Blog on Value Investing | Safal Niveshak

A Cheat Sheet To Avoid Stock Market Ruin

In his book, Skin in the Game, Nassim Taleb runs an interesting thought experiment where he talks about two cases of playing the casino.

Equate the first case with ‘stock market trading’ in general –

…one hundred people go to a casino to gamble a certain set amount each over a set period of time, and have complimentary gin and tonic. Some may lose, some may win, and we can infer at the end of the day what the “edge” is, that is, calculate the returns simply by counting the money left in the wallets of the people who return. We can thus figure out if the casino is properly pricing the odds.

Now assume that gambler number 28 goes bust. Will gambler number 29 be affected? No.

You can safely calculate, from your sample, that about 1 percent of the gamblers will go bust. And if you keep playing and playing, you will be expected to have about the same ratio, 1 percent of gamblers going bust, on average, over that same time window.

51 Ideas from 2020

Dear Tribe Member,

Despite the despair all around, I trust 2020 treated you well and that you and everyone around you are keeping safe and healthy.

Right before the year ends, I thought I’d share a handful of ideas I’ve learned, re-learned, and wrote about in the past twelve months. Here are 51 of them categorized under the subjects of investing and life. I hope you find these useful, as much as I did.

[Read more…] about 51 Ideas from 2020

Lost Money on Stocks? Have No Shame

Adolf Merckle was a leading German entrepreneur who, in the early 1970s, founded Germany’s first generic drug manufacturer, Ratiopharm. For several decades he also held large parts of cement company HeidelbergCement as well as vehicle manufacturer Kässbohrer.

In 2007, he was worth US$ 12.8 billion, and among the five richest people in Germany.

However, near the end of 2008, Merckle’s investment company VEM faced a liquidity shortage, and he also faced huge losses on speculation in Volkswagen shares, which he bet would fall but instead surged. It is believed that he lost as much as €500 million on this speculative bet. His trouble was made worse by the spreading financial crunch, which hit his corporate empire hard.

Crushed by watching his life’s work slip through his fingers, on 5th January 2009, Merckle walked out into the bitter cold night and threw himself under a speeding train.
“An industrialist losing a fortune on the stock market has different motives for killing himself than a father with six children who loses his job,” said Detlev Liepmann, professor of economic psychology at Berlin’s Free University. He added, “Merckle’s livelihood was certainly not threatened by his risky investments but he was threatened by shame, a loss of face in society, and a loss of honor.”

A man who spent a life working hard to do good, built a billion-dollar wealth, then lost a part of it due to wrong bets and collapse of world markets, died of guilt and shame seemingly because he equated his financial failure with failure in life.

Though at his memorial service, Gerhard Maier, a retired bishop, said, “What brought a man of great will who felt responsible to God to the point where he took his own life is something that, deep down, we humans will never comprehend.”

There is Merckle in All of Us
Well, the reason I brought in Merckle’s tragic story today is because there is a part of Merckle in all of us that causes us to feel shame for our financial mistakes – even small – that often leads us to bigger mistakes. Of course, most people in the same spot as Merckle would not think of killing themselves no matter what happens.

People talk about regret aversion and how we make decisions to avoid regretting an alternative decision in the future. But I would rather call it ‘shame aversion,’ because most of the time most if you see guilt or shame as a more powerful emotion than plain regret.

So, we feel guilty for not investing in rising stocks when we see our friends making money on them. We feel guilty of not having invested in stocks when the prices were down, and we knew (now, in hindsight) that we should have sold our houses then to invest.

We feel bad accepting we made a mistake that causes us to hold on to our losing stocks (bad businesses) because the shame of such acceptance would be too heavy to bear on our already frail hearts. So, not only would people bet heavily on hot stocks in frothy markets, but they would also double-down when these stocks fall to avoid the shame of turning their paper losses into real ones.

Losing Money on Stocks is NOT a Shame
My dear friend, there is no shame in losing money on a stock or any investment. Everyone loses at some point in time, and there is not a single investor who has never made a mistake.

Of course, that does not mean you bet your house on stocks – even the best ones. Losing ₹ 1 crore on a ₹ 100 crore net worth is not the same as losing ₹ 1 crore on a ₹ 2 crore net worth. So, you should always be worried about losing big money permanently. But that worry should show up in the kind of work you do on your process to pick stocks, not after you have already lost money.

Investing or money are such insignificant parts of this beautiful thing called life that you must not lose sleep over them, forget losing your life.

Markets change, cycles turn, everything passes, and there are numerous opportunities one gets to rise after a fall, clean the dust, give up any guilt or shame of falling, and start walking again.

The noted British writer and speaker Alan Watts said –

Man suffers only because he takes seriously what the Gods made for fun.

Russian philosopher and novelist Fyodor Dostoevsky agreed in a way when he said –

The cleverest of all, in my opinion, is the man who calls himself a fool at least once a month.

Learn from your mistakes, but stop taking them, or yourself, so seriously.

How much I wish Adolf Merckle, and others like him who passed through similar tragedies, understood this.

How much I wish you do.

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That’s about it from me for today.

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Stay safe.

Regards,
Vishal

The 42nd Lesson

Value Investing Almanack (VIA) – Special Offer Ends TODAY: VIA, our premium newsletter that subscribers call “the best resource on Value Investing in India,” which was closed for new subscriptions for the past few months, is now accepting new members, and at a very special 55% discount, or Rs 9,000 off the base price! Click here to join now.

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Life’s passing by too fast, or so it seems. I complete 42 years in my present state of existence today. That’s around two-thirds of the average life expectancy of an Indian male.

While spiritualists would want me to believe that I have existed from anadi (before the beginning of cosmos) and will exist till ananta (infinity), I see forty-two years as a good enough time to find some meaning in one’s life. At least, my rapidly greying hair and receding hairline help me realize that.

Now, while it amazes me that I’ve been around that long — I feel like I’ve barely begun.

I’m not usually one to make a big deal about my birthday, but as always, it has given me an opportunity to reflect.

[Read more…] about The 42nd Lesson

Wisest Words Ever Spoken About Investing

Value Investing Almanack (VIA) Special Offer Ends 7th December: VIA, our premium newsletter that subscribers call “the best resource on Value Investing in India,” which was closed for new subscriptions for the past few months, is now accepting new members, and at a very special 55% discount, or Rs 9,000 off the base price! Click here to join now.

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Some nice stuff I am reading now…

We are fortunate to be living in an era where we have all the teachings of wise investors available to us. As compared to 19th century, it has become much easier and cheaper for small investors to participate in the growth of businesses through stock market. Jason Zweig reminds us of some of the wisest words of investing wisdom that have been spoken in the past century. Zweig writes –

You don’t need to have known these people to be grateful for their wisdom. As the biologist Richard Dawkins pointed out in a lecture in 1996, many of us today know more about the world around us than Aristotle, the greatest mind of his age, did more than 2,300 years ago: “Science is cumulative, and we live later.

[Read more…] about Wisest Words Ever Spoken About Investing

The Power of Visual Thinking

Value Investing Almanack (VIA) Special Offer: VIA, our premium newsletter that subscribers call “the best resource on Value Investing in India,” which was closed for new subscriptions for the past few months, is now accepting new members, and at a very special 55% discount, or Rs 9,000 off the base price! Click here to join now.

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Here is your latest Saturday newsletter, where I share the latest updates from the site, an idea worth thinking about, few stories you shouldn’t miss, and a question for you. Let’s get started.

Safal Niveshak Updates
Just in case you missed, here are a couple of recent posts on the site –

30 Big Ideas from Seth Klarman’s Margin of Safety (Special Report) (Corrected and with new download links)
The Best Books: Recommended Reading List
Regret Missing the Rally in Stocks? Now What?

Regret Missing the Rally in Stocks? Now What?

In March 2020, when stocks all around were sinking, I wrote a post about how I was investing my money.

In that post, I mentioned about a stock I had bought in mid-February 2020 that was down 60% from my original purchase price in just a month. My total investment in the stock was then around 3% of my stock portfolio, and it was down 55% from the total invested amount.

Here is a quick update on that. That stock is now 3.5% of my portfolio and is down just around 7% from the total invested amount. The stock has almost doubled from its March lows when I wrote that post.

A few other stocks I had purchased in March and April 2020 are up anywhere between 40% and 120%.

Want to Become a Full-Time Investor? Here’s Your Checklist

One of the most common questions I get asked by people I meet in my workshops and through email is – “I have a passion in investing and would love to do it full-time. So how do I prepare to become a full-time investor?”

With the last few years of reasonably good performance from the overall stock market, and with more and more people flouting their multi-baggers on social media, it isn’t surprising to see many people wanting to quit their jobs to become full-time investors because they think they have a “knack for finding potential multi-baggers.”

I believe such thoughts are often masked by recency bias, because most of such questions about quitting a job to become a full-time investor usually follow good (recent) periods in the stock market.

Envy is also at work here, because a lot of people are witnessing some full-time investors (especially those popular on social media) get rich quick.

And then don’t forget the role of survivorship bias, which is a logical error of concentrating only on people or things that “survived” some process and inadvertently overlooking those that did not.

So, taking inspiration from other full-time investors who have made good money from “emerging moats” or “100-to-1 stocks” or “value trading” and ignoring others who followed similar processes but ended up with disasters can lead you to false conclusions about your own potential as a full-time investor.

What is more, like them, you don’t need to consider investing as a way to make you rich…but a way to keep you rich, that is, help you grow your purchasing power over time. Look at your work – job / profession / business – to make you rich and thus focus more energy there than on the stock market. That is another reason most of us should consider owning only high-quality businesses where we don’t have to spend a lot of time answering a lot of questions.

What Money Worry Keeps You Awake At Night?

Understanding and containing the chance of losing money in investing is a full time job. The markets remind us of that practically every day.

So, how much ever homework you do, some of your investments are bound to fail…or will fail.

You shudder when the thought of losing money springs up — something you just don’t want to think about.

However, if you don’t know what’s really worrying you big time, how would you work out a solution to contain that worry?

You need to know what is that big worry with respect to your money that keeps you awake at night. And writing it out is a great way to start working up a solution to the same.

Maybe you are worried if your savings will last through your retirement.

The Secret to Learning Anything

I’ve been trying a lot of things these days to connect my 9-year old son Chaitanya with a variety of new learnings – in life, human behaviour, how the mind works, ethics, and how to develop good lifelong habits.

To say that I have been successful in making this connection would be an overstatement. There are some aspects about such learning that he easily connects with and loves what I show or tell him. But like most kids, his mind wanders away frequently, towards things that he finds more interesting and engaging.

Now, either I could worry about his lack of concentration on a few things that would really matter as he grows up, or I could let him just be himself and learn whatever he enjoys learning. Over a period of time, I have become more inclined towards the latter.

So, it was without doubt that I loved it when I read a 100-year old letter Albert Einstein wrote to his 11-year old, Hans Albert, where he laid down the secret to learning anything.