Vishal Khandelwal

Roulette, Mispriced Bets and Investing

Joseph Jagger, born in September 1830 in a village near Bradford, Britain, was an engineer in a cotton factory in Yorkshire.

With years of practical experience in the cotton manufacturing industry, Jagger developed an intuitive feel about what machines could do. He figured that even the most sophisticated instruments are far from mechanical perfection. Every machine has flaws. And every flaw brings with it an opportunity to exploit it.

The Englishman often wondered if it was possible to convert his expertise into more cash, not by scamming his employer at the cotton factory but by discovering the possible flaws in the gambling machines at Monte Carlo? Especially the roulette wheels.

In 1873, Joseph Jagger became the first man to break the bank at Monte Carlo.

The Beaux-Arts Casino at Monte Carlo, Monaco was inaugurated in 1863. In Beaux-Arts casino, at the start of the day, every table was funded with a cash reserve of 100,000 francs – known as ‘the bank’. François Blanc, the original owner of the casino, devised a rule for the Casino. If any gambler won more than the cash allocated for the table, the play was temporarily suspended and a black cloth was laid over the table in question. This ceremony was called breaking the bank. After an interval, while extra funds were brought out from the casino’s vaults, the table re-opened and play continued.

How to Create An Antifragile Life, and A Stock Portfolio (A Personal Experiment)

Life was good when I was working at my job as a stock market analyst around 2005-06. Markets were doing well, and my stock picks were flying high. My company’s clients were happy with our recommendations, and consequently, my salary was coming in.

Talking about salaries of stock market analysts, the less that’s said the better. You get paid undeservingly (salary-to-effort ratio, as compared to most other knowledge workers) for constantly questioning the hard work of entrepreneurs and then not questioning your own analyses while churning out words that lose relevance in a few weeks or months.

Anyways, since I was an analyst then, I did not question what I am questioning now. Life was good. I felt safe and comfortable in my job, loved what I was doing, and thought that I would be happy doing the same thing for the rest of my life.

Do Nothing When Nothing Must Be Done

Disclaimer: This post isn’t against doctors or financial advisors. I respect both these professions but believe that a system bent on action often leads professionals in these fields astray. The consequences are often bad for their counterparties – patients and investors.

It was sometime in 2008. I had an uncle who was a well-known dermatologist in my hometown. One day, on a routine annual checkup, the radiologist found a lump in his stomach. My uncle then got himself checked by his surgeon friend. The diagnosis was stomach cancer.

This surgeon was one of the best in this field and had even successfully tried a treatment on this exact cancer for other patients that tripled the five-year-survival odds – from 5 percent to 15 percent – albeit with a poor quality of life.

My uncle was not interested in this treatment. He knew the prognosis well and his focus now was spending time with family and feeling as good as possible for whatever time he had on hand.

A few months later, he died at home. He got no surgical treatment, no chemotherapy, no radiation.
[Read more…] about Do Nothing When Nothing Must Be Done

Nassim Taleb on True Wealth

Here’s some good stuff I read in recent times that might interest you…

Nassim Taleb on True Wealth
Nassim Taleb is one of my favourite authors, and his Antifragile is one of my favourite books. One of this book’s chapters that interests me particularly is titled Via Negativa. Here, Taleb argues that the solution to many problems in life is by removing things, not adding things.

For example, here is a list of things Taleb counts as constituents of true wealth that are all about subtracting things (via negativa) from life than adding –

Worriless sleeping
Clear conscience
Reciprocal gratitude
Absence of envy
Good appetite
Muscle strength
Physical energy
Frequent laughs
No meals alone
No gym classes
Some physical labor
Good bowel movements
No meeting rooms
Periodic surprises

I could check twelve from this list (let the ones I didn’t check remain a secret). What about you? What in the list remains getting checked for you?

How Not to Bet

Jeanne was in her late 80s. Her husband had already passed away twenty years back. Her only daughter, Yvonne, had died much earlier at a relatively young age. Yvonne’s son, Frédéric, was raised by Jeanne herself. Unfortunately, like his mother, Frédéric too had a premature demise when he was killed in an automobile accident at a young age of 36.

All her life Jeanne had lived in Arles, France and had no wish to leave the place in her final years. However, living alone with no source of income, it was hard to support herself.

That’s when a forty-seven-year-old lawyer named André-François Raffray offered a deal to the old lady.

At age ninety and with no heirs, Jeanne agreed to sell her apartment to Raffray for the price of a low monthly subsistence payment of 2,500 francs. The contract said that the payments would stop upon her death, at which point she would be carried out and Raffray could move in.

Jeanne would thus have an ongoing source of cash to live on in her last years, and the lawyer would get an apartment cheaply, with no money down, in return for accepting the uncertainty as to when he would take possession.

[Read more…] about How Not to Bet

What You Need to Succeed in Investing (Hint: It’s Not Genius Brain)

“Hey Vishal, have you read about how Albert Einstein lost so much money in the stock market?” asked my friend Ravi as we met for dinner over the weekend.

“Yes Ravi,” I said. “In fact, he lost most of his winnings from the 1921 Nobel Prize in the stock market crash of 1929.”

“Wow!” Ravi exclaimed. “And we are talking about one of the genius minds to have ever walked this planet.

“Right Ravi. And I’m sure you’ve also heard about Mr. Newton, who was wiped out while chasing the stock market bubble in 18th century England.”

“Yes Vishal, you only told me about Mr. Newton’s misdoings when we met a few months back.”

“Sometimes I fail to understand,” Ravi continued, “how men with such high levels of intelligence fail at such petty things as the stock market, even when you hear of investment stories about individuals who’ve made fortunes because of exceptional insights or sheer genius!”

“Because, my dear friend, the best rewards in investing don’t generally go to investors with the smartest brains but to those with the strongest stomachs.”

“Stomach? Are you serious?”

5 Lessons on Life & Investing from Guy Spier’s Education of a Value Investor

Once upon a time, there was a young man who got his dream job in the financial services industry, thought he could make it big one day and worked hard at it, then got disillusioned and disgusted by what he saw around, and finally quit to live a life of greater peace and fulfillment, while pursuing his passion in value investing.

If I had not read Guy Spier’s The Education of a Value Investor, and someone told me this story, I would have believed it was mine.

This is truly my story, but Guy has captured this beautifully in his wonderful book, which I completed reading recently.

Of course, Guy gas written about his personal story, but it resonated so much with me that I have kept this book in my must-read book advisory list for any budding value investor.

Of course, there are great differences between me and Guy –

He studied at Oxford and Harvard while I studied at obscure colleges;
He won a lunch date with Warren Buffett (jointly with Mohnish Pabrai, at a cost of US$ 650,000), while I continue to dream of a visit to Omaha to meet the Oracle some day;
He started and ended his career at an investment bank, and I did it with an independent research house.
He now manages multi-million dollars, while I barely manage to manage my own little savings. 🙂

Anyways, coming back to Guy’s story and his book, as I mentioned, I could relate to a lot of his experiences, thoughts, and lessons. I have pulled out just five of them that have guided me well.

These thoughts not only hold importance in investing but in life as well. In fact, I find Guy’s book amazing because it talks less about value investing rules and more on a value investor’s character development.

In Guy’s own words…

…this book is also about the inner game of investing, and by extension, the inner game of life. As I’ve come to discover, investing is about much more than money. So as your wealth grows, I hope you will also come to realize that the money is largely irrelevant. And what you will want to do with the bulk of your wealth is give it back to society.

So, here are those five meaningful thoughts that Guy writes about in his book, which I believe serve a great learning for most people aspiring to find a greater meaning in life and become better as value investors.

7 Secrets of Warren Buffett’s Success (as per Charlie Munger)

In the 2008 shareholder meeting of Wesco Financial, a shareholder asked Charlie Munger to describe what caused Warren Buffett’s success.

“His success…is a lollapalooza,” Munger replied – a confluence of factors moving in the same direction.

Munger outlined the following seven key factors which combined together to cause Buffett’s success –

Mental aptitude (Being seriously smart)
Having great interest in the subject (“It’s very hard to succeed in something unless you take the first step – which is to become very interested in it.” ~ Sir William Osler)
Early start (If something takes a long time to achieve, you better start early)
Being a learning machine (Keep learning and learning)
Reinforcement (Human beings work well if they get reinforcement – constant rewards for doing well, which drives you to do more of the same)
Being correctly trusted by people
Avoiding envy, jealousy, self-pity, vengeance, and extreme ideology

My Interview with Farnam Street’s Shane Parrish

Note: This is an excerpt of my interview with Shane Parrish that was originally published in the December 2017 issue of Value Investing Almanack (VIA). To read the entire interview and more such interviews and other deep thoughts on value investing, business analysis and behavioral finance, click here to subscribe to VIA.

Shane Parrish is the curator behind Farnam Street, a website aimed at mastering the best of what other people have already figured out. Shane is the founding partner of Syrus Partners, a holding company that acquires and operates businesses in North America. Before Syrus, Shane worked as an executive in the Canadian government, where he led the creation and execution of key cyber-defense initiatives.

This isn’t your typical value investing interview, but one around topics of reading, learning, and multidisciplinary thinking.

Over to Shane!

Safal Niveshak (SN): Please share about your background. What led you to the wonderful work you are doing at Farnam Street today?

Shane Parrish (SP): I started working for an intelligence agency on Aug 27, 2001. Two weeks later the world changed forever, and I was thrust into a leadership role — not because of any competence on my part but rather because of necessity. As the promotions kept coming, I realized that I was increasingly making decisions that impacted not only my team and their families but also the organization and people around the world. The problem was, I had no idea “how to make decisions.”

My first response to this was to look around the organization and study how most successful people made decisions. This was a great inside view. To complement that I wanted to get an outside view, so I decided to get an MBA.

A Guide to Getting Good at Dealing with Stock Market Chaos

Imagine it’s 2020. Some genius political scientist in collaboration with a computer wizard has developed a flawless algorithm that can be marketed as a revolutionary predictor.

These geniuses offer their services to the United States President Donald Trump. In return for a generous down payment, they tell Mr. Trump that according to their forecasts, a revolution would certainly break out in the US during the following year.

How would Mr. Trump react?

Most likely, he would immediately lower taxes, distribute billions of dollars in handouts to the citizens – and beef up his secret police force, just in case the revolution breaks out.

These pre-emptive measures work! The year comes and goes and, surprise, there is no revolution.

Mr. Trump demands his money back. “Your algorithm is worthless!” he shouts at the scientist. “In the end, I could have built a few more mansions for myself instead of giving all that money to you for your dumb predictor.”