Blog on Value Investing | Safal Niveshak

Latticework of Mental Models: The Zero Price Effect

Would you buy something if it were discounted from Rs. 500 to Rs. 200? May be.

What if it was discounted from Rs. 500 to Rs. 10? Possibly.

How about if it were discounted to zero? Absolutely!

Getting something for free feels good. Isn’t it?

But don’t get too excited. Although the ‘cost of free’ is zero, it’s also a source of irrational behaviour. Remember those pile of free key chains, free pencils and notepads lying at some corner of your house? Well that pile may be harmless but there are other situations where this irrational affinity for FREE stuff can cause us to make bad decisions. The Zero Price Effect says that we often pay too much when we pay nothing.

I regularly give in to this zero price effect in my day to day decisions. Amazon offers zero shipping charges if I make a minimum purchase of Rs. 499. Every time I order a book which costs less than 499, I end up buying another book (which I don’t plan to read) just to avail the free shipping offer. I just can’t let go off the free offer.

So what explains our unusual love for FREE! stuff?

Latticework of Mental Models: Deliberate Practice

There are moments in life when you are in awe of someone so much that you wish to be in that person’s shoes, doing what he or she is doing.

For that matter, everybody aspires to be really good at something. It could be a sport, an art, playing a musical instrument or any other activity like reading, painting or drawing. When we see someone who displays an extraordinary talent in any of these fields, it leaves us awestruck and inspired.

So how do you become good at something? How do you improve your performance in a chosen activity?

The most popular strategy among people is to practice by mindlessly repeating an activity over and over. Many performance coaches and motivational gurus tout this idea of working incessantly for long and hard hours. Practice makes perfect – is the mantra they preach. Ten thousand hours of practice, they say, is the key to world class performance.

Latticework of Mental Models: Naive Realism

Let me start by inviting you to have an intellectual and emotional experience. Take a few seconds and stare at the picture below.

**Image-1 (Source: The Seven Habits of Highly Effective People by Stephen Covey)**

Observe closely. What do you see?

You’d probably see a woman who is looking away from you. You may notice that she is wearing a necklace. She seems to have high cheekbones, long eyelashes, and a pointy nose.

Now I ask you to take your eyes off her and focus on the second picture below –

**Image-2 (Source: The Seven Habits of Highly Effective People by Stephen Covey)**

What do you see now? Another woman? What does she look like? How old do you think she is? What is she wearing? In what kind of roles do you see her?

You probably would describe this second woman as beautiful as the first one. You might guess that she is about 25 years old and fashionable. In fact, the second image looks like a lower resolution version of the first image.

Latticework of Mental Models: Antifragility

As a kid, one of the most fascinating thing I ever witnessed while conducting my own zoology experiments, was to watch a lizard leave it’s tail behind.

I am sure many of you must have found it intriguing that a lizard, if threatened, can voluntarily let go of its tail. It’s common in many lizard species to shed a part of their tails. It’s a survival mechanism. The trick allows these reptiles to escape when captured by the tail by a predator. The detached tail writhes and wiggles, creating a deceptive sense of continued struggle, distracting the predator’s attention from the fleeing prey animal.

It’s a marvellous self-preservation mechanism that evolution has given to lizards. And what’s more fascinating is that the lizard can grow that tail back in a matter of few weeks. What a robust way to deal with loss!

If that sounds cool then you must also know about Hydra. It is a serpent-like creature from Greek mythology. Hydra grows two new heads every time you cut one off. In Indian mythology, there is a similar character called Raktavija. A demon (asura) who who has the magic boon that every drop of blood shed from his body gives rise to another Raktavija (literally the blood borne).

These apocryphal characters are very important metaphors to improve our understanding about fragility and robustness.

What is fragile? Something which breaks or disintegrates easily when subjected to a stress or disorder. Isn’t it?

True Wealth Workshop 2016: Want to Meet Us In Your City?

After covering nine tier-2 Indian cities in 2014, we plan to conduct the second round of Safal Niveshak’s True Wealth Workshop starting this September. This is going to be a three-hour Workshop in a non-metro city, through which we plan to help people learn the most important rules of value investing, personal finance, and long-term wealth creation.

So if you wish to meet us in your city, please click here to fill this registration form.

As for the fee of the Workshop, we would let the participants fix the same. So, if you attend the Workshop, as a beneficiary, whatever you decide was the worth of the Workshop – anything ranging between Rs 0 and Rs 3,000 – you can pay us.

We are also looking for volunteers to help us arrange the Workshop in their respective cities. If you represent an organization and would like us to conduct the Workshop at your office premises, please email with your request at vishal[at]safalniveshak[dot]com.

Safal Niveshak’s journey that started five years back now craves for a wider path as more tribe members join in. And we will be happy to join you on this path of becoming simple and sensible with your hard-earned money.

Latticework of Mental Models: Straw Man Fallacy

A policeman, while on his usual late night patrol, finds a well dressed gentleman squatting under a streetlight.

“Is there a problem sir? Are you looking for something?” Policeman asked the man.

“I lost my car keys officer.” Replied the gentleman.

“Do you need some help?”

“Thanks. I sure could use some help. It’s been an hour since I lost my keys and can’t find them.”

So they both started looking under the streetlight together. After about half an hour, the policeman asks, “Where exactly did you lose your keys?”

“Oh, I actually lost them in the park, half a kilometre down this road.”

“Then why in the world are you searching here under the streetlight?”

“Because this is where the light is.” The gentleman replies with shrug and a look of obviousness on his face.

This might look like a party joke but it has important clues about human behaviour. Please allow me to explain.

Value Investor Interview: Rajeev Thakkar – Part 2

Note: This interview was published in the January 2016 issue of our premium newsletter, Value Investing Almanack. To gain instant access to more such interviews and other interesting stuff on value investing and business analysis, click here to subscribe now.

Read Part 1

SN: Is there a mechanism in Mutual Funds where you repay cash to shareholders if you’re not finding opportunities for a long period of time?

RT: Some people do it by the way of dividend payouts. Other mechanism is that you can shut the doors for the inflows. What you can say is that I’m not getting opportunities now so I wouldn’t be buying anymore. Lot of people have done that also. So you shut the door and say I’ll not take any more inflows from this date onwards. And you can open it as and when the opportunity arises. You can keep it shut for may be 3-6 months or 1 year or whatever period you deem fit.

SN: Being a fund manager, what are your thoughts on indexing?

RT: Indexing has a very important role to play but you can’t overemphasize it. People typically fall into two categories. One category of people are completely pro indexers. And the other is people who are completely against indexing. I am someone who is in between. So at one side indexing acts as a huge control on excessive fund management fees. Since indexing is a low cost mechanism for people to participate in equity markets. It’s a fact that if all the money were to be managed by professional managers the aggregate return that they give to investors will be market return minus fees. They can’t outperform themselves as a group. So mathematics is fine and I appreciate indexing from that point of view.

Value Investor Interview: Rajeev Thakkar – Part 1

Rajeev Thakkar possesses over 15 years of experience in various segments of the Capital Markets such as investment banking, corporate finance, securities broking and managing clients’ investments in equities. He is currently the Director and Fund Manager at PPFAS Mutual Fund.

Rajeev’s tenure at PPFAS began in 2001. His passion for researching and analysing the fundamentals of companies was evident from the very beginning and very soon he was heading the Research division at PPFAS. His responsibilities soon expanded as he was appointed the Fund Manager for the flagship scheme of the Portfolio Management Service, titled “Cognito” in 2003.

Rajeev is a strong believer in the school of “value-investing” and is heavily influenced by Warren Buffett and Charlie Munger’s approach. In his interview with Safal Niveshak, Rajeev shares his wide investment experience and how investors can practice sensible investment decision making.

Video Series: Latticework of Mental Models

We perceive this world through our five senses – sight, sound, touch, taste and smell. So our eyes, ears, skin, tongue and nose are the five receivers which help us make sense of the world around us.

Nature has designed each of our senses meticulously. In spite of that, if used individually, these five instruments are insufficient to help us function normally. That’s why for most of our routine activities we use combination of more than one sense organ. For example, walking requires use of eyes, skin and ear (for balancing), for communicating we use ears and tongue etc.

For most people who are passionate about learning, reading is a primary source of information. However, in reading you’re only using one instrument – eyes. These days, audio books is another popular and very effective medium to learn new things. In audio books (and podcasts), you’re again engaging only one sense – hearing.

In fact, for thousands of years, until the discovery of print medium, most human civilizations transferred their knowledge orally from one generation to other – their own version of audio books, if you will.

But what if you could engage both these senses together? Don’t you think the retention of what you learn would be much better?

Latticework of Mental Models: Inattentional Bias

“Where is it?” I asked my wife, while my eyes scanned the kitchen cupboard again. I was looking for the sugar jar. The plan was to impress her with my exceptional tea making skills which I acquired after watching few YouTube videos.

“It should be there. Right in front!” informed my wife from the other room.

“It’s not here. I can’t see it.” I again scanned all the shelves in the cupboard.

“Look again. I kept it there in the morning.” My wife sounded very sure about it.

“No! It’s not here. I am sure.” I confirmed while closing the cupboard. What happened next shouldn’t be surprising for you because most of you have experienced it before.

She came, opened the cupboard, grabbed the sugar jar which was obviously sitting right in front and handed over to me. I stood there flabbergasted. How could I miss it? What’s wrong with my eyes? Have I gone blind? It felt as if the jar manifested itself out of thin air. It was like…magic.

Haven’t you experienced something similar in your life? I see a smile on your face. 🙂

Now that embarrassing episode in the kitchen may look like a minor incident but it holds an important clue to a fascinating behavioural bias inherent in every human brain. It’s called Inattentional Blindness, which means not being able to see things that are actually there.