The Sketchbook of Wisdom Now on Amazon: My new book – The Sketchbook of Wisdom – is now available on Amazon India. Packed with 50 timeless ideas, the book is a manual on virtue, happiness, and the pursuit of wealth and good life, and has already been bought across 30+ countries within 15 days of launch. Click here to get your copy on Amazon or buy on my book website.

There are businesses that may remain good (earning return on capital greater than cost of capital) for some time, maybe a long time, but you must not attach infinite values to them.

This is because high returns attract competition, generally causing return on capital to move towards the cost of capital. While such companies may still earn excess returns, but the return trajectory is down.

The good thing about high-quality stocks is that you can pay up for them (never overpay), expensive looking prices, and still do well till the underlying businesses remain good.

With poor quality, most probably, you have no hope.

As Charlie Munger says –

Over the long term, it’s hard for a stock to earn a much better return that the business which underlies it earns. If the business earns six percent on capital over forty years and you hold it for that forty years, you’re not going to make much different than a six percent return – even if you originally buy it at a huge discount. Conversely, if a business earns eighteen percent on capital over twenty or thirty years, even if you pay an expensive looking price, you’ll end up with one hell of a result.

Somewhere, right this very moment, an investor you know of is having more fun than you. He has made a lot of money – more than you – in the stock market surge of the past few months. And you missed out on it.

In fact, you may even know of someone who owns all the stocks that are rising, and you are cursing yourself for not being that person, plus envying him.

Not just that, looking at your portfolio you realize that somewhere, something isn’t right. There’s one stock, or maybe more, that hasn’t done much even when other stocks you don’t own have skyrocketed.

I know this affects you, annoys you. And that’s a normal emotion to have, and one you have no control over, which is also normal. Your lizard brain – part of the brain that is responsible for primitive survival instincts such as aggression and fear – is hardwired to behave that way.

So, even when you own more assets and privileges than you could have imagined by this age, and are reasonably happy in your life outside stocks, you feel terrible because you missed out on a few stocks that have done wonders for other investors you know of.

[Read more…] about The Biggest Killer of Investment Returns

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.

[Read more…] about A Cheat Sheet To Avoid Stock Market Ruin

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

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.

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

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.

• 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