Safal Niveshak

Wit. Wisdom. Value Investing.

You’re A Bad Investor!

Dalbar, a leading financial services market research firm in the US, recently conducted a study to determine how small investors have fared over the years compared to the stock market as a whole.

In fact, it has conducted a similar research for the past 12 years, and with conclusion that has said the same story each time, which is…

Small Investors are Bad Investors!
“Small investors are losers,” says the Dalbar report, “…and have consistently underperformed the broader market on a multi-year time frame.”

Here is a chart that shows the most recent decade’s rolling 20-year returns for the average mutual fund investor in the US compared to the S&P 500 index…


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“But these numbers are for the American small investor,” you may say.

My dear friend, I’m sure the numbers for Indian investors won’t be any different!

Now, why do I say this? For two reasons:

  1. First, like their US counterparts, a majority of Indian equity mutual funds, after fees and expenses, have underperformed the benchmark indices over long time periods.
  2. Two, you know for sure how you – and other small investors around you – have moved in and out of the stock market and thus these mutual funds, thereby compounding your costs and cutting short your returns.

Over the years, thanks to your sudden excitement or sudden panic, you have hurt yourself as far as your stock market return is concerned.

Thus, I feel unfortunate to tell you this, but there are great chances that you have been a bad investor all these years!

If you have any doubt about it, I encourage you to compare your performance against that of the BSE-200 index (or any other broader index of your choice) over the past 5-10 years. You may be due for some humbling.

But if it makes you feel any better, know that you’re not alone. Most other small investors may have performed equally bad.

Another proof I have is the list of confessions drawn from my recent post where I had asked readers to list down their worst individual stock performances.

More than the actual performances, what was more enlightening was the list of mistakes readers shared associated with their losses, which follows below.

I suggest you take a print of the following text, paste it in front of you, and read it every time you are about to make an investment decision. It may save you a lot of grief in the future.

Small Investor’s Wall of Shame
Here is a list of 40 investing mistakes most investors make, which I have collated from the confessions I received in the recent post. I am sure you will associate with a lot of these…

  1. I, the small investor, buy stocks even when I don’t understand the underlying businesses.
  2. I get carried away seeing just glimpses of greatness – like low valuation and good corporate governance – and don’t look at the overall business. I act like the man with a hammer for whom everything in the world looks like a nail.
  3. I invest in businesses that are growing fast, but ignore that they are also burning capital consistently to achieve that growth.
  4. Ensuring management integrity sounds difficult, so I often avoid it. I forgot what Buffett said about energy, intelligence, and integrity (that if you don’t have the last, the first two would kill you).
  5. I spend a lot of time reading newspapers and watching business channels, and thus I easily get carried away by stories – especially when too many people are repeating them.
  6. I don’t believe brokers but I believe independent research houses that serve me readymade stock recommendations week after week. So that solves my problems of doing any independent study.
  7. Okay, I sometimes put blind trust on tips from broker, especially when they are for multi-bagger stocks.
  8. I hold on to a stock – whether it’s in profit or loss – even after I realize that buying it was a mistake. Hope has always been my great friend.
  9. I love the ups and downs of cyclical industries (cement, steel, etc.) despite not being an insider and despite not having deep knowledge in the same. So what if I was crushed by such cycles in the past. The future will surely be different.
  10. I love to throw good money after bad because I want to be consistent with my original decision. I work hard to find companies and then invest a lot of money in then. Every fall just gives me an opportunity to average down my costs. If I can average when a stock falls from 100 to 25, I will always average when it falls to 10 or even 5.
  11. I have read that high debt can kill a company, but I have also seen a few companies recover from their debt burden in the past…and so I don’t avoid companies with high debt to equity. I don’t understand the base rate of success of companies that have high debt.
  12. When I love a company’s product or service, I don’t think twice before buying its stock. I believe if a company’s product or service is good, so will be its financial performance.
  13. Warren Buffett is too humble to have a “too hard” basket for businesses that are complex to understand. I don’t find anything too hard for me!
  14. I believe a good company will always turn into a good investment. So I don’t mind paying any price if the business is good.
  15. I hold on to stocks that are down 80-90%. How worse can it get?
  16. I find it difficult to convince myself that I have made an investment mistake. After all, I rarely make mistakes!
  17. I often don’t remember why I bought a stock.
  18. I often buy a stock because a smarter investor bought it. How could he be wrong?
  19. IPOs? Oh I love them, and especially for their listing gains. Again, I don’t bother about the base rate of success as an IPO investor (which, in reality, sucks!).
  20. I only show patience when it comes to holding on to my losers…rarely otherwise.
  21. I love cheap stocks. Even if the business goes bankrupt, I will still get some money back.
  22. I believe in high conviction and high concentration. So sometimes, my best idea would form 70-80% of my portfolio.
  23. I have great faith that businesses that are going downhill can turn around. I know Peter Lynch said that “turnarounds rarely turn around”, but I am always hopeful.
  24. When I make some money in the stock market, I feel like a great stock picker. I see this as a great way to keep myself motivated.
  25. Some stocks that are down 80-90% are lying in my portfolio for the last 10 years. You see, I am a long term investor.
  26. I know that businesses that have been “reliable” for years will be reliable in the future as well, and so I can always “rely” on them.
  27. I have a great memory and don’t believe in having a written process. I am after all a human and will continue to make many mistakes. But I will learn from them, and that’s important.
  28. The beautiful anchors on business channels often lead me to buy bad stocks. But that’s a cost you must pay to watch them throughout the day.
  29. I often buy stocks due to peer pressure. How can people I know make quick money while I am left out?
  30. If a company’s promoter is doing fine today, I avoid looking into his past. People change, after all.
  31. I understand P&L accounts but find balance sheets confusing. By the way, who has the time to read balance sheets these days?
  32. So what if the stock has risen 50% from the time I sold it? I will buy it again! I don’t want to miss out on the gains like others have made in recent times.
  33. If a company is earning good profits, it must be earning good cash. After all, doesn’t profit equal cash?
  34. I am often attracted to shiny stuff that has great future potential – things like green energy, new drug, and latest technology.
  35. I am young and thus have too many years to cover my mistakes. So what if I lose some money now. I have enough time on my side to try out many stocks before finding the best ones.
  36. I am sure putting out my mistakes in the open will help me avoid making them in the future, so I felt great after confessing on Safal Niveshak.
  37. I read Safal Niveshak like it is a holy grail that will make me a smarter investor. I am sure of Vishal’s capabilities and thus sure that I will find my multi-baggers some day.
  38. I stopped doing my homework ever since I left school.
  39. I don’t believe in miracles, except when it is about my stock portfolio.
  40. I know that a fool and his money are soon parted, but I am not that fool.

Hate the Sin, Not the Sinner
You see, there’s no point splitting your hairs on what has happened in the past. But surely there’s an urgent need to throw floodlights on what you are doing as an investor, as of NOW.

It’s a time to do a reality check – whether you really want to take up stock market investing on your own, or delegate the responsibility to a fund manager and then keep your fingers crossed for the next 10 years.

Of course, there’s no point quitting the stock market at all taking this to be a casino or a place where just the big investor wins.

If you have time in your hand – and that’s your biggest edge as a small investor – there’s no better place than the stock market to create your retirement nest egg.

But there’s no point being overconfident – and that’s a big sin – on your capabilities as a stock market investor…thinking that you are much better at it than you actually are.

Please don’t treat stocks as coins in a coin-flipping contest. “If not this one, then that one!” is a dangerous mentality in the stock market.

Your odds of success will only grow if you can take time out to understand businesses, then buy only those that are good and are available at discounted prices, and behave sensibly all through this process.

Online trading has given you great powers to instantly invest whenever and wherever you want. But before you choose to use this power the next time, always remember what Spiderman said – “With great power comes great responsibility.”

You have been a bad investor. Now I hope you will become a responsible one.

All the best!

How to Stop Worrying about Falling Stock Prices

My friend Rohan visited me on the weekend, and here is how our discussion went. Rohan’s comments are in red.

“Hey Vishal, did you notice the crash last week? I am pained to see my portfolio again and again!”

“Crash? Where?”

“Stop fooling dude! You know I am talking about the stock market and the crash in the Sensex!”

“Oh that! No, I was busy somewhere else, so didn’t notice that!”


One Year Course in Value Investing

Join The Safal Niveshak Mastermind, my special one-year course in Value Investing to reinvent how you invest and take control of your financial life. Click here to know more and subscribe. Subscriptions for the first batch close on 25th August 2013!


“How could you miss a 1,200 points crash in the last 8 days? And you seem to be writing an investment blog, huh!”

[Read more…] about How to Stop Worrying about Falling Stock Prices

Poke the Box: Have Fun Today, and Please Avoid Death

Let’s Start with Safal Niveshak
Just in case you missed any of this on Safal Niveshak over the last few days…

  • In life and investing, “It will never happen to me!” is a widely held but dangerous notion. You must avoid it at all costs!
  • There’s this one great investment you can ever make for yourself and your loved ones. I’m already making it. What about you?
  • Here’s your chance to get into the mind of one of the best Indian investment thinkers. Prof. Sanjay Bakshi agrees for a second interview for Safal Niveshak. Ask him your question here.


One Year Course in Value Investing

Join The Safal Niveshak Mastermind, my special one-year course in Value Investing to reinvent how you invest and take control of your financial life. Click here to know more and subscribe. Subscriptions for the first batch close on 25th August 2013!

Mental Model of the Week: Second-Level Thinking

Here is what Ben Graham wrote in The Intelligent Investor…

“The art of investment has one characteristic that is not generally appreciated. A creditable, if unspectacular, result can be achieved by the lay investor with a minimum of effort and capability; but to improve this easily attainable standard requires much application and more than a trace of wisdom.”

The ironical truth about investing is that, despite hundreds of rules that guide the practice of being an investor, there is no rule that works all the time, and in the same manner.

Investing is, after all, not like a game of football where the ground and the ball remain the same throughout the ninety minutes of play. It’s more like cricket where the pitch changes its behaviour with every new ball, and the ball changes is shape every time it’s bowled.

So, when you are an investor, the environment in which you play isn’t controllable, and circumstances rarely repeat exactly. What’s most important then is how you behave when others are behaving oddly.

One of the best tools to think and behave better in investing is what Howard Marks calls the “second level thinking”. Here is how Marks explains it in his book The Most Important Thing…

  • First-level thinking says, “It’s a good company; let’s buy the stock.” Second-level thinking says, “It’s a good company, but everyone thinks it’s a great company, and it’s not. So the stock’s overrated and overpriced; let’s sell.”
  • First-level thinking says, “The outlook calls for low growth and rising inflation. Let’s dump our stocks.” Second-level thinking says, “The outlook stinks, but everyone else is selling in panic. Buy!”
  • First-level thinking says, “I think the company’s earnings will fall; sell.” Second-level thinking says, “I think the company’s earnings will fall less than people expect, and the pleasant surprise will lift the stock; buy.”

In other words, first-level thinking, as the name suggests, is what comes to our mind first. And given that our mind is searching for simplicity, in most cases, this kind of thinking is simplistic and superficial, and just about everyone can do it (a bad sign for anything involving an attempt at superiority, like in investing).

In essence, if you wish to perform better than the rest – or in other words, perform better than average – your thoughts actions, expectations, and portfolio have to diverge from the norm.

Most importantly, you don’t have to be just different, you also must get it right…not 100% of the times, but it’s good to aim for a distinction…that is 75%. And for that, you need to practice second-level thinking.

Book Worm
Here is what Howard Marks writes on investing defensively in his amazing book The Most Important Thing…

When friends ask me for personal investment advice, my first step is to try to understand their attitude toward risk and return. Asking for investment advice without specifying that is like asking a doctor for a good medicine without telling him or her what ails you.

So I ask, “Which do you care about more, making money or avoiding losses?” The answer is invariably the same: both. The problem is that you can’t simultaneously go all out for both profit making and loss avoidance. Each investor has to take a position regarding these two goals, and usually that requires striking a reasonable balance. The decision should be made consciously and rationally.

Stimulate Your Mind
Here’s some amazing content I read during the week gone by…

  • Handy list of some great books on the psychology behind human decision making and irrationality
  • Great, practical way to avoid death!
  • Bihar orders head-teachers to taste all school lunches before they are served to children. Now that’s a simple solution to a complex situation.
  • Anyone can learn from their own experience. The competitive advantage comes from being able to learn from the experience of others. Now, what about learning from history’s most hated?
Poke of the Week – Make it Fun

“Those who approach life like a child playing a game, moving and pushing pieces, possess the power of kings.” ~ Heraclitus

Sure, children are stubborn, noisy, and often hard to deal with. But they also possess some of the most fearless and creative minds in the world, a trait that should be made second nature to anyone grown up.

My daughter, for instance, won’t take “I don’t know” for her “Why?” questions. She is fearless in the face of things I consider as daunting – like trying something new.

She will look at everything in a new, fresh way. For her, there isn’t “one right way” do a thing.

To a child the world is a playground and everything therein is a toy. If, as grown-ups, we can look at life, work, and our problems in the same way and then try to find solutions, we would indeed possess power of kings.

You see, there is always enjoyment hiding in what you do, you just have to find it. Start taking a look at your world with a renewed sense of vigour, like a child does.

You will be much happier with the results of your hard work.

The renowned chair designer Bill Stumpf was once asked what criteria he used to select new projects.

He responded – “There are three things I look for in my work: I hope to learn something, I want to make some money, and I’d like to have some fun. If the project doesn’t have the promise of satisfying at least two of these, then I don’t sign on.”

That’s the way to go!

If you haven’t done it already, sign up here to receive Poke the Box in your email…and get ready for stimulating Saturday mornings.

Keep poking.

Play like a child.

Have fun.

Please avoid death.

Till next weekend…

Vishal Khandelwal
Chief Poker – Poke the Box

I’m Making This Investment. Are You?

“Man surprised me most about humanity. Because he sacrifices his health in order to make money. Then he sacrifices money to recuperate his health. And then he is so anxious about the future that he does not enjoy the present; the result being that he does not live in the present or the future; he lives as if he is never going to die, and then dies having never really lived.” ~ Dalai Lama

In my previous post, I wrote about the need to avoid the “it-will-never-happen-to-me” mentality when it comes to health and investing.

Before I get to writing again on money and stock markets, here’s one more thought (more important than money and stock markets) I wanted to share with you.

I’m sure you must have never heard of Dr. Lester Breslow, like I didn’t till last week while attending to my ailing father and reading up stuff on keeping good health.


One Year Course in Value Investing

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[Read more…] about I’m Making This Investment. Are You?

It Will Never Happen to Me!

Sitting in a Kolkata hospital lobby while getting my father treated for a heart ailment, I see this wall hanging that says – “It will never happen to me!”


The pictures below this headline show how a person hurts his heart through stuff like…

  • Alcohol consumption
  • Cigarette smoking
  • Poor eating habits
  • Sedentary lifestyle
  • Stress

…yet continues to think that a heart ailment will never happen to him.

It will happen to everyone around him, but not to him!

Such thinking is widely prevalent when it comes to deadly diseases, death, or even investing doom.

We all consider everyone else as vulnerable but ourselves as invincible. And this is the reason we continue to play with fire, whether it comes to our life, habits and investing.

Charlie Munger says…

A lot of success in life and business comes from knowing what you want to avoid : early death, a bad marriage, etc.

Ironically, most of us while knowing what we must avoid for a healthy heart, long life, better relationships, and comfortable financial life, are mostly travelling on the path assuming others are going to die there, but we will survive.

This is sad, and dangerous! Why?

Because…

It happens, and often!
My father is as healthy a person as anyone can be – no alcohol consumption, no smoking, and he certainly does not have a sedentary lifestyle.

But he has still suffered a serious heart ailment, for which he is being treated now.

He was not “supposed” to have such a disease, but he still has it.

The situation seems under control as of now (keeping fingers crossed!), but his heart has surely taken a serious hit!

Anyways, over the past three days, I have seen several cases of people with heart problems who would have believed at some points in their lives that “it will never happen to me.”

Sadly, many people I see suffering here are in their 40s and 50s. Even sadly, most would have surely fallen to these ailments on account of the poor habits like the ones mentioned above.

But people don’t understand the base rates of living a dangerous lifestyle and then falling into a deadly health issue. It’s high, and increasing!

I am not in a situation to write further at this point of time but, dear tribesman, stuff happens!

Especially in life and also in investing, “It will never happen to me!” is a widely held but dangerous notion.

Surely take risks in life, but only ones that will not cause you a permanent loss.

I am not old enough to dole out advice on healthy living, but I know it surely helps.

I have reiterated it several times in the past, and would do it again today. Remember what Charlie Munger says…

All I want to know is where I’m going to die so I’ll never go there.

You know where you are going to die – in life and investing – so please avoid going there.

Please!

Safal Niveshak StockTalk: Godrej Consumer Products Ltd.

Statutory Warning: This report may cause a reaction, and acting on it can be injurious to your wealth.

Note: This StockTalk analysis has been written by Abhishek Jain.

About GCPL
Godrej Consumer Products Limited (GCPL) promoted by Godrej group is a household and personal care products company. Godrej group owns around 64% of equity and the company is professionally managed. Through international acquisitions, the company has built a sizeable international presence in Africa, Latin America, Indonesia and the UK. Its overseas businesses now account for 40% of revenues.


One Year Course in Value Investing

Join The Safal Niveshak Mastermind, my special one-year course in Value Investing to reinvent how you invest and take control of your financial life. Click here to know more and subscribe. Subscriptions for the first batch close on 25th August 2013!


Over the past decade, GCPL has evolved from a domestic market soap manufacturer to a diversified emerging market MNC. The proportion of soaps in GCPL’s consolidated revenues has reduced to ~20% in FY13 from 63% in FY05.

[Read more…] about Safal Niveshak StockTalk: Godrej Consumer Products Ltd.

Poke the Box: The Downside of Envy

Let’s Start with Safal Niveshak
Just in case you missed any of this on Safal Niveshak over the last few days…

  • Rs 25 lac is good enough saving for an Indian middle class family over a period of 5-6 years. But how about an “extra” Rs 25 lac? Here’s how you can achieve it.
  • People find it difficult to confess their mistakes in the open. Not the Safal Niveshak tribesmen! Read a big bunch of confessions from readers who have lost a lot of money in stocks they now think were big mistakes (good revelation in hindsight :-)). By the way, if you haven’t confessed yet, what are you waiting for?
Mental Model of the Week: Envy

“It is not greed that drives the world, but envy,” said Warren Buffett many years ago.

Recently, Farhan and Raju validated this in the movie 3 Idiots…


We often evaluate our own situation by comparing what we have with what others have.

The rigours of modern life – and the social necessity of keeping up with the Joneses – makes this weakness even more pronounced.

Here is an excerpt from Dan Ariely’s “Predictably Irrational” that I’m sure you would relate with your own life (like I could)…

A few years ago, for instance, I met with one of the top executives of one of the big investment companies. Over the course of our conversation he mentioned that one of his employees had recently come to him to complain about his salary.

“How long have you been with the firm?” the executive asked the young man.

“Three years. I came straight from college,” was the answer.

“And when you joined us, how much did you expect to be making in three years?”

“I was hoping to be making about a hundred thousand.”

The executive eyed him curiously.

“And now you are making almost three hundred thousand, so how can you possibly complain?” he asked.

“Well,” the young man stammered, “it’s just that a couple of the guys at the desks next to me, they’re not any better than I am, and they are making three hundred ten.”

The executive shook his head.

You see, envy is a tricky emotion. It exists on the edges of our consciousness. We don’t like to admit that we envy someone, especially if that someone is someone we don’t like or to whom we feel superior.

Subsequently, we’re as likely to deny we’re in the grip of envy not only to others but to ourselves. And that’s when it becomes a deadly sin, even as far as investing is concerned.

Like, look at this friend of mine who sold off his HUL shares a few months back at Rs 450, and then bought them again recently at Rs 700.

“Why?” I asked him in a sense of intrigue and disgust.

“Because I didn’t wanted to miss out on gains like others have made recently,” he revealed.

This reminded me of the story of Newton and his tryst with the stock of South Sea Company in 1720…


I find a lot of such Newtons around me…and often in the mirror! 🙂

Financial historian Charles Kindleberger wrote in “Manias, Panics, and Crashes” – “There is nothing so disturbing to one’s well-being and judgment as to see a friend get rich.”

It was for good reason, after all, that the Ten Commandments admonished – “Neither shall you desire your neighbor’s house nor field, or male or female slave, or donkey or anything that belongs to your neighbor.”

Now, how do you get over your envy?

You can’t…simply because human nature makes us compare ourselves with others all the time. That’s the way our brains have been wired.

But you can still try. How?

  • Never envy your neighbour and never be owned by pride.
  • Remind yourself this each day – “I will not run a rat race because even if I win, I will still be a rat.”
  • Don’t try to mimic what those around you are doing. They may have a totally different purpose in life.
  • If someone else is getting richer faster than you by, for example, investing in risky stocks, so what? Someone will always be getting richer faster than you. This is not a tragedy. (Indian CEOs eyeing the “Forbes Richest” list need to read this!)

Finally, remember what Charlie Munger said – “Envy is a really stupid sin because it’s the only one you could never possibly have any fun at. There’s a lot of pain and no fun. Why would you want to get on that trolley?”

Stimulate Your Mind
Here’s some amazing content I read during the week gone by…

  • When is the last time you thought about how you think? Here’s a nice little post from Farnam Street on the five elements of effective thinking.
  • Here’s another reason I read a lot, and why even you should.
  • Stress kills, and big time! Here are three effective ways to free yourself from your addiction to stress.
  • The Economist recently posed this question to a few of today’s leading writers – “What was the greatest speech ever?” The result will surely make you proud.

Keep poking.

Avoid envy.

Avoid falling in love with your ideas.

Till next weekend…

Vishal Khandelwal
Chief Poker – Poke the Box

I Confess!

“How much – in percentage terms – has been your biggest ever booked loss in a stock? And which stock was that?”

I asked this on Safal Niveshak’s Facebook and Twitter walls yesterday. And before I could realize, the walls was full with people confessing how they have earned 50-100% losses on their stocks.

While some have booked these losses, there are a few who are hopeful to get their money back. 🙂

Anyways, my friend Vidyanshu suggested that it might be a great exercise to get the learnings of a lot more people from their investment failures, which has resulted in me writing this post.

[Read more…] about I Confess!

How to Save an Extra Rs 25 Lac

A three-bedroom apartment. Two cars. Enough flying miles to send an airline into losses (well almost!). Job with a foreign consulting company. Annual salary of Rs 30 lac…or around 45-times India’s average per capita income.

Yet my friend Rohan is not happy.

Whenever I meet him, he is, as I put it, caught on the “work-spend treadmill.”

So, last week when he was showing off his latest purchase, a third mobile, and one costing in excess of Rs 45,000, I told him, “Spend less money, my friend.”

“But spending money is what makes me happy,” he replied.


One Year Course in Value Investing

Join The Safal Niveshak Mastermind, my special one-year course in Value Investing to reinvent how you invest and take control of your financial life. Click here to know more and subscribe. Subscriptions for the first batch close on 25th August 2013!


“You don’t have to feel deprived when you spend less money,” I said. “In fact, if you keep spending and spending even as your income rises, you’ll keep running and running and never get anywhere.”

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Poke the Box: Make a Ruckus, Take Risks…but Remember Base Rates

Let’s Start with Safal Niveshak
Just in case you missed any of this on Safal Niveshak over the last few days…

  • Released StockTalk 2.0 report on India’s leading IT services company, TCS. See some interesting discussion in the Comments section of the report.
  • Safal Niveshak turned two on 11th July, so relived the amazing journey so far. I want to thank you, dear tribesman, for raising this initiative to this point — it truly could not have happened without your support!
Mental Model of the Week: Base Rates

I heard this recently in a radio ad of a leading insurance company – “For every minute you are stuck in the traffic, we settle five claims.”

Sounds great, right? Five claims in one minute is quite a number.

“But, five out of how many claims that you receive, sir?” I wanted to ask. When I got back home and checked the claim-settlement number, it was around 70%! Now that’s poor!

“There is nothing more deceptive than an obvious fact,” said Sherlock Holmes.

Then, Bertrand Russell said, “Obviousness is always the enemy to correctness.”

It happens so often in life that we come out with wrong conclusions because they seem the obvious based on a single observed effect.

When someone remarked to the French writer Voltaire, “Life is hard,” he retorted, “Compared to what?”

We tend to ignore alternatives, and therefore we fail to make appropriate comparisons. Often we only consider information or evidence that is presented or available and don’t consider that information may be missing.

In effect, we ignore the base rates, which simply mean that if 1% of the public were “medical professionals”, and 99% of the public were not “medical professionals”, then the base rate of medical professionals is simply 1%.

In the same way, if 2% of penny stocks earn good long-term return, and 98% don’t, then the base rate of success in penny stock investing is just 2%.


Here is what Prof. Sanjay Bakshi said in his interview with Safal Niveshak…


One of the great lessons from studying history is to do with “base rates”. “Base rate” is a technical term of describing odds in terms of prior probabilities. The base rate of having a drunken-driving accident is higher than those of having accidents in a sober state.

So, what’s the base rate of investing in IPOs? When you buy a stock in an IPO, and if you flip it, you make money if it’s a hot IPO. If it’s not a hot IPO, you lose money.

But what’s the base rate – the averaged out experience – the prior probability of the activity of subscribing for IPOs – in the long run?

If you do that calculation, you’ll find that the base rate of IPO investing (in fact, it’s not even investing…it’s speculating) sucks!

That’s the case, not just in India, but in every market, in different time periods.

What you don’t see can really kill you! And people don’t see the base rates.

——-

When you evaluate whether smoking is good for you or not, if you look at the average experience of 1,000 smokers and compare them with a 1,000 non-smokers, you’ll see what happens.

People don’t do that. They get influenced by individual stories like a smoker who lived till he was 95. Such a smoker will force many people to ignore base rates, and to focus on his story, to fool themselves into believing that smoking can’t be all that bad for them.

What is the base rate of investing in leveraged companies in bull markets?


By the way, here are some base rates of dying for different reasons (as per the US National Center for Health Statistics)…

  • Hand gliding – 1 in 560
  • Grand Prix racing – 1 in 100
  • Motorbike racing – 1 in 1,000
  • Mountain climbing – 1 in 1,750
  • Bicycling – 1 in 140,000
  • Running/Swimming– 1 in 1 Million (1 Million = 10 Lac)
  • Car driving – 16 in 100,000 drivers
  • Motorcycle riding – 21.5 in 100 million vehicle miles
  • Airplane – 1.3 deaths in 100,000 flight hours
  • Smokers – 22x more likely to die of lung cancer than non-smokers
  • Lifelong smokers – 50% die before age 70
  • Dance parties – 1 in 100,000

Finally, regardless of all risks, your probability of dying during a given year doubles every 8 years!

So watch out for base rates before making any decision in life (and investing), and please be careful.

Stimulate Your Mind
Here’s some amazing content I read during the week gone by…

Poke of the Week – Take Risks

The leading American entrepreneur, author and public speaker Seth Godin has had a great influence on my life as a writer and thinker.

In his recent book titled The Icarus Deception, Seth writes about the story of Icarus, whose father Daedalus fashioned two pairs of wings out of wax and feathers for himself and his son to fly out of a prison they were captivated in.

Daedalus tried his wings first, but before taking off from the island, warned his son not to fly too close to the sun, nor too close to the sea, but to follow his path of flight. However, overcome by the giddiness that flying lent him, Icarus soared through the sky curiously, but in the process he came too close to the sun, which melted the wax.

Icarus kept flapping his wings but soon realized that he had no feathers left and that he was only flapping his bare arms, and so he fell into the sea.

The Icarus myth is often used as an example of when hubris or over-confidence – of flying too high – can go badly wrong.

However Seth, in his book, points out that there is another part of the story – Icarus’s father Daedalus also told his son not to fly too low as the water could also damage his wings.

As per Seth – “Society has altered the myth, encouraging us to forget the part about the sea, and created a culture where we constantly remind one another about the dangers of standing up, standing out, and making a ruckus.”

However, he writes, settling for too little is “a far more common failing”.

You see, we all have the potential to do great work in life. However to do so, we need to leave our comfort zones – to fly closer to the sun, and to fail sometimes.

If you’re not failing every now and again, it’s a sign you’re not doing anything very innovative.

Looking from another angle, if you’re hitting bull’s-eye every time, maybe you’re standing too close to the target.

Like when it comes to investing, I have a long list of great stocks that I did not buy or sold early, for a simple reason that I feared taking some risk.

But since these errors of omission won’t show up in my profit and loss account, I often ignore them.

The reality is that our errors of omission – not flying high and close to the sun – can be more costly than the errors of commission – flying too close to the waters.

Thankfully, what I omitted – taking risks – in my investing life, I committed in my work life, and that led me to quit my job to pursue my passion.

Ask yourself what stops you from taking risks in your life – not risks based on arrogance and blind overconfidence, but well-calculated risks like…

  • Building up a saleable skill that people would pay for, and then telling your boss that you won’t need his services soon
  • Telling your boss how his excel-based projections could go haywire
  • Starting a business that you have been wanting for years
  • Researching businesses and then investing in them independently
  • Spending time learning a third, or a fourth language
  • Learning how to swim or drive…or cook

Arthur Koestler put it so well – “If the Creator had a purpose in equipping us with a neck, he certainly would have meant for us to stick it out.”


Just answer this question – “What would our world look like if more people moved out of their comfort zones, made a ruckus, and took risks to change their and others’ lives?”

Maybe this could be your permission slip.

If you haven’t done it already, sign up here to receive Poke the Box in your email…and get ready for stimulating Saturday mornings.

Keep poking.

Make a ruckus.

Take risks.

Remember base rates.

Please try to quit smoking.

Till next weekend…

Vishal Khandelwal
Chief Poker – Poke the Box