This is an excerpt from my upcoming book – Shut Up and Wait: And Other Timeless Principles to Win at Investing and in Life – which I aim to release in August 2022. Click here to read more about the book and download five chapters.

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One of the most important lessons I have learned as a writer is that every great story, bestselling novel, or a blockbuster movie’s screenplay began with a ‘premise, that, in simple words, is the foundational idea that expresses the plot in simple terms.

A strong premise in writing or storytelling ideally includes three elements. First, the description of the main character or protagonist of the story – “misfit team of deep-core drillers.” Second, the protagonist’s goal – “save Earth from the impact of a large asteroid.” And third, the situation or obstacle the protagonist find themselves in – “how to destroy the asteroid the size of Texas.”

A good premise serves as both a hook for the reader or the audience and a guiding light for the writer, providing a storytelling roadmap from the start of a story to its end.

[Read more…] about The Need for an Investment Premise

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One of the biggest flaws in my decision-making process caused me a lot of anguish and a few losses in the early part of my investing career.

It was the idea of averaging down or buying more of the stocks from my portfolio after they fell from my original buying prices just so that I could ‘average down’ my costs.

The math is simple. Assume you buy 100 shares of ABC Co. for ₹120 per share. Your total investment is ₹12,000. The stock falls to ₹90, because the stock market falls, and you buy 100 more shares. Your new investment is ₹9000. Your total investment is ₹21000 (12000 + 9000) and for a total holding of 200 shares, your average cost now stands at ₹105. You have ‘averaged down’ your cost.

Now, this is not a problem if the underlying business remains good but the stock has fallen just because the overall market has taken a hit.

Anyways, ABC Co. falls from ₹90 to ₹60 because there is a rumour in the market about some mismanagement in the company, but you ignore that. You buy 100 more shares for a total investment of ₹6000. Your total cost now is ₹27000. Your total holding is 300 shares. Your average cost of total holding is ₹90.

You feel happy seeing your average cost come down, from ₹120 for the first transaction to ₹90 for the total of three transactions.

[Read more…] about The Dangers of Averaging Down

…is almost always more profitable than investing when everything seems certain.

Investors, like most people going about their daily lives, don’t like doubts and uncertainties – like the Covid-19 pandemic, or the Russia-Ukraine crisis. So, we would anything we can to avoid it.

Of course, it’s a good idea to avoid entirely what you can’t totally get your mind around, successful investing is largely about dealing well with uncertainties.

In fact, uncertainties are the most fundamental condition of the investing world.

Seth Klarman wrote in Margin of Safety –

Most investors strive fruitlessly for certainty and precision, avoiding situations in which information is difficult to obtain. Yet high uncertainty is frequently accompanied by low prices. By the time the uncertainty is resolved, prices are likely to have risen.

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.

What Klarman suggests is that if you need reassurance and certainty, you’re giving up quite a bit to get it. Like high fees to experts who would predict the future (which you falsely believe as certainty, which it isn’t), or expensive prices for stocks (because everyone knows their future is clear, which often isn’t).

On the other hand, if you can get in the habit of seeking out uncertainty, you’ll have developed a great instinct. Plus, in the long term, it’s highly profitable.

[Read more…] about Investing in Uncertain Times

This is an excerpt from my upcoming book – Shut Up and Wait: And Other Timeless Principles to Win at Investing and in Life – which I aim to release in August 2022. Click here to read more about the book and download five chapters.

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The small town I was born in West Bengal gets occasional loud and wild mud storms. Growing up there in my early years, though, no one really freaked out about it, not even the people residing in small mud houses surrounding my house.

They had built their houses so strong that any wild storm was rarely a problem. And so was the attitude towards the storms, that it was hardly a problem worth getting nervous about.

The case with the place in Rajasthan where I grew up in my teens was different. Temperatures during summers peaked at 50 degree Celsius, and dropped to 5 degree during winters. But we rarely went crazy because we had learnt to prepare for and live with both the extreme seasons.

Now, the weather where I have lived for the past 21 years i.e., Mumbai, is so humid throughout the year that people travelling from North India, who do not get freaked out about the extremes there, find Mumbai terrible. On the contrary, I find Mumbai’s weather much more comfortable than the extremes of the places I grew up in.

[Read more…] about The Secret of Investing

If someone had told me this in February 2020 that I would be writing this to you in February 2022, I would have laughed at that person. But here I am, writing to you, announcing my second hardcover book (first being The Sketchbook of Wisdom).

The book is titled – Shut Up and Wait: And Other Timeless Principles to Win at Investing and in Life. I am working on it and aim to release it in August 2022.

First, the credit where it is due. The idea of this title – Shut Up and Wait – came from a tweet from Morgan Housel of Collaborative Fund. I checked with Morgan if he would like to ever write a book with this title. He had no plans of doing this and so I sought his permission to use it for this book.

Shut Up and Wait is not a book of investing advice or secrets. Instead, it is a collection of notes I have written to myself over the past 20 years in my pursuit of becoming a better investor and a better person.

[Read more…] about Shut Up and Wait: My Upcoming Book on the Timeless Principles to Win at Investing and in Life

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

In most fields, studying the patterns of success is a standard way to learn. So when people come to financial markets they try the same approach. All new investors get busy investigating how successful investors made their money in the stock market. They want to know the secret behind the winning strategies. But investing is a world of counterintuitive ways.

All successful investors and traders have made their money in widely varying ways and more often than not, their strategies often contradict each other. If one market pro vouches for his or her winning method, another market savant would seem to oppose it ardently.

Jim Paul, in his book What I Learned Losing A Million Dollars, wrote —

Why was I trying to learn the secret to making money when it could be done in so many different ways? I knew something about how to make money; I had made a million dollars in the market. But I didn’t know anything about how not to lose. The pros could all make money in contradictory ways because they all knew how to control their losses. While one person’s method was making money, another person with an opposite approach would be losing — if the second person was in the market. And that’s just it; the second person wouldn’t be in the market. He’d be on the sidelines with a nominal loss. The pros consider it their primary responsibility not to lose money.

The truth is that like there is more than one way to skin a cat, there is more than one way to make money in the markets.

Obviously, there is no ‘one’ secret way to make money because the people who have achieved success in this game over the long run have done it using very different, and often contradictory, approaches. But one big lesson that almost all these people have agreed to settle for is this – Learning how not to lose money is more important than learning how to make money. 

Which means if you are looking for success in investing, your chances are better if you take the indirect approach, i.e., finding the ‘anti-patterns.’ In other words, finding ways which most often lead to losses and then actively try to avoid those patterns.

Some such anti-patterns include –

• Chasing performance
• Looking to get rich quick
• Ignoring market cycles
• Letting emotions guide decisions
• Failure to accept mistakes and cut losses
• Venturing beyond circle of competence
• Ignoring margin of safety
• Driven by FOMO – fear of missing out

The list is long, but the idea is simple. To win in investing, find the anti-patterns, and then try to avoid them.

[Read more…] about Identifying Investing’s Anti-Patterns

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

There are negative connotations attached to the word ‘loss.’ It’s considered as a synonym to failure. The words loss, wrong, bad, and failure are all regarded as same. So when someone loses money in the stock market, he or she invariably equates it to being wrong. Similarly, when someone makes a profit, it’s assumed that the person was right. But in the stock market, being right and making a profit aren’t necessarily the same thing. And being wrong and incurring a loss aren’t same either.

Jim Paul and Brendan Moynihan wrote in their book What I Learned Losing a Million Dollars –

Success can be built upon repeated failures when the failures aren’t taken personally; likewise, failure can be built upon repeated successes when the successes are taken personally…

Personalizing successes sets people up for disastrous failure. They begin to treat the successes totally as a personal reflection of their abilities rather than the result of capitalizing on a good opportunity, being at the right place at the right time, or even being just plain lucky. They think their mere involvement in an undertaking guarantees success. This phenomenon has been called many things: hubris, overconfidence, arrogance. But the way in which successes become personalized and the processes that precipitate the subsequent failure have never been clearly spelled out.

In other words, successes and failures get personalised when the ego gets involved. And bringing in the ego is the fastest way you can sabotage your investing.

The truth is that investment gains and losses are never a reflection of your intelligence or self-worth. In fact, investing is not about being right or wrong. It is about making decisions, after careful consideration. That is where you sow the seeds of future outcomes, good or bad.

But an outcome is, well, just an outcome, never to be taken personally.

When you decouple your ego from a bad outcome, it creates an opportunity for you to learn from it.

When you decouple your ego from a good outcome, it saves you from future disasters.

[Read more…] about How to Stop Sabotaging Your Investing

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

Have you heard of Kent Evans? No?

Okay, have you heard of Bill Gates? Yes?

Kent Evans was Bill Gates’ first best friend, his classmate at Lakeside School in Seattle, and a co-member of a school-sanctioned computer club called the Lakeside Programmers Group.

In the documentary Inside Bill’s Brain, Bill Gates described Kent as extremely clever, carrying a briefcase with all kinds of gadgets and magazines everywhere he went.

The two self-proclaimed geeks loved scheming about what they would be doing in the future, much to the eye rolls of their classmates who were more concerned with the activities of that moment, the upcoming school dance.

Together, they would read Fortune Magazine and imagine, “If you went into the civil service, what did you make? Should we go be CEOs? What kind of impact could you have? Should we go be generals? Should we go be ambassadors?”

Bill and Kent believed they would go on to do extraordinary things.

Just one of them did it. Bill Gates went on to start Microsoft and the rest, we know, is history.

What happened to Kent Evans?

He died in a mountaineering accident before he graduated high school.

I first read about Kent Evans in Morgan Housel’s brilliant book The Psychology of Money. Explaining the concept of luck and risk, while sharing Kent’s story, Morgan wrote –

Bill Gates experienced one in a million luck by ending up at Lakeside (being one of the rare schools to have a computer those days). Kent Evans experienced one in a million risk (dying in a rare mountaineering accident) by never getting to finish what he and Gates set out to achieve. The same force, the same magnitude, working in opposite directions.

This is just one of the wonderful stories Morgan has shared in his book to explain the important ideas around the subject of money.

Extending the topic of luck vs risk, he wrote –

Luck and risk are both the reality that every outcome in life is guided by forces other than individual effort. They are so similar that you can’t believe in one without equally respecting the other. They both happen because the world is too complex to allow 100% of your actions to dictate 100% of your outcomes.

They are driven by the same thing: You are one person in a game with seven billion other people and infinite moving parts. The accidental impact of actions outside of your control can be more consequential than the ones you consciously take.

Apply this to investing and you would realize that when you judge the financial success of others, and even your own, you must not just look at the returns made but also the risks assumed.

Doing well with money is, after all, is less about what you know and more about how you behave. The earlier you understand and appreciate it, the better off your financial return will be over the long run.

But just avoid dying early.

[Read more…] about Focus on the Risks You Take, Not Just the Returns You Make