Vishal Khandelwal

Beware the Winning Streak

A couple of announcements before I begin today’s post –

1. The Sketchbook of Wisdom: Special Offer until 20th April 2024: I have published an abridged version (44 pages) of my upcoming book, “The Worldly Wisdom of Charlie Munger.” This version contains 30 of his best lessons on life, decision-making, and investing. It’s not available for sale separately as of now, but you can get it for free until 20th April 2024 with your order of The Sketchbook of Wisdom. Read more and order here.

2. Value Investing Meetups in Dallas and New York: I am organising in-person meetups on Value Investing in –

Dallas (US): Saturday, 27th April
New York (US): Saturday, 11th May

If you are in or around these cities and wish to attend, kindly register here.

Here is the latest issue of The Journal of Investing Wisdom, where I share insightful stuff on investing I am reading and thinking about. Let’s get started.

A Thought: Beware the Winning Streak

Howard Marks of Oaktree Capital, wrote this in his seminal book The Most Important Thing –

In bull markets – usually when things have been going well for a while – people tend to say ‘Risk is my friend. The more risk I take, the greater my return will be. I’d like more risk, please.’

The truth is, risk tolerance is antithetical to successful investing. When people aren’t afraid of risk, they’ll accept risk without being compensated for doing so… and risk compensation will disappear. But only when investors are sufficiently risk-averse will markets offer adequate risk premiums. When worry is in short supply, risky borrowers and questionable schemes will have easy access to capital, and the financial system will become precarious. Too much money will chase the risky and the new, driving up asset prices and driving down prospective returns and safety.

Risk, which Marks and Warren Buffett have often defined as losing significant amounts of money and permanently, often moves in the same direction as valuations.

In other words, risk increases/decreases as valuations rise/fall. At the same time, high valuations imply weak prospective returns, while depressed valuations imply strong prospective returns. Consequently, both Marks and Buffett suggest that risk is lowest precisely when prospective returns are the highest, and risk is highest precisely when prospective returns are the lowest.

Economist and investment strategist Peter Bernstein said –

The riskiest moment is when you are right.

In much of life, doing things right over and over again is a sign of skill. Consider chess players or expert musicians. They rarely make a wrong move or hit a wrong note. Also, the skill of one good musician does not cancel out the skill of other musicians, that is, it does not make it harder for others to be equally good. This is not true of financial markets. ‘Skilled’ investors’ actions cancel each other out as they quickly bid up the prices of any bargains, which makes luck the main factor that distinguishes one investor from another.

Skill in investing shines through over the long term, but a streak of being right in the short term can make anyone forget how important luck is in determining the outcome.

Watch out for that streak of being right, dear investor.

[Read more…]

30 Big Ideas from Seth Klarman’s Margin of Safety (E-Book)

Seth Klarman of Baupost Group is one of the most esteemed investors in the current era.

Since he established his investment partnership in 1983, Klarman has consistently delivered exceptional returns. Additionally, he has contributed insightful and enduring observations on the dynamics of markets and the intricacies of investment practice.

He wrote “Margin of Safety: Risk Averse Investing Strategies for the Thoughtful Investor,” a book that has been celebrated as a cornerstone of value investing since its release in 1991.

As I was re-reading Margin of Safety, I thought of collating the key ideas Klarman has written about, and present to you as a compilation.

[Read more…]

My Personal Financial Plan

A couple of announcements before I begin today’s post –

1. Value Investing Workshop in Mumbai, Dallas, New York: I am organising in-person workshops on Value Investing in –

Mumbai: Sunday, 14th April
Dallas (US): Saturday, 27th April
New York (US): Saturday, 11th May

If you are in or around these cities and wish to attend, kindly register here.

2. The Sketchbook of Wisdom: Special Offer until 20th April 2024: I have published an abridged version (44 pages) of my upcoming book, “The Worldly Wisdom of Charlie Munger.” This version contains 30 of his best lessons on life, decision-making, and investing. It’s not available for sale separately as of now, but you can get it for free until 20th April 2024 with your order of The Sketchbook of Wisdom. Read more and order here.

In the endnotes of his brilliant book, Winning the Loser’s Game, Charles Ellis wrote about two of his best friends who, at the peak of their distinguished careers in medicine, agreed that the two most important discoveries in medical history were penicillin and washing hands (which stopped the spreading of infection from one mother to another via the midwives who delivered most babies before 1900).

Ellis’s friends also counselled him there was no better advice on how to live longer than to quit smoking and to buckle up when driving.

[Read more…]

The Most Powerful Mental Model for Identifying Stocks

“It’s a funny thing about life; if you refuse to accept anything but the best, you very often get it.” ~ W. Somerset Maugham – English dramatist & novelist (1874-1965)

As I’ve seen in the past 20+ years of investing in the stock market, Maugham’s thought holds a great relevance when it comes to picking up businesses for investment.

Pick up a business with good economics and with good margin of safety, and the probability of making money in the long run is high. Pick up a business with poor economics with any margin of safety, and the probability of losing your shirt, and entire wardrobe, in the long run is very high.

Understanding a business also adds significantly to your margin of safety, which is a great tool to protect yourself against losing a lot of money.

[Read more…]

How Little We Know

Before beginning today’s post, I have a brief announcement to make.

I am organising in-person workshops on Value Investing in –

Bengaluru: Sunday, 7th April
Mumbai: Sunday, 14th April
Dallas (US): Saturday, 27th April
New York (US): Saturday, 11th May

If you are in or around these cities and wish to attend, kindly register here.

How Little We Know

Daniel Kahneman, a groundbreaking psychologist and behavioural economist who taught me that it’s perfectly fine to say “I don’t know” when faced with difficult questions in life and investing, passed away recently at the age of 90.

His bestselling book Thinking, Fast and Slow introduced me to his piercing observation that we, as humans, are generally blind to our blindness.

He wrote, “We have very little idea of how little we know. We’re not designed to know how little we know.”

While succinct, the profoundness of these words extends far beyond their brevity.

Despite its remarkable abilities, our brain is inherently limited in what it can perceive, process, and understand. These limitations aren’t merely gaps in knowledge that can be filled with more information or education. Instead, they represent fundamental constraints on our cognitive abilities.

As Kahneman explains in his book, one of the most significant barriers to our understanding is cognitive biases, which are like mental shortcuts or rules of thumb that our brain uses to quickly make sense of the world around us. They can be helpful because they allow us to make decisions quickly without having to stop and think about every little detail. But these shortcuts aren’t always accurate, and sometimes, they can lead us to make wrong or irrational decisions.

Another key aspect of our cognitive limitation, as per Kahneman, is overconfidence. Most people tend to overestimate their knowledge and abilities. This overconfidence bias can lead to disastrous decisions, as people act on incorrect assumptions and flawed information, believing they understand more than they actually do. Overconfidence in our knowledge not only impedes learning but can also lead to significant errors in judgment.

Anyway, the question is: Now that we know the flaws in our cognition, can we do something about them to make better decisions?

Kahneman advised that the first step is awareness. Recognizing that our understanding of the world – of investing and outside of it – is inherently limited, and that we are prone to cognitive biases, is crucial. This recognition can cultivate humility and openness to new perspectives, reducing the likelihood of falling prey to overconfidence.

Another effective strategy is openness in seeking views from diverse people. Being a loner, I have a lot of ground to cover here, but I understand that this can provide a broader range of insights and ideas, helping to fill the gaps in our understanding. This diversity can act as a counterbalance to our individual biases and overconfidence, leading to more informed, balanced decisions.

Also, education and lifelong learning play a crucial role in mitigating our cognitive limitations. While we can never fully overcome these limitations, being a lifelong learner can help us make better, more informed decisions. The pursuit of knowledge and wisdom should be seen as an ongoing journey, not a destination.

Before I end, here’s the crux of it all. The recognition of our cognitive limitations, as highlighted by Kahneman’s work, is not a cause for despair but a call to action.

By acknowledging and addressing these limitations, we can make more informed decisions, evolve into becoming lifelong learners and, ultimately, move forward through the complexities of life with greater wisdom and humility.

As Kahneman advised, the journey toward understanding and wisdom is endless, but it enriches our lives and broadens our horizons in profound ways.

My Talk on the Art of Investing – Bangkok

Before beginning today’s post, I have a brief announcement to make.

I am organising in-person workshops on Value Investing in –

Bengaluru: Sunday, 7th April
Mumbai: Sunday, 14th April
Dallas (US): Saturday, 27th April
New York (US): Saturday, 11th May

If you are in or around these cities and wish to attend, kindly register here.

I recently presented at an event organized by a dear friend in Bangkok, Thailand. The topic was “The Art of Investing”.

I shared my thoughts on some powerful lessons I have learned as a stock market investor over the past 20+ years and how one can use them to walk with confidence on their wealth-creation journey.

Click here to watch the video of the talk.

I hope you find the talk worth your time.

Embracing Loss and Pain, in Life and Investing

Before beginning today’s post, I have a brief announcement to make.

I am organising in-person workshops on Value Investing in –

Bengaluru: Sunday, 7th April
Mumbai: Sunday, 14th April
Dallas (US): Saturday, 27th April
New York (US): Saturday, 11th May

If you are in or around these cities and wish to attend, kindly register here.

Embracing Pain, in Life and Investing

I read a newspaper headline recently that called a 1% decline in the stock market a ‘bloodbath’ and narrated how investors had to suffer through the “pain” of losing a small part of their wealth quickly.

It got me thinking about how our perception of pain and loss, especially in investing, has changed over the years. And it reminded me of my own journey with understanding and embracing discomfort.

[Read more…]

An Underrated Secret of Success in Life and Investing

The Sketchbook of Wisdom: Get Your Copy Now

Buy your copy of the book Morgan Housel calls “a masterpiece.” It contains 50 timeless ideas – from Lord Krishna to Charlie Munger, Socrates to Warren Buffett, and Steve Jobs to Naval Ravikant – as they apply to our lives today. Click here to buy now.

The Art of Value Investing: Chicago and New York

I am organising a couple of sessions on Value Investing in the US –

Chicago: Sunday, 28th April 2024
New York/New Jersey: Sunday, 12th May 2024

If you are in or around these cities and wish to attend, kindly register here.

In its obituary, The New York Times wrote this about Charlie Munger in December 2023 –

Although overshadowed by Mr. Buffett, who relished the spotlight, Mr. Munger, a billionaire in his own right had far more influence at Berkshire than his title of vice chairman suggested.

Mr. Buffett has described him as the originator of Berkshire Hathaway’s investing approach. “The blueprint he gave me was simple: Forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices,” Mr. Buffett once wrote in an annual report.

That investing strategy was a revelation for Mr. Buffett, who had made his name in the 1950s buying troubled companies at deep discounts. (He called them “cigar butts,” because investing in them, he said, was like “picking up a discarded cigar butt that had one puff remaining in it.”)

Mr. Munger counseled Mr. Buffett that if he wanted to build a large, sustainable company that would outperform other investors, he should buy solid brand-name companies. “He was the architect and I was the general contractor,” Mr. Buffett said of their relationship.

[Read more…]

My Notes on Warren Buffett’s 2023 Letter to Shareholders

The Sketchbook of Wisdom: Get Your Copy Now

The Art of Value Investing: Dallas and New York

I am organising a couple of sessions on Value Investing in the US –

Dallas: Saturday, 27th April 2024
New York/New Jersey: Sunday, 12th May 2024

If you are in or around these cities and wish to attend, kindly register here.

My Notes on Warren Buffett’s 2023 Letter to Shareholders

Warren Buffett recently released his 2023 letter to shareholders of Berkshire Hathaway. He started with a beautiful eulogy to his longtime partner, Charlie Munger, who passed away on 28th November 2023, just 33 days before his 100th birthday.

In his note, Warren, very humbly, called himself a “general contractor” to carry out the day-by-day construction of his vision of Charlie, whom he called the “architect” of present-day Berkshire. He wrote –

Charlie, in 1965, promptly advised me: “Warren, forget about ever buying another company like Berkshire. But now that you control Berkshire, add to it wonderful businesses purchased at fair prices and give up buying fair businesses at wonderful prices. In other words, abandon everything you learned from your hero, Ben Graham. It works but only when practiced at small scale.” With much back-sliding I subsequently followed his instructions.

…Charlie never sought to take credit for his role as creator but instead let me take the bows and receive the accolades. In a way his relationship with me was part older brother, part loving father. Even when he knew he was right, he gave me the reins, and when I blundered he never – never –reminded me of my mistake.

Throughout life, we cross paths with individuals who, often unexpectedly, alter the course of our journey. These could be mentors who ignite in us a passion we never knew existed, friends who challenge our perspectives, or even strangers whose words or actions resonate deeply, causing a shift in our worldview. Their impact might manifest in altering our career paths, influencing our personal development, or reshaping our beliefs and values.

The beauty of these interactions lies in their unpredictability and profound impact. It’s a reminder that every encounter holds the potential to significantly transform our life’s trajectory, encouraging us to remain open and receptive to new experiences and people.

For Buffett, Munger played the role of altering his life’s trajectory.

It’s very important to pause, reflect, and ask this question to yourself – Who is MY Munger?

I think it’s a very important question.

Anyway, I have prepared some notes on Buffett’s letter. Click here to read my notes.

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With respect,
– Vishal

Rethinking Financial Freedom – A Masterclass

The Sketchbook of Wisdom: Get Your Copy Now

[Download PDF version of this post]

A Masterclass on Financial Freedom

‘Financial freedom’ is a subject that people tie only to money and not to the peace that no amount of money or wealth would get us. It is, however, a subject matter of the understanding within, of course, along with enough money.

I am holding a 2-hour online session on the subject of “Rethinking Financial Freedom.” The session is free for Mastermind members. However, if you are not one, you can join the session by registering here (India), or here (outside India).

[Read more…]