Blog on Value Investing | Safal Niveshak

Latticework of Mental Models: Ludic Fallacy

On October 23, 2010, Francis Crippen, an American national, drowned while swimming in the sea near the shores of United Arab Emirates. He was only 26 years old.

Francis’ story shouldn’t strike you as very unusual. Thousands die every year because of drowning. In fact, your best guess would be that it’s such a non-event that it wouldn’t have found even a single mention in any of the prominent newspapers. However, what I haven’t told you about Francis is that he was no ordinary swimmer.

All three of Crippen’s sisters were competitive swimmers. Being inspired by his sister Maddy, Crippen started swimming at the age of six. Maddy was a 2000 Olympian in the 400 individual medley. Crippen’s other sister Claire was an Olympic Trials qualifier. Teresa Crippen, Fran’s third sister was a member of U.S. national swimming team. Francis himself was a six-time US National Champion and won several international medals.

This is the account of the events that followed on that fateful day.

Value Investor Interview: Rohit Chauhan

Note: This interview was originally published in the October 2016 issue of our premium newsletter – Value Investing Almanack (VIA). To read more such interviews and other deep thoughts on value investing, business analysis and behavioral finance, click here to subscribe to VIA.

I recently interviewed Rohit Chauhan for our premium newsletter, Value Investing Almanack.

Rohit Chauhan is an Engineer / MBA with 20+ years of experience, working in different functions in large corporations in India and abroad. Rohit was introduced to the value investing philosophy in the mid 90s and has since then followed it in managing money for himself and others who have entrusted their capital to him.

Rohit has been writing on the topic of investing for the last 11 years through his blog.

In his interview with Safal Niveshak, Rohit shares his wide investment experience and how small investors can practice sensible investment decision making.

My Multibagger Diwali Idea

Stop right here if you are looking for a stock idea from me, because most of my multibagger ideas are outside the stock market.

But if you are still reading this, you may be interested to know the multibagger Diwali idea I am going to share. Don’t you?

Well, it’s festival time and I won’t waste much of yours.

My multibagger idea for this Diwali is to start a chain of gifting books that inspire.

I am starting with gifting one book that has inspired me to one person I know. I expect that person to then pay it forward by gifting one book to one of his or her friends, and the chain continues…till someone does not want to gift the book.

You don’t have to wait for someone to send you a book before you can begin.

Mahatma Gandhi said, “Be the change you want to see in this world.” So today I urge you to start the chain you want to be a part of. Anyone reading this can start his or her own chain. Trust me, you can’t even imagine how far the ripple effects of your small act can reach.

Pay It Forward

Lily Hardy Hammond wrote, “You don’t pay love back; you pay it forward.”

Ralph Waldo Emerson, in his 1841 essay titled Compensation, wrote, “In the order of nature we cannot render benefits to those from whom we receive them, or only seldom. But the benefit we receive must be rendered again, line for line, deed for deed, cent for cent, to somebody.”

Same is with knowledge. The only way you can pay back for the knowledge you have received is to pay it forward. Become a funnel, says Prof. Sanjay Bakshi, not a sponge.

One way to do that is to teach someone what you have learned. The other is to simply gift a good book.

But then, how does gifting a book make for a multibagger idea?

Well, knowledge, as you would have heard Warren Buffett say a lot of times, builds like compound interest. And because knowledge builds like compound interest, it gives you an exponential return. And what causes an exponential return makes for a multibagger over time.

Now, when you get a book as a gift, and you read it, it adds to your knowledge. And when you pay it forward by gifting a book to someone else and that person reads it, it adds to his/her knowledge. Over time, as a society, we get more knowledgeable and hopefully wiser. And that’s the idea of starting this chain.

So this Diwali, read a book…gift a book…and spread the light of wisdom all around you.

Anshul and I wish you a very happy Diwali and prosperous New Year.

P.S.: To ensure that this movement benefits maximum number of people, gift the book to someone who isn’t part of this already. So Anshul and I, by default, shouldn’t be in your chain.

Note: If you were to buy your books for gifting by clicking on the image below (or through this link), Amazon would pay me a small commission. The books won’t cost you any extra. And then I will give away 100% of the commission for the betterment of the under-privileged.

Safal Niveshak Stream – October 26, 2016

Note to Readers: In Stream, we suggest worthwhile reading material on a variety of topics, not all of which are directly related to investing. Some of the articles require you to be paid subscriber of those sites. However, it is often possible to read such articles by going to Google News and searching for the article’s title.

Some nice stuff we are reading, watching, and observing during the middle of this week…

Life/Learning

(2100 words/9 minutes read): Do you know the three important life skills nobody ever taught you? Please don’t take it personally, be open to changing your long and dearly held beliefs and the most important one – get comfortable with uncertainty…

When something tragic happens and you become horribly hurt, as much as your pain has you absolutely convinced that this must be about you, remember that hardship is part of choosing to live, that the tragedy of death is what gives meaning to life, and that pain has no prejudice — it afflicts us all. Deserving or not deserving isn’t part of the equation.

When you decide to change careers, there’s no one there telling you which career is right for you. When you decide to commit to someone, there’s no one telling you this relationship is going to make you happy. When you decide to start a business or move to a new country or eat waffles instead of pancakes for breakfast, there’s no way of knowing — for certain — if what you’re doing is “right” or not.

Developing the ability to simply do things for no other reason than curiosity or interest or hell, even boredom — the ability to do things with no expectation for result or accolade or productivity or fanfare — will train you to better make these big ambiguous life decisions. It will train you to simply start on something without knowing where in the hell it’s going.

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5 Ways to Create Luck in Investing and Life

A wise man once said, “I am a great believer in luck. The harder I work, luckier I get.”

Believers in this saying usually belong to the meritocratic school of thought. They claim, “If you’re good, you don’t need luck.”

If you’re successful it’s a natural human tendency to assume the credit for your success. After all, you must have worked hard for it and you surely deserve it. But when I think of my life, I have seen and met many individuals for whom, in spite of working extremely hard, success remained elusive.

Goes with saying that I have also met those who achieved great heights with relatively much lesser effort. These are the people who manage to attract much more than their fair share of luck. Usually, we look down on such people with some envy and disdain. It’s assumed that any success founded on an element of luck is inherently undeserving.

Do you know someone who always manages to find himself in the right place at the right time? Before you label him as lucky, ask yourself – do you think his luck is out of pure randomness? Perhaps he has a knack for arriving at the right place and at the right time.

Common sense tells us that luck can’t be controlled and it’s all about chance and probability. But what if someone told you that there was a way to control luck? Not in an esoteric way but in a rational way? If you feel like scoffing at such an idea, I would urge you to have an open mind. Just for the sake of curiosity.

Safal Niveshak Stream – October 22, 2016

Some nice stuff we are reading, watching, and observing at the start of this weekend…

Investing/Stock Market

Jason Zweig, The Wall Street Journal’s investing columnist, in an interview with Philip Tetlock, the co-author of “Superforecasting: The Art and Science of Prediction,” explore why amateurs can actually be better than experts at predicting the future, and what the experts can learn from it…

One reason is that experts sometimes know too much. I was talking once to John McLaughlin, former director of the CIA, about the end of the Cold War period, and he was remarking that the analysts who were slowest to recognize that East Germany was disintegrating were the people who had been on the case for 20 years.

It was the newbies coming in who got it pretty quickly. And there’s a lot of psychological evidence that attests to the power of preconceptions to grip us and make it hard for us to be timely belief updaters. So sometimes knowledge is actually an impediment. Another big factor is that there is a large amount of uncertainty in the world. So no matter how smart you are, it isn’t going to give you a lot of traction.

[Read more…] about Safal Niveshak Stream – October 22, 2016

Video Series: Investing Lessons From Occam’s Razor

It’s a human tendency to address a complex problem with a complex solution. And when it doesn’t work, man starts looking for an even more complex solution.

In an uncertain world, seeking complexity is a big error. Complex problems do not always require complex solutions. Overly complicated systems like financial markets are not only difficult to comprehend but easy to exploit and possibly dangerous.

In investing, less is more.

Warren Buffett, in his 2004 letter to shareholders, wrote…

Last year MidAmerican wrote off a major investment in a zinc recovery project that was initiated in 1998 and became operational in 2002. Large quantities of zinc are present in the brine produced by our California geothermal operations, and we believed we could profitably extract the metal. For many months, it appeared that commercially-viable recoveries were imminent. But in mining, just as in oil exploration, prospects have a way of “teasing” their developers, and every time one problem was solved, another popped up. In September, we threw in the towel.

Our failure here illustrates the importance of a guideline – stay with simple propositions – that we usually apply in investments as well as operations. If only one variable is key to a decision, and the variable has a 90% chance of going your way, the chance for a successful outcome is obviously 90%. But if ten independent variables need to break favorably for a successful result, and each has a 90% probability of success, the likelihood of having a winner is only 35%. In our zinc venture, we solved most of the problems. But one proved intractable, and that was one too many. Since a chain is no stronger than its weakest link, it makes sense to look for—if you’ll excuse an oxymoron—mono-linked chains.

Safal Niveshak Stream – October 19, 2016

Some nice stuff we are reading, watching, and observing during the middle of this week…

Investing/Stock Market

The long run is just a collection of short runs, writes Morgan Housel…

…value is ultimately created in the long run. That’s where scale takes off and compounding works its magic – over years and decades, not months and weeks.

The key is recognizing that the long run is just a collection of short runs, and capturing long-term growth means managing the short run effectively enough to ensure you can stick around for a long time.
In 2011, Seth Klarman explained the psychology necessary to be a good value investor, in an interview that he did with Charlie Rose. In this interview, Klarman says, “Investing is the intersection of Economics and Psychology.” He added…

The economics, the valuation of a business is not that hard. The psychology, how much do you buy, do you buy at this price, do you wait for a lower price, what do you do when it looks like the world might end. Those things are harder.

[Read more…] about Safal Niveshak Stream – October 19, 2016

What Buses Taught Me About Stocks

When I was studying in College in Mumbai, I heard a saying from my friends about BEST buses.

“You should never run behind a bus because if you miss one, there’s always the next one coming in few minutes.”

And it was quite true because I don’t remember waiting at any bus stop for more than 15-20 minutes ever in Mumbai for whatever period I stayed there.

It’s funny that later I found the same analogy being used in the context of stock market. Occasionally, I visit few online stock discussion forums, not for fishing new ideas but just to see what’s keeping people busy these days.

In one such forum an investor argued, “If my stock seems overpriced, I sell it even if it’s a good business to own. I’ll buy it again when it comes down.”

“What if it doesn’t come down?” someone countered.

“Well, then I’ll buy something else,” the first guy reasoned. “There’s always the next stock to buy in the share market. Isn’t it?”

Now, that reminded me of Mumbai’s BEST buses. I thought of naming it the “Mumbai BEST Effect”. Don’t worry, it’s not really an official psychological bias. But just for the fun of it, I coined the term.
[Read more…] about What Buses Taught Me About Stocks

Safal Niveshak Stream – October 15, 2016

Some amazing stuff we are reading, watching, and observing at this start of this weekend…

Investing/Stock Market

If I could reveal just one secret of sensible, successful investing (which isn’t a secret, by the way), it would be…
Buying stocks when the market collapses is far harder to do than to imagine. But the great economist — and equally great investor — John Maynard Keynes waded into the wake of the Great Crash of 1929, when US stocks fell by more than 80% from peak to trough. His experience should teach all investors the importance of preparation, courage and patience…

Keynes understood, as did his contemporary, the American value investor Benjamin Graham, that bear markets are so unpredictable that reliably sidestepping them is nearly impossible — and that the pain of losing money is nearly unbearable.

Still, Keynes knew, barging into bear markets to buy, rather than trying to sidestep them, is the way to prevail. Since, over the long run, stocks tend to go up more than they go down, one of the greatest advantages an investor can have is the gumption to buy stocks aggressively in falling markets.

[Read more…] about Safal Niveshak Stream – October 15, 2016