying, an imagined reality is something that everyone believes in, and as long as this communal belief persists, the imagined reality exerts force in the world. Most millionaires sincerely believe in the existence of money and limited liability companies. Most human-rights activists sincerely believe in the existence of human rights.

Ever since the Cognitive Revolution, Sapiens have thus been living in a dual reality. On the one hand, the objective reality of rivers, trees and lions; and on the other hand, the imagined reality of gods, nations and corporations. As time went by, the imagined reality became ever more powerful, so that today the very survival of rivers, trees and lions depends on the grace of imagined entities such as the United States and Google.

Take a pause and question yourself, “What stories do I believe in about the reality and have they served me well?”

36. Writing is a Thinking Tool
Writing, apart from being a communication tool, is a thinking tool too. Famous author, Dan Pink, recommends – “write things to figure out your thoughts”.

Writing is a powerful weapon for focusing thoughts. The more you write, the more precision of thought you build. It allows you to take fuzzy thinking and distill it into precise line of thought. If you want to think better you have to start writing your thoughts.

When Michael Mauboussin posed the question to Daniel Kahneman, what is a single thing an investor can do to improve his or her performance, he said –

…go down to a local drugstore and buy a very cheap notebook and start keeping track of your decisions. And the specific idea is whenever you’re making a consequential decision, something going in or out of the portfolio, just take a moment to think, write down what you expect to happen, why you expect it to happen and then actually, and this is optional, but probably a great idea, is write down how you feel about the situation, both physically and even emotionally. Just, how do you feel? I feel tired. I feel good, or this stock is really draining me. Whatever you think…When you’ve got a decision-making journal, it gives you accurate and honest feedback of what you were thinking at that time.

Writing is a thinking exercise and it acts as a shield against the mental rust.

37. Opposite of a Good Idea
Both Amazon and Apple are technology companies with close to trillion-dollar market cap each. Amazon sells products as cheap as possible. Apple prices its devices as expensive as possible.

In marketing, there are two equally potent, but completely contradictory, ways to sell a product. Luxury goods offer the promise of owning something which can’t be owned by everybody, i.e., a scarcity bias informs the worth of the product. And we also find comfort in buying stuff which has been rated high by millions of others, i.e., we look for social proof in making our decision.

Similarly, two opposite points of view can both be rational without violating any laws of logic or physics.

Remember, situations where we get two accounts of the same event, but the versions are dramatically different, it’s because they’re informed by different facts and perspectives.

In other words, understanding the context is very important before announcing your verdict on what’s right or wrong.

38. Curiosity Kills the Cat, but You’re not a Cat
Sometimes, when you’ve figured out the answer to a question, you realize that the path between the question and its answer was more interesting than the two endpoints.

Which means the journey that your curiosity takes you through becomes more rewarding than the end result. And the great thing about following your curiosity is that no one can stop you and you can keep going.

Follow the process. And the process is — keep scratching the itch of a probing mind and never letting the fire of inquisitiveness to die down.

Put simply, it doesn’t matter what question you begin with. What matters is —

1. How rigorously you chase the clues,
2. What assumptions you make to simplify a complex problem and transform it into a more useful one, and
3. How long you’re willing to remain discontent with your discoveries.

To expect to begin your quest with only intelligent questions could be overwhelming and you may never get started.

So, start small, start stupid and let your curiosity take you places.

39. Risk of Avoiding the Non-Risk
In 2014, an AirAsia flight crashed into Java Sea killing all 162 people on board. Investigations revealed that it was caused by a pilot error because he performed a non-standard reset of the onboard flight control computers. Why did he do that? Because he wanted to get rid of a non-critical warning light that was flashing on his panel.

The gap between what’s risky and what feels risky is significant. The perception of risk is often misplaced in most people’s head.

Nick Maggiulli writes —

…you can hold 100% bonds and experience little short term volatility (i.e. low risk right?), but you now risk not having enough principal in the future after your portfolio battles against the scourge of inflation for multiple decades…remember that you are always taking risks. The key is understanding what risks you are taking and when you are taking them.

Risk and the perception of risk are two different beasts. What doesn’t seem to hurt in the short run lulls people into complacency and just when they feel the safest the storm of accumulated risk arrives with no advance notice and causes the blow-up.

III. LIFE
40. Weathering Life’s Storms
In Kafka On The Shore, Murakami wrote –

Sometimes fate is like a small sandstorm that keeps changing directions. You change direction but the sandstorm chases you. You turn again, but the storm adjusts. Over and over you play this out, like some ominous dance with death just before dawn. Why? Because this storm isn’t something that blew in from far away, something that has nothing to do with you. This storm is you. Something inside of you. So all you can do is give in to it, step right inside the storm, closing your eyes and plugging up your ears so the sand doesn’t get in, and walk through it, step by step. There’s no sun there, no moon, no direction, no sense of time. Just fine white sand swirling up into the sky like pulverized bones. That’s the kind of sandstorm you need to imagine.

And you really will have to make it through that violent, metaphysical, symbolic storm. No matter how metaphysical or symbolic it might be, make no mistake about it: it will cut through flesh like a thousand razor blades. People will bleed there, and you will bleed too. Hot, red blood. You’ll catch that blood in your hands, your own blood and the blood of others.

And once the storm is over you won’t remember how you made it through, how you managed to survive. You won’t even be sure, in fact, whether the storm is really over. But one thing is certain. When you come out of the storm you won’t be the same person who walked in. That’s what this storm’s all about.

41. Dealing with the Scary World
In Aaron Thier’s wonderful new novel, The World Is A Narrow Bridge, there is a scene where Eva and Murphy, the two young prophets of the god Yahweh, are sent on a mission that terrifies them. As they begin the mission, Eva and Murphy are approached by Satan, who has been sent by Yahweh, to give them their final instructions. After Satan gives the instructions, he begins to leave for his next mission:

“You have to go so soon?” says Eva. “Right away?”

She looks devastated. Murphy, too, is unhappy. Satan frowns and chews on his lip. He doesn’t like to leave them like this.

“I’ll teach you a trick,” he says. “I’ll teach you an incantation that will protect against despair. If things are dark, and I’m not around to help, you can repeat it a few times and it’ll help.

It would go something like this: ‘The world is a narrow bridge, and the most important thing is not to be afraid.’”

Murphy and Eva both repeat this very slowly. Eva says, “That’s lovely.”

Satan nods. “Just repeat it to yourself when things are bad. You could try different translations too. ‘Do not make yourself afraid, the whole world is a narrow bridge.’

The point is this life we’re living—this world we inhabit—is a scary place. If you peer over the side of a narrow bridge, you can lose your heart to continue. You freeze up. You sit down. So too with life. If we think too much about the journey we have to make, the one that begins with the trauma of birth and ends with the tragedy of death, the one that is so perilous and unpredictable, we’ll never make it.

The important thing is that we are not afraid. That we don’t overthink things. That we don’t give way to fear, as the Stoics tell us over and over again. Just repeat it to yourself—The world is a narrow bridge and I will not be afraid—and keep going. Like the thousands of generations who have come before you.

42. Life’s Purpose and Meaning
Tuesdays with Morrie was one of the best books I read in 2019. In one passage, the author wrote something that resonated well with me –

So many people walk around with a meaningless life. They seem half-asleep, even when they’re busy doing things they think are important. This is because they’re chasing the wrong things. The way you get meaning into your life is to devote yourself to loving others, devote yourself to your community around you, and devote yourself to creating something that gives you purpose and meaning.

43. Hope and Fear
Seneca wrote –

Limiting one’s desires actually helps to cure one of fear. ‘Cease to hope … and you will cease to fear.’ … Widely different [as fear and hope] are, the two of them march in unison like a prisoner and the escort he is handcuffed to. Fear keeps pace with hope … both belong to a mind in suspense, to a mind in a state of anxiety through looking into the future. Both are mainly due to projecting our thoughts far ahead of us instead of adapting ourselves to the present.

44. Power of Meditation
Yuval Harari, the author of Sapiens, wrote this beautiful passage in his book –

According to Buddhism, the root of suffering is neither the feeling of pain nor of sadness nor even of meaninglessness. Rather, the real root of suffering is this never-ending and pointless pursuit of ephemeral feelings, which causes us to be in a constant state of tension, restlessness and dissatisfaction. Due to this pursuit, the mind is never satisfied. Even when experiencing pleasure, it is not content, because it fears this feeling might soon disappear, and craves that this feeling should stay and intensify.

People are liberated from suffering not when they experience this or that fleeting pleasure, but rather when they understand the impermanent nature of all their feelings, and stop craving them. This is the aim of Buddhist meditation practices. In meditation, you are supposed to closely observe your mind and body, witness the ceaseless arising and passing of all your feelings, and realise how pointless it is to pursue them. When the pursuit stops, the mind becomes very relaxed, clear and satisfied. All kinds of feelings go on arising and passing – joy, anger, boredom, lust – but once you stop craving particular feelings, you can just accept them for what they are. You live in the present moment instead of fantasising about what might have been. The resulting serenity is so profound that those who spend their lives in the frenzied pursuit of pleasant feelings can hardly imagine it. It is like a man standing for decades on the seashore, embracing certain ‘good’ waves and trying to prevent them from disintegrating, while simultaneously pushing back ‘bad’ waves to prevent them from getting near him. Day in, day out, the man stands on the beach, driving himself crazy with this fruitless exercise. Eventually, he sits down on the sand and just allows the waves to come and go as they please. How peaceful!

45. Karma
One of the best books I read this year was No Shortcuts to the Top. This is an autobiography of Edmund Viesturs, wherein he documents his 16-year journey summitting all 14 of the world’s eight-thousander mountain peaks (more than 8,000 meters above sea level), and his strategies to manage risk in extreme environments.

In one beautiful passage from the book, Viesturs wrote –

Although I remain uncertain about God or any particular religion, I believe in karma. What goes around, comes around. How you live your life, the respect that you give others and the mountain, and how you treat people in general will come back to you in kindred fashion. I like to talk about what I call the Karma National Bank. If you give up the summit to help rescue someone who’s in trouble, you’ve put a deposit in that bank. And sometime down the road, you may need to make a big withdrawal.

46. Widening our Circles of Compassion
Long before Carl Sagan wrote of compassion as our only mechanism for moving beyond “us vs. them,” Einstein wrote in 1950 –

A human being is part of a whole, called by us the “Universe,” a part limited in time and space. He experiences himself, his thoughts and feelings, as something separated from the rest — a kind of optical delusion of his consciousness. This delusion is a kind of prison for us, restricting us to our personal desires and to affection for a few persons nearest us. Our task must be to free ourselves from this prison by widening our circles of compassion to embrace all living creatures and the whole of nature in its beauty.

47. Humility
In The Apology, the Greek philosopher Plato wrote that the oracle at Delphi had pronounced Socrates the wisest man in Athens.

No one was more astonished and disbelieving than Socrates himself. So, he immediately set out to disprove the oracle by finding a wiser man. Here is what Socrates found as he met a few supposedly wise men –

I went to one who had the reputation of wisdom, and observed to him – his name I need not mention; he was a politician whom I selected for examination – and the result was as follows: When I began to talk with him, I could not help thinking that he was not really wise, although he was thought wise by many, and wiser still by himself; and I went and tried to explain to him that he thought himself wise, but was not really wise; and the consequence was that he hated me, and his enmity was shared by several who were present and heard me.

So I left him, saying to myself, as I went away: Well, although I do not suppose that either of us knows anything really beautiful and good, I am better off than he is – for he knows nothing, and thinks that he knows. I neither know nor think that I know. In this latter particular, then, I seem to have slightly the advantage of him.

Then I went to another, who had still higher philosophical pretensions, and my conclusion was exactly the same. I made another enemy of him, and of many others besides him.

In the end, Socrates discovered he was indeed the wisest man in Athens. Not because of how much he knew, but because he was the only one who understood how much he did not know.

Knowing that you don’t know is the dawning of wisdom.

Knowing that you don’t know, accepting it and not being ashamed about it is the start of a continuing journey of wisdom.

Recognizing the darkness is the prerequisite for bringing on the light. Only when the darkness is brought out of hiding does the light have the opportunity to illuminate it.

48. Meaning of Life
One of the best books I have read on the pursuit of the world’s highest peak, Mount Everest, is George Mallory’s Climbing Everest. George was possibly the first man to summit Everest (nobody knows whether he did it), almost 30 years before Edmund Hillary and Tenzing Norgay began their ascent. It was during his third expedition to the Everest that he lost his life, last seen about 800 feet from the summit.

Anyways, all his writings on climbing are collected in Climbing Everest, which started out as letters to his wife Ruth. One of my favourite parts from the book is when George shared his response to one question asked by a journalist about why he would risk his life to attempt to reach the Everest.

His profound response outlines an undeniably powerful way to perceive life –

People ask me, ‘What is the use of climbing Mount Everest?’ and my answer must at once be, ‘It is of no use.’ There is not the slightest prospect of any gain whatsoever. Oh, we may learn a little about the behaviour of the human body at high altitudes, and possibly medical men may turn our observation to some account for the purposes of aviation. But otherwise nothing will come of it. We shall not bring back a single bit of gold or silver, not a gem, nor any coal or iron…

If you cannot understand that there is something in man which responds to the challenge of this mountain and goes out to meet it, that the struggle is the struggle of life itself upward and forever upward, then you won’t see why we go.

What we get from this adventure is just sheer joy. And joy is, after all, the end of life. We do not live to eat and make money. We eat and make money to be able to live. That is what life means and what life is for.

What a beautiful, inspirational thought!

Life is never perfect. And as George wrote, living is not just about eating and making money.

Facing adversities and challenges head on, and stepping away from what is comfortable and familiar to us and into the unknown, is what often brings us real joy.

That’s what gets us life’s real worth.

49. Triumph and Disaster
One of the most life-changing books I have ever read is Viktor Frankl’s Man’s Search for Meaning. The book is a chronicle by Frankl of his experiences as a German Nazi concentration camp inmate during World War II.

In this book, Frankl describes his psychotherapeutic method, which involved identifying a purpose in life to feel positively about, and then immersively imagining that outcome.

The central theme of Frankl’s book is ‘survival.’ Although he witnessed and experienced horror, the book focuses less on the details of his own experience and more on how his time under Nazi rule showed him the human ability to survive and endure against all odds.

As Frankl wrote, he saw the lowest parts of humanity while in the camps. He saw fellow prisoners promoted to be in-camp guards turning on their fellow prisoners. He watched as they beat their lifeless, malnourished campmates. He watched sadistic guards treating them as if they were lower than animals. But he also saw individuals rising up like saints above it all.

The part that impacted me the most from the book was this –

When we are no longer able to change a situation, we are challenged to change ourselves…Everything can be taken from a man but one thing: the last of the human freedoms — to choose one’s attitude in any given set of circumstances, to choose one’s own way.

Life (investing included) isn’t easy. And unlike, what we imagine in both scenarios of triumphs and disasters, life isn’t supposed to move in a straight line of happiness and smiles, or sadness and pain. It’s not supposed to stay the same, just like you’re not supposed to stay the same.

Life is evolving and changing. It is a constant surge of ups and downs, twists and turns, and as Rudyard Kipling said, “…triumphs and disasters.” Like you have your happy and blissful moments, you are supposed to feel pain, get hurt, and experience losses occasionally. And some of them can be really bad!

Now, that does not mean that you deserve every bit of the sadness, defeats, and tragedies that life hands over to you. It’s just part of the journey that we are walking through. It’s just part of what makes us human.

50. Meditating on Mortality
Meditation on mortality (that we are going to die one day) is one of the oldest practices in all Buddhist traditions. In the words of the Buddha, “…of all the footprints, that of the elephant is supreme. Similarly, of all mindfulness meditation, that on death is supreme.”

But why should we contemplate our own death while we are still alive?

“It cures you,” the Bhutanese say. Not just the Hindu and Buddhist scriptures, even Stoicism talks about Memento Mori that is the practice of reflection on mortality, especially as a means of considering the vanity of earthly life and the transient nature of all earthly goods and pursuits.

Now, the thing about meditating on your own mortality is that it doesn’t make life pointless. Instead, knowing that you will die one day creates priority and thinking about it helps you live with a more positive perspective. So you can focus on what’s important.

Death is, however, a subject mostly shunned by our cultures and societies. Nothing explains this resistance better than what the American actor and comedian Woody Allen said in one of his movies, “It’s not that I’m afraid of dying; it’s just that I don’t want to be there when it happens.”

51. What Papa Taught Me
I lost my father late this year. Papa was a genuinely good man – good in a pure, innocent, unfailing way. He wanted, more than anything, to do good in the world, to always do the right thing. That is one attribute I picked up from him, and I thank God I did that.

Another thing I learned from Papa was that the best life one could live was not one in which a person did big, great things that influenced the lives of millions, but one in which you made a difference in the part of the world you touched, no matter how small.

He said that a life in which you helped only one person because that was the only opportunity you had to help someone else was just as great a life as that of someone who changed the lives of millions.

Perhaps the best way I can celebrate Papa’s life is to try as hard as I can to walk in the world with the same compassion, humility, love, and joy that he carried with him so that the light of his life will not extinguish even after the passing of his mortal body.

“Your parents, they give you your life, but then they try to give you their life,” said Chuck Palahniuk, the noted American fiction novelist.

Papa, I realize now, gave me his life. I hope I stand up to it.

Thank You
Before I close, let me share with you the Serenity Prayer that has helped me a lot in facing my personal, professional, and investing turmoils. I am sure if you keep this prayer close to your mind and heart, it will help you face your own turmoils well, including those related to your investing.

The Serenity Prayer

God, grant me the serenity to accept the things I cannot change,
Courage to change the things I can,
And wisdom to know the difference.

~ Reinhold Niebuhr

I wish you a happy, healthy, and peaceful 2020.

With respect,
Vishal