Vishal Khandelwal

Why Most of Us Are Bad at Investing

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…because most of us in the stock market, most of the time, do not do investing, which is…

Thinking how markets work,
Understanding how other investors behave and why not to behave like most of them,
Studying businesses,
Sticking only with what is simple and what we understand,
Buying stocks at appropriate valuations,
Owning those businesses knowing they are ‘businesses’ and not just symbols on your screen, and
Being patient with those businesses and holding on till they remain good businesses.

Instead, we 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?

Countless wise people have advised us for centuries that to become good at anything, we do not need to always add more things but give up on some of them.

However, when it comes to investing, giving up on everything mentioned above is not as easy as it sounds. All these (mis)attributes and (mis)behaviours make us human (except trolling others), and thus there is no point trying hard to eliminate all of them from our lives at one go.

But if we work towards minimizing these – some starting today, and others over a period of time – we may end up with an outcome better than we had ever imagined.

I would leave you with a couple of quotes, which signify how what we think and do now, help us create our destinies –

Watch your thoughts; they become words.
Watch your words; they become actions.
Watch your actions; they become habits.
Watch your habits; they become character.
Watch your character; for it becomes your destiny.

– Lao Tzu

You are what your deep, driving desire is.
As your desire is, so is your will.
As your will is, so is your deed.
As your deed, is so is your destiny.

– Brihadaranyaka Upanishad

For good or bad, investing does not follow any other path.

A Teacher’s Three Secrets to Living A Good Life

The Sketchbook of Wisdom: Now Available at a Special Discount

We know Ben Graham as the father of value investing and the first real teacher of the subject. His book, The Intelligent Investor, has changed the lives of many, particularly Warren Buffett’s, who was one of Graham’s students at Columbia Business School.

Graham played a significant role in shaping Buffett’s career and investment philosophy. But as Buffett has mentioned at several occasions, Graham’s influence on him extended well beyond lessons on analyzing financial statements.

In a short article in the Financial Analysts Journal, remembering Graham after his death in 1976, Buffett emphasized what he learned from the three things Graham said he hoped — even at the age of 80 — to do every day. He wrote –

Several years ago Ben Graham, then almost 80, expressed to a friend the thought that he hoped to do every day “something foolish, something creative and something generous.”

Let’s talk about each of these.

The word “foolish” often carries a negative connotation, but the implied meaning here has more to do with humility and a willingness to forgo self-importance than anything else. Like this is what Buffett wrote to shareholders in his 1989 letter –

Charlie and I have both total job security and financial interests that are identical with those of our shareholders. We are willing to ‘look’ foolish as long as we don’t feel we have ‘acted’ foolishly.

And this is what he wrote in his 2017 letter –

Though markets are generally rational, they occasionally do crazy things. Seizing the opportunities then offered does not require great intelligence, a degree in economics or a familiarity with Wall Street jargon such as alpha and beta. What investors then need instead is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals.

A willingness to look unimaginative for a sustained period – or even to look foolish – is also essential.

On the aspect of “creativity,” Buffett wrote this about Graham –

A remarkable aspect of Ben’s dominance of his professional field was that he achieved it without that narrowness of mental activity that concentrates all effort on a single end. It was, rather, the incidental by-product of an intellect whose breadth almost exceeded definition.

That’s the thing about creativity – the willingness and the ability to get over the narrowness of your mind and perceive the world in new ways, to find hidden patterns, to make connections between seemingly unrelated phenomena, and to generate solutions.

Maria Popova of Brainpickings defines creativity this way –

Creativity is a combinatorial force: it’s our ability to tap into our ‘inner’ pool of resources – knowledge, insight, information, inspiration and all the fragments populating our minds – that we’ve accumulated over the years just by being present and alive and awake to the world and to combine them in extraordinary new ways.

Coming to the third aspect of “generosity” that Graham aimed to practice in his daily life, Buffett has often told us –

I benefited enormously from the intellectual generosity of Ben Graham, the greatest teacher in the history of finance.

And here is what he wrote in his 1976 remembrance –

…his third imperative – generosity – was where he succeeded beyond all others. I knew Ben as my teacher, my employer and my friend. In each relationship – just as with all his students, employees and friends – there was an absolutely open-ended, no-scores-kept generosity of ideas, time and spirit. If clarity of thinking was required, there was no better place to go.

And if encouragement or counsel was needed, Ben was there. Walter Lippmann spoke of men who plant trees that other men will sit under. Ben Graham was such a man.

Even leaving aside his generous contributions to the world of investing, Graham was an extraordinary man who left the world with invaluable lessons.

This one especially – of daily being foolish, creative, and generous – can certainly help us lead wonderful lives.

Wishing you all a very happy Teachers’ Day. In whatever way you may be playing the role of a teacher – parent, child, friend, colleague, teacher, or even as a student – I thank you for bringing light into dark corners.

More power to you.

Regards, Vishal

[Notes] Skin in The Game by Nassim Taleb

The problem with Taleb is not that he’s an a**hole. He as an a**hole. The problem with Taleb is that he is right.

Those are not my words. It’s from one of the blurbs for Taleb’s book Skin in The Game. And among many other surprising things about the book, one is that all the blurbs that appear on the jacket aren’t from other famous authors. Taleb took the testimonials from ordinary readers and printed it on the back of the book. Not because other famous authors weren’t willing to offer their testimonials — many of them would be honoured to do that — but it’s because Taleb doesn’t care.

Those who have read his books agree on one thing — Taleb is idiosyncratic and he is a genius.

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Move Forward, But with Caution: Lessons on How to Deal with Bull Markets

Recent advances in neuroscience and physiology have shown that when we take risk, including financial risk, we do a lot more than just think about it.

We prepare for it physically. Our bodies, expecting action, switch on an emergency network of physiological circuitry, and the resulting surge in electrical and chemical activity feeds back on the brain, affecting the way it thinks. In this way, the body and the brain string together as a single entity, united in the face of challenge.

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It’s Not Supposed to Be Fair

In 1999 when Warren Buffett bought a 75% stake in MidAmerican Energy Holdings Company, David Sokol was its CEO. He retained his position till 2008. Apart from managing MidAmerican, Sokol played a crucial role in turning around Berkshire’s other investments like NetJets and Johns Manville. Over the years he established a reputation inside Berkshire Hathaway as Mr. Fixit.

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The World’s Best Investing Checklist

Peter Kaufman has done an amazing job compiling some of the world’s best lessons on investment behaviour into a masterpiece. We know it as Poor Charlie’s Almanack, which is a collection of speeches and talks by Charlie Munger.

While the entire book is one amazing journey through the mind of one the greatest investment and behavioural thinkers of our times, one part that takes the cake is where Kaufman has condensed Munger’s teachings into a checklist.

He calls this “Investing Principles Checklist”, as it contains the core principles that has made Munger the brilliant investor he is today.

These principles can further be condensed into four most basic guiding principles of life and investing – Preparation. Discipline. Patience. Decisiveness.

These principles cannot be prioritized in terms of any importance. Rather, together, they make up a sensible, thinking, and disciplined investor’s mental toolkit.

Munger’s Investing Principles Checklist
1. Risk – All investment evaluations should begin by measuring risk, especially reputational.

Incorporate an appropriate margin of safety
Avoid dealing with people of questionable character
Insist upon proper compensation for risk assumed
Always beware of inflation and interest rate exposures
Avoid big mistakes; shun permanent capital loss

2. Independence – “Only in fairy tales are emperors told they are naked.”

Objectivity and rationality require independence of thought
Remember that just because other people agree or disagree with you doesn’t make you right or wrong – the only thing that matters is the correctness of your analysis and judgment
Mimicking the herd invites regression to the mean (merely average performance)

3. Preparation – “The only way to win is to work, work, work, work, and hope to have a few insights.”

Develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to become a little wiser every day
More important than the will to win is the will to prepare
Develop fluency in mental models from the major academic disciplines
If you want to get smart, the question you have to keep asking is “why, why, why?”

4. Intellectual humility – Acknowledging what you don’t know is the dawning of wisdom.

Stay within a well-defined circle of competence
Identify and reconcile disconfirming evidence
Resist the craving for false precision, false certainties, etc.
Above all, never fool yourself, and remember that you are the easiest person to fool
“Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of things.”

5. Analytic rigor – Use of the scientific method and effective checklists minimizes errors and omissions.

Determine value apart from price; progress apart from activity; wealth apart from size
It is better to remember the obvious than to grasp the esoteric
Be a business analyst, not a market, macroeconomic, or security analyst
Consider totality of risk and effect; look always at potential second order and higher level impacts
Think forwards and backwards – Invert, always invert

6. Allocation – Proper allocation of capital is an investor’s number one job.

Remember that highest and best use is always measured by the next best use (opportunity cost)
Good ideas are rare – when the odds are greatly in your favor, bet (allocate) heavily
Don’t “fall in love” with an investment – be situation-dependent and opportunity-driven

7. Patience – Resist the natural human bias to act.

“Compound interest is the eighth wonder of the world” (Einstein); never interrupt it unnecessarily
Avoid unnecessary transactional taxes and frictional costs; never take action for its own sake
Be alert for the arrival of luck
Enjoy the process along with the proceeds, because the process is where you live

8. Decisiveness – When proper circumstances present themselves, act with decisiveness and conviction.

Be fearful when others are greedy, and greedy when others are fearful
Opportunity doesn’t come often, so seize it when it comes
Opportunity meeting the prepared mind; that’s the game

9. Change – Live with change and accept unremovable complexity.

Recognize and adapt to the true nature of the world around you; don’t expect it to adapt to you
Continually challenge and willingly amend your “best-loved ideas”
Recognize reality even when you don’t like it – especially when you don’t like it

10. Focus – Keep things simple and remember what you set out to do.

Remember that reputation and integrity are your most valuable assets – and can be lost in a heartbeat
Guard against the effects of hubris (arrogance) and boredom
Don’t overlook the obvious by drowning in minutiae (the small details)
Be careful to exclude unneeded information or slop: “A small leak can sink a great ship”
Face your big troubles; don’t sweep them under the rug

In the end, it comes down to Munger’s most basic guiding principles, his fundamental philosophy of life: Preparation. Discipline. Patience. Decisiveness.

A Father’s Lessons for Life and College

My dearest Kavya,

As I sit down to write this letter, tears well up in my eyes, and my heart swells with a mix of pride and sadness.

I am still not able to believe that you were in kindergarten just a minute ago (or so it seems), and leaving home today to spread your wings and embark on this incredible journey called ‘college.’

You are all grown up, and though it’s hard to let go, I know that this is just the beginning of an extraordinary chapter in your life.

[Read more…]

The Art of Making Good Decisions

Who wakes up every morning thinking, “I am going to make bad decisions today”?

No one.

Yet we all make poor decisions, more often than we want to. Surprisingly that’s not the biggest irony.

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Stress and Investing: A 20-Point Checklist

I was at my hometown recently and chanced upon a friend who works as an investment banker in Delhi. We had met almost after 15 years, and so I could notice a big contrast in his looks as compared to what it was in the early 2000s. He looked much older than his age, around 39, and so I enquired about his health.

To my utter shock, he said, “I had an angioplasty late last year, where they put a tiny tube in my blood vessel to restore blood flow through my arteries.”

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In short, he meant, “I just survived a heart attack.”

“Stress is part of my job profile, you see,” he shrugged it off jokingly.

I had earlier read of a 35-year-old London-based hedge fund trader who died of a heart attack in 2013, and of the head of JP Morgan’s equity sales, aged 37, who had also died of heart failure in 2012. But my friend was, well, my friend, and thus the gravity of the situation weighed heavier this time.

“Is it worth it?” I asked my friend.

[Read more…]

Of Lucky Idiots and Orangutans

The Sketchbook of Wisdom: A Hand-Crafted Manual on the Pursuit of Wealth and Good Life

Howard Marks of Oaktree Capital wrote this in one of his 2006 memos to shareholders titled ‘Risk‘ –

In the investing world, one can live for years off one great coup or one extreme but eventually accurate forecast. But what’s proved by one success? When markets are booming, the best results often go to those who take the most risk. Were they smart to anticipate good times and bulk up on beta, or just congenitally aggressive types who were bailed out by events? Most simply put, how often in our business are people right for the wrong reason?

These are the people Nassim Nicholas Taleb calls “lucky idiots,” and in the short run it’s certainly hard to tell them from skilled investors.

Warren Buffett, in his brilliant 1984 article titled The Superinvestors of Graham-and-Doddsville, describes a contest in which each of the 225 million Americans starts with US$ 1 and flips a coin once a day. The people who get it right on day one collect a dollar from those who were wrong and go on to flip again on day two, and so forth. Ten days later, 220,000 people have called it right ten times in a row and won US$ 1,000.

Buffett writes –

Now this group will probably start getting a little puffed up about this, human nature being what it is. They may try to be modest, but at cocktail parties they will occasionally admit to attractive members of the opposite sex what their technique is, and what marvelous insights they bring to the field of flipping.

After another ten days, there are 215 ‘survivors’ who have been right 20 times in a row and have each won US$ 1 million. By this exercise, each have turned one dollar into a little over $1 million.

…this group will really lose their heads. They will probably write books on “How I turned a Dollar into a Million in Twenty Days Working Thirty Seconds a Morning.” Worse yet, they’ll probably start jetting around the country attending seminars on efficient coin-flipping and tackling skeptical professors with, “If it can’t be done, why are there 215 of us?”

By then some business school professor will probably be rude enough to bring up the fact that if 225 million orangutans had engaged in a similar exercise, the results would be much the same — 215 egotistical orangutans with 20 straight winning flips.

This is a very important story and the reason I am reminding you of this today is because there are now more than 215 egotistical orangutans that are talking about how they have turned small amounts of money into millions investing in stocks and elsewhere and how you can do that easily too.

Worse, each of these 215 have a following of more than 215,000, so you can understand the multiplier effect of the ‘how to get rich easily from stocks’ theory.

Even worse, they are not chest-thumping hanging on trees of some far off jungle, but in a computer or mobile screen right in front of you, on Twitter, YouTube, and everywhere.

Buffett said –

Only when the tide goes out do you discover who’s been swimming naked.

Sir John Templeton said –

The four most dangerous words in investing are: this time it’s different.

This time is not any different, and I wish you realize this now and not when the tide goes out.

There will be a lot of naked swimmers then. I wish you are not one of them.

Watch out.

That’s about it from me for today.

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Stay safe.

Regards, Vishal