Safal Niveshak

Wit. Wisdom. Value Investing.

Chance Has No Memory

“My luck is about to change. The trend will reverse.”

Assume India and Pakistan are playing a one-day international series of 10 matches. Today is the ninth match and the Indian captain Virat Kohli is tossing a fair coin. Pakistan won all the tosses in the previous eight matches. The series is currently tied at 4 – 4.

What is the probability of Kohli winning the toss today?


The answer is –

P (Kohli winning the toss) = No of favorable outcomes / Total no of outcomes = 1 / 2 = 0.5, or 50%

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Who Wants a 20% Annual Risk-Free Return?

Here are the best things I read and thought about today –

  • Matt Levine writes on Bloomberg that gambling is not a retirement plan. He writes about a few people – common people like you and me, including a few 60-80 year old – who bought leveraged exchange-traded notes (ETN – complex financial instruments that use debt to amplify returns, which also increases risk) that promised unreasonably high returns, and lost their money in the volatility of the last few months. He then quips (emphasis mine) –

    I have long argued that the most important lesson of “financial literacy,” one that is never taught in any “financial literacy” classes, is: If I offer you a 20% annual risk-free return, am I lying? The answer is yes, of course.

    UBS was not actually offering a 20% annual risk-free return — the ETN “often yielded 20% or more” but didn’t advertise any fixed interest rate, and it said right on the front page that it was risky — but just knowing that single core fact of financial literacy would be sufficient to guide your investment decision here.

    “Ooh fun gamble, 20% return, maybe I’ll take a chance on it”: Fine, great, whatever. “Hmm this seems to offer monthly income, and a 20% return would help my retirement, guess I should put all my savings into it”: No, bad, wrong.

    Consider the stock market.

    The original design of the stock market was purely capitalist in intention. It was created to provide a means for business people – entrepreneurs, inventors, developers – to obtain needed investment capital, to start or to expand their businesses. So stocks were issued, bankers and other investors bought the stock, and the businesses made use of the invested money. But once a business started flourishing and was producing a profit, it returned the money back to the stock holders so that it could be used by other enterprises.

    Over the years, however, this last part of the process was completely forgotten. As years passed, the brokers quickly realized that they could make lots of easy money in trading shares back and forth. They became middlemen, in charge of the flow of capital, earning their commission on each and every transaction.

    As we see now, the game is no longer just about capital and businesses, and has become one where everything is centered on the flow of money from one investor to another, instead of one business to another. And in this flow, investors get doomed time and again because they fall for the “20% annual risk-free return” kind of promises! And brokers and other middlemen earn their commissions even on such doom.

    This is exactly like it happens in a casino. One gambler gets rich at the expense of others, but ultimately loses it all. But whatever happens, the broker (the casino) always wins.

    Asking the question Levine poses – If I offer you a 20% annual risk-free return, am I lying? – the answer for which is – Yes, of course, I am lying – will save you from a lot of blushes and disasters not just in the stock market but also in your broader financial life.
     

  • Massive up and down moves in stocks in the same year are more common than you think, argues Ben Carlson in his latest post –

    You can get cycles during a 12-month time frame that feel like they should be playing out over the course of 12 years.

    The stock market can move very fast in either direction seemingly without warning.

    Here are some reminders I like to consider when thinking through big moves like this:

    • I cannot predict the direction of the stock market over the short-term.
    • I cannot predict the magnitude of stock market moves.
    • I cannot predict when market moves are going to start or stop.
    • The stock market doesn’t always make sense nor does it have to.
    • The stock market has the ability to make everyone look foolish at times.

     
    Things looked bleak in March. Now things look not so bad considering the S&P 500 is down just 2-3% on the year. What happens next is anyone’s guess.

    I don’t know.

    Well, nobody knows. Worse, we all are ignorant of our own ignorance.
     

  • Aswath Damodaran, sometimes known as the ‘Dean of Valuation,’ recently spoke at the 73rd CFA Institute Annual Virtual Conference on the topic The Value of Everything in an Unstable Environment) –

    Considering valuation principles in light of the COVID-19 crisis:
     

    • Valuation first principles have not changed just because of the crisis, but investors have to be willing not only to make estimates about the damage that the crisis will cause to corporate earnings but also to think about what a company will look like in the post-coronavirus economy.
    • If you are tempted to use multiples and pricing because you don’t want to make assumptions in the fact of uncertainty, you will find uncertainty affecting you in different ways, with trailing numbers moving dramatically and multiples becoming either not meaningful or not usable.
    • Difficult times require dynamic models, where forecasts of the past are not anchored in past numbers. In other words, mechanical models (which is what many DCF models have become in practice) will yield strange-looking numbers.
    • Ultimately, crises are crucibles that test investor faith and philosophies, and this crisis will be the acid test for active investing, in general, and value investing, in particular.

    Download Mr. Damodaran’s presentation here.
     

  • Barry Ritholtz writes that if investors are worried about too much uncertainty, they should know that the world has always been like this –

    These may be unprecedented times, but they are not really out of the ordinary. Uncertainty always rules, and no one ever knows the future. For that reasons, no one really knows or even has a good sense of when the economy will recover, how many will die and when the pandemic will be over. Pretending otherwise with euphemisms does not make it any less so.

    Just remember that there is exactly the same amount of uncertainty now about the future as there always is. During times of crisis, you simply lose the ability to fool yourself about it.

  • Ever wondered why very beautiful scenes can make you so melancholy or sad? The Book of Life has a beautiful answer –

    Beauty has served to highlight, by contrast, everything that has come before. We notice – in a way we couldn’t yesterday – how much disappointment, violence, meanness and humiliation has been written into the structure of our ordinary surroundings and routines and has from there seeped into our souls. Thanks to the little limestone church (that we’ll visit after breakfast) assembled by craftsmen around 1430 and ringing its bells for morning service, we’re finally in a position to feel how much agony is latent in our hearts. We haven’t been pain-free all this time, we’ve just been numb, holding in our sorrow because there was nowhere to discharge it, because there were no alternatives to it and nothing to remind us of the scale of our compromise.

    The beauty of the landscape is like the very kind friend who, after a period of turmoil, puts a hand gently on ours and asks how we have been – and does so with such tenderness and intelligent concern, we surprise ourselves by bursting into tears that don’t stop for a very long time. It takes kindness until we can realise how much suffering we were holding in. It takes beauty until we realise how far we have drifted from our better selves.

    Someone comes in and sees our eyes filled with tears. They wonder sweetly if they could fetch us anything to eat – or a taxi to go sightseeing. But we are far stranger than we can begin to explain. We are crying tears of joy at a goodness we have missed out on; we are crying because we don’t know how to nourish ourselves, we are crying at the sight of a happiness we are emotionally too cowardly, defensive and inept to know how to make our own. We are crying because we don’t want to be tourists, we want to be reborn.

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That’s about it from me for today.

If you liked this post, please share with others on WhatsApp, Twitter, LinkedIn, or just email them the link to this post.

Have a great day. Stay safe.

With respect,
— Vishal

A Simple P/E Valuation Model that Works

Since most investors fail to evaluate a company before buying it, they usually have no preconceived idea of what they can earn over time.

That is a fatal mistake.

You should be able to estimate the annualized rate of return you expect from every investment and be able to quantify how you derived that figure.

If your criteria for investing are vague or ill-defined, you are more likely to make mistakes about selling.

Are you looking for a 50% price increase in one year. If so, what factors can cause that to occur, and how likely are those factors to occur?

Are you looking for 15% a year for 10 years? If so, calculate what the stock must trade for in 10 years and determine the earnings that will be needed to support the price.

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20 Lessons on Starting Up

This is not a post on investing or human behaviour.

It’s on starting up, which has helped me become a better behaved investor.

I recently shared on Twitter a few lessons on starting up from my personal experience of the last ten years. Here is a slightly detailed version of the same –

  1. When you start up, say yes to everything that comes your way. Opening your doors means the world will come to you. Over time, you will get to choose which door you enter, so you then need to learn to say no. When I started in 2011 as a content writer, I said yes to writing stuff that I did not like and that paid peanuts. But that helped me run my house partly, while I was building something I could be proud of (Safal Niveshak). Over time, I learned to say no to a lot of things that could have helped me earned more money but would have led me to the slippery slope of unhappiness.
     

  2. Try as much NOT to have a Plan B that you can go to if Plan A fails. With no Plan B to fall back upon, I had just one path to walk upon, and I am still walking on that very path. All you need to not have a Plan B is a Plan A that you believe in completely. It’s like your backbone. You’re willing to fight for it.
     

  3. Sometimes you might have a solution that people want, but you need to stick it out long enough so that people come to trust you. So, once you have taken the plunge, DO NOT give up. Things get scary at times but persist for the time you’ve pre-decided upon. And it should not be a few weeks or months. I gave myself two years’ time to see the fruits of my work show up. Good things take time. But if you keep working on things that you believe in, and what many people will pay you for, keep at it. It took me more than 15 months to move up from the bottom of the curve, but it was worth the wait.
     

  4. Even when you have decided to persist, set a timeline to accept that things may not work out the way you expected. Try multiple ideas, and learn from what did not work for you and what did. Kill what doesn’t work, and get better at what does. Writing for others didn’t keep me happy for long. Writing for myself did. And that’s what I worked on, and on, and on.
     

  5. Start small. People try to build their new business into a massive launch, but this is a mistake. Start as small as possible, giving a minimum viable product to a few friends, and let them test it out. Better, take a leaf out of Seth Godin’s book, The Purple Cow, and build a ‘minimum remarkable product’. I started very small in 2011, with just one idea, a blog, and have remained small ever since. To my distracted mind, that gives the ability to focus hard on what matters. Being small hasn’t just been a stepping stone for me, it’s been my journey, my destination, everything.
     

  6. You would be more than lucky to execute on just one simple idea or revenue stream, let alone three or four. So, focus on just one idea to start, and give your heart and soul to it. Like Charlie Munger said, “Take a simple idea and take it seriously.”
     

  7. Experiment as much as you want, just ensure that none of the experiments must burn you out or kill you financially. No one knows you at the start, so experimenting and then failing should not worry you anyways. Despite no steady revenue stream, and uncertainty about the future, my first revenue generating model of conducting workshops was open-priced. People could pay anything, whatever they wanted to pay after the workshop. Some paid nothing, some paid next to nothing, but thanks to a few kind souls, I always covered my expenses and kept some tiny amount back. I did that for almost two years, and that’s the most memorable model I’ve worked upon since then.
     

  8. Aim to be truly loved by a few you serve than be liked by thousands. True love is rare, so even if you can find just people 100 people who love your work so they will talk about it with their friends, you’ve hit the ball out of the park. This is also what I learned from my father. He always said that the best life one could live was not one in which a person did big, great things that influenced the lives of millions, but one in which you made a difference in the part of the world you touched, no matter how small. He said that a life in which you helped only one person because that was the only opportunity you had to help someone else was just as great a life as that of someone who changed the lives of millions. Safal Niveshak had very few readers by the end of six months, the first of them being my father. But I wrote almost daily. And he loved what I wrote. And so I tried to write more and better for him, and he became that person whom I had in my mind whenever I sat down to write my posts. He’s no more, but that’s the plan I still follow.
     

  9. Don’t spend on SEO or social media marketing. These are bottomless money pits, and don’t add any value for your customers. Let your work – your blog, product, service – speak for you and bring in people. I’ve done basic SEO work on my site, and on my own, and that has worked well so far for 10 years. By the way, as I type this, there are 1,774,777,646 websites online right now in the world, many vying for the same audience. That’s the competition and everyone wants to be ranked #1. No SEO can take you there. Only your work can. Like if you search for “value investing course”, Safal Niveshak is the first non-advertised website on Google. For “value investing”, Safal Niveshak is on page one. All this without spending a single rupee on SEO or online marketing over the past ten years. By the way, these ranks mean nothing to me, but I just shared to show why your work matters more than any marketing.
     

  10. While you don’t need to spend money on marketing, you must still learn to sell, that is to positively convince, influence, inspire people to buy what you are building. If you can build but cannot sell, you won’t get much done. Your work should be your best salesperson. All I have done over the past 10 years is work (write). No advertising, no networking, nothing. Just plain simple work. And it seems to have paid fine. By the way, one of the best ways to sell well is to write well, clearly and simply…as if you’re talking to your friend. Clear writing also helps in clarifying the thought process. So, learn to write.
     

  11. Do your best work, and forget about numbers, especially targets like page views, subscribers, revenues, etc. Those are meaningless, especially when you are starting out. Instead, worry about how much you’re helping people. You can’t put numbers on those things. All I have tried to do all these years at Safal Niveshak is create an abundance of confidence by giving away a large amount of value for free so people trust me in return. And, in my work, there is nothing more precious to me that that trust. I hold as tight to it as I do to my integrity and reputation.
     

  12. Get ready to be alone and lose friends. While family and close friends will always be supportive, most others may not understand the work it takes to build something from scratch. I lived such a life after starting up. Looking back, I do not regret any moment of it.
     

  13. Practice lean living at least a year before you start out. Instant compromises are heart breaking! Save money to use as initial capital, and keep expenses low. Bootstrap as much as possible. Don’t borrow money till you aren’t generating cash. Try not to borrow at all. Spending other people’s money may sound great, but there’s a noose attached. You give up control. When you turn to outsiders for funding, you have to answer to them too. That’s fine at first, when everyone agrees. But what happens down the road? Well, often, it’s not a happy question to answer. Also, not having enough money of your own is a way of not having a Plan B, because that will lead you to work harder on building something so great that people will pay for it in advance, that they’ll eagerly sign up to use what you’re making.
     

  14. If you believe in your work and the ways of doing it, ignore the critics, keep your head down, and quietly do your work. People ready to pull you down are everywhere. Remember Theodore Roosevelt’s famous ‘The Man in the Arena’ talk wherein he said – “It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.” This talk has been one of my saviors all these years.
     

  15. Don’t believe people who tell you – “How I started up on my own, doubled my income and cut my hours in half”…or something like this. They will not help you if you reach a point of no return. Learn from others, but believe in just yourself and your work.
     

  16. Build your work around the life you want to have. Avoid being a workaholic and make time for family, leisure, and self-care. Don’t forgo sleep. It’s easy to get caught up in the challenges of starting up. But it’s also easy to fall into the habit of making it your only priority.
     

  17. Celebrate little wins. I clapped for myself every time someone subscribed to my free newsletter in those early days. And mostly one person subscribed on most days. Initially, the wins are slow and infrequent. But celebrating in your own little ways will keep you charged up.
     

  18. Never compromise on what you set out to do, and the way you set out to do it. Never walk the path that may lead you to regrets. Hold tight on integrity. Avoid short cuts. Say no to what would not let you sleep peacefully at night, even if that seems lucrative financially.
     

  19. Learn to be okay with NOT knowing. You will not know what will happen with your business. World is changing. Your business will change. You will change. You don’t know anything, really, and that’s fine. Just keep working on what keeps you happy when you wake up everyday.
     

  20. Enjoy the journey, with all its speed breakers and potholes. Avoid getting caught up in the black and white of success and failure. Don’t forget to enjoy what you are doing. Forget about success and failure. They are just two imposters. Stay the course. Enjoy the scenery.

That’s all I have to share as of now.

Mark Twain is quoted as saying – “Twenty years from now you will be more disappointed by the things that you didn’t do than by the ones you did do. So throw off the bowlines. Sail away from the safe harbor. Catch the trade winds in your sails. Explore. Dream. Discover.”

If you have been waiting to start out for long, know that there will never be a perfect time to do anything. Do something and stick to it. And yes, you don’t have to quit your day job to start something, just as you don’t have to drop out of college to do so. You have weekends and evenings and all that time you’re online.

A Few Resources on Starting Up:

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That’s about it from me for today.

If you liked this post, please share with others on WhatsApp, Twitter, LinkedIn, or just email them the link to this post.

Stay safe.

With respect,
— Vishal

Why We’re Ignorant of Our Own Ignorance

Here is some stuff I am reading and thinking about this weekend…

Idea I’m Thinking – Dunning Kruger Effect
One day in 1995, a large, heavy middle-aged man robbed two banks in the American city of Pittsburgh. He did it in broad daylight, without wearing a mask or any sort of disguise. And he smiled at surveillance cameras before walking out of each bank. Later that night, police arrested a surprised McArthur Wheeler. When they showed him the surveillance tapes, Wheeler stared in disbelief. “But I wore the juice,” he mumbled. Apparently, Wheeler thought that rubbing lemon juice on his skin would render him invisible to videotape cameras. After all, lemon juice is used as invisible ink so, as long as he didn’t come near a heat source, he should have been completely invisible.

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Give Your Investment Ideas Some Legs

Ever since I started writing for Safal Niveshak, I always wondered where does Vishal get his ideas for writing.

“Write more, write every day,” Vishal often recommends.

However, one of the most important (and often ignored) aspects of mastering any skill is tacit knowledge. Tacit knowledge is the knowledge that can’t properly be transmitted via verbal or written instruction.

In a master-apprentice relationship, more is caught than taught. This means a lot more can be learned by observing what good writers do because they may not explicitly verbalize when they’re asked to explain their craft.

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The Riskiest Moment in Investing

Here are the best things I read and thought about today –

  • Peter Bernstein is one of my favourite authors when it comes to the idea of ‘risk’. He was a financial historian and had been in the investment world since the 1950s. He is the author of “Capital Ideas” and “Against the Gods,” the second being a super-text that everyone wanting to understand about financial risk and its history must read.
     
    One of the best interviews I have read of him is the one with Jason Zweig that I came across recently (I first read it long time back), and read through it entirely. It contains some brilliant insights on investing, risk, and decision making. Here is the part I liked the best where Bernstein said that “the riskiest moment in investing is when you’re right.”

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The Man in the Arena

Once upon a time, when I worked as an equity research analyst, I used to meet company managers as part of my research process.

I “grilled” them with my questions and cross-questions, doubted and criticized them, liked those performing well and condemned those that didn’t.

Looking back, I reflect on those times with some wisdom that comes with middle age, and I know that there were things I would have done a bit differently, knowing what I know now about the idea of…empathy.

Empathy is the ability to understand and share the feelings of another. It is the ability to put yourself in another person’s shoes and understand with depth the gravity of their situation.

In general, I believe the world and investors needs more empathy.

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The Fastest Path to a Better Life

Here is some stuff I am reading and thinking about this weekend…

Book I’m Reading – On the Shortness of Life
This is one book that stays by my bedside. In this, Seneca, the Stoic philosopher and playwright, offers us an urgent reminder on the non-renewability of our most important resource: our time. It is a required reading for anyone who wishes to live to their full potential, and it is a manifesto on how to get back control of your life and live it to the fullest.

Here are a few passages from the book that serve as great reminders on, well, the shortness of life –

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