Blog on Value Investing | Safal Niveshak

Why I Don’t Invest in Banking Stocks

In October 2016, I had written a post about how I let an opportunity to buy HDFC Bank in the middle of 2006 pass by, and why I have never come to regret that decision (the stock has turned into a 10-bagger since then!).

My reasons to miss that stock was my inability to understand the complexities of the banking and finance business, and more importantly that I have never trusted banks to uphold high levels of honesty and integrity in their business operations.

I received a lot of brickbats for that post for castigating an entire sector (and the bank) that has created so much wealth for shareholders in the past, and that constitutes such a big part of India’s stock market capitalization.

Well, I stand by my thoughts which, by the way, are my personal thoughts and are not binding on you to also avoid stocks from the banking and financial services space.

Investing is a personal affair, and what makes me uncomfortable can be comfortable for you, and vice versa.

Anyways, now the question is – Why am I writing a second post on my unwillingness to invest in banking stocks?

The Ultimate Game of Economics

Have you heard about the ‘ultimate game of economics’? Here’s how it goes.

A person – let’s call him proposer – is given a hundred bucks and asked to split the money with a stranger, called responder. The split doesn’t need to be equal. Proposer could split it 50-50 or he could even keep 90 for himself and offer 10 to the stranger. But the condition is that if the responder rejects the offer, none of them get any money.

If you were the responder, at what split ratio would you accept the offer?

50-50? Most people would consider that fair. But is it rational?

What if you didn’t know about the total sum involved in the deal and you’re told only about the amount that proposer offers you? Isn’t it like a free money, something that you found lying on the street. Why would you reject even 5 bucks that way?

But that’s not how humans think. Right?

The knowledge that someone else got a better deal (at our cost) makes us humans feel cheated.

“Not fair,” we cry. “How dare the proposer offer less than 50 to me?” [Read more…] about The Ultimate Game of Economics

Bull Market and Bad Habit of Being Right

Picture this: It is 2019, and you are watching the cricket World Cup finals. India is playing Pakistan. It’s the start of the 42nd over of India’s run chase. Yuvraj Singh has just hit Pakistan’s lead spinner for five sixes in the first five balls of the over.

Yuvraj is on a hot streak. He had hit the same spinner for six sixes in a row in a match on the same ground last year. So, he is going to hit the next one out of the park as well, right?

Keeping aside the patriotism that is much seen in an India-Pakistan match, you, like most Indian cricket fans would unhesitatingly reply, “Yes!”

Well, that assumption doesn’t say as much about Yuvraj’s skills as it does about how our brains work. In fact, it tells a lot about how we humans have evolved.

Anyways, coming back to your assumption (conclusion) that Yuvraj will deliver even the last ball for a six is, well, way off the mark. Statistically, Yuvraj isn’t significantly more likely to hit a six on this last ball than he is to get caught at the boundary, whatever hot streak he may be going through.

Latticework Of Mental Models: Hedgehog Vs Fox

On June 16, 2015, Donald Trump announced his candidacy for President of the United States. Most political forecasters and pundits brushed this news as Trump’s another gimmick for seeking attention and creating sensational news.

Sixteen months later, as November 2016 approached, it became frighteningly clear that Trump was very close to winning the elections.

However, when the experts were shaking their heads in disbelief and talking about all the things that were wrong with Trump, there was a cartoonist in San Francisco who had been writing blogs all through 2015 and 2016, claiming that Trump will win the elections in landslide. He received a lot of flak (even threats) but on November 8, 2016, Scott Adams, the creator of Dilbert was proved right.

Not entirely right because Trump’s victory wasn’t exactly a landslide but he did win the elections. But Adams was way ahead than the experts who were sweating over predicting precise numbers by which Trump will lose.

Charlie Munger likes to say, “It’s better to be approximately right than precisely wrong.”

Analyze a Stock in 60 Minutes (Free Stock Analysis Excel Version 2.0)

A few readers have accused me in the past of being a sadist who wants them to do the dirty work of analyzing companies on their own, instead of simply recommending stocks like so many other blogs do.

But I’d rather give you a compass instead of a map, for you can confuse map with territory and lose your life’s savings walking that path!

In this pursuit of handing you another compass, here is Version 2.0 of my Stock Analysis Excel Sheet that you can download on to your computer, and analyze not just the past performance of a company but also arrive at its approximate intrinsic value.

If you have been into financial modelling in the past, this excel file may seem like a child’s play. But, if my fourteen years of experience as an analyst is anything to go by, this is most of all you require to “quantitatively” analyse stocks…not models running into hundreds of rows and tens of sheets.

Two Wise Men: Stories for Children Inspired from the Wit and Wisdom of Warren Buffett and Charlie Munger

In July 2016, Bill Gates wrote a memoir on his 25 years of friendship with Warren Buffett. Here is how Gates started his memoir –

I don’t remember the exact day I first met most of my friends, but with Warren Buffett I do. It was 25 years ago today: July 5, 1991.

I think the date stands out in my mind so clearly because it marked the beginning of a new and unexpected friendship for Melinda and me—one that has changed our lives for the better in every imaginable way.

Warren has helped us do two things that are impossible to overdo in one lifetime: learn more and laugh more.

That last note caught my attention. Including the two lessons that Gates learned from Warren, there are four most important lessons I have learned from studying the latter and his partner Charlie Munger over the past 15+ years.

Notes from Howard Marks’ Lecture: 48 Most Important Things I Learned on Investing

“If you were to read just five books in your life to become a sensible investor,” I often suggest people seeking my view, “…they have to be Warren Buffett’s letters, Poor Charlie’s Almanack, Peter Lynch’s One Up on Wall Street, Ben Graham’s The Intelligent Investor, and Howard Marks’ memos.”

Well, if you don’t know who Howard Marks is, let me tell you he is the CEO of Oaktree Capital and is one of the most famous investors who manages to keep a low profile, despite managing almost US$ 100 billion. Marks is also the author of an amazing book – The Most Important Thing: Uncommon Sense for the Thoughtful Investor. In its ultimate praise, Warren Buffett writes, “This is that rarity, a useful book”.

I have been reading and re-reading Marks’ memos for a few years now, so was very fortunate to attend a lecture he gave in Mumbai yesterday titled – The Truth About Investing.

It was an enlightening session, just to be in the presence of this legend and hear him out live.

I made some notes from Marks’ lecture, which I present below (most of these are direct quotes from Marks). He calls these lessons as the “brutal truths” of investing. As you would realize while reading the notes, these indeed are brutal truths – stuff that is easier said than done.

3 Big Investing Lessons from the World’s Greatest Stock Market Speculator

I have been reading Edwin Lefèvre Reminiscences of a Stock Operator over the past few days.

It’s a brilliant first-person account of the career of “Lawrence Livingston”, who is a slightly fictionalized version of Jesse Livermore, one of the greatest stock speculators of all times.

Livingston, just out of school, goes to work as a quotation-board boy in a stock-brokerage office. This was sometime in the 1890s, one hundred years before the advent of real-time internet stock quotes. Stock quotes were written on chalkboards.

He develops a feel for the stock market and, in time, begins to speculate. He’s not an investor — he’s a speculator. He gambles in stocks. And he does a great job at it, building a million-dollar fortune during his twenties.

Then he loses everything. In fact, Livingston builds — and loses — several million-dollar fortunes between the first twenty years of 1900s.

Reminiscences of a Stock Operator is an entertaining and educational book on Livingston’s career (read Livermore’s). It contains great many lessons that are also valid for investors.

Here are three such lessons straight out of the book that I believe would serve you well. The emphasis is mine.

Investing is Simple, but Not Easy

“Life is really simple, but we insist on making it complicated.” ~ Confucius

“Simplicity is a great virtue but it requires hard work to achieve it and education to appreciate it. And to make matters worse: complexity sells better.” ~ Edsger W. Dijkstra

It’s a sad fact of life that great people rarely divulge deep insights into how they achieved their greatness. And the sadder fact of life is that when a few of the greats do divulge the secrets of their greatness, we ignore them because the secrets often are too simple, too pedestrian, for us to appreciate.

“Huh! That’s it? It can’t be so simple!” we would say when we hear a great shelling out simple advice to achieve greatness.

Like, if you are learning martial arts and you hear Bruce Lee speak out the secret to his greatness – “Absorb what is useful, discard what is not, add what is uniquely your own” – you say, “Great thought, but is that it? It cannot be so simple!”

Consider investing. When we read Warren Buffett revealing that the only two rules of successful investing are – Rule No. 1: Never Lose Money. Rule No. 2: Never Forget Rule No. 1 – our brain protests, “Great thought, but is that it? It cannot be so simple!”

Investing is simple, like Buffett also says, but not easy. Take a simple idea, Charlie Munger suggests, but take it seriously.

One Idea That Could Change Your Life (and How You Invest)

“Good morning, Sir,” I called out to a man walking just ahead of me during my morning walk yesterday. Like me, he was a regular at the walking track and we often crossed each other exchanging smiles and wishes. I had heard good things about him from others, and so I thought of engaging him in an interaction.

“How are you doing today?” I asked him.

“Great, as always!” he replied with a smile of a ten-year old. He, by the way, looked ninety years of age but healthy enough to be walking at quick pace.

“I have been observing you for the past many days,” I said, “And you always wear a nice smile on your face and look so healthy. It seems you are living a great life.”

“Yeah, it’s always been wonderful,” he replied, “No regrets at all.”

“That’s wonderful!” I said, “But you’ve been lucky,” I murmured, which he could hear, “Else life is so full of adversities and regrets.”

“Yeah, that’s true,” he replied. “It’s adversity all the way, but that’s what life is supposed to be, isn’t it?”

“Maybe, but then that’s not a life you seem to have lived, right?” I asked. “I can see that you are happy and healthy at ninety years of age, and I know that you are financially free. In other words, you seem to have everything that is missing for most of us going through mid-life.”