Blog on Value Investing | Safal Niveshak

Latticework of Mental Models: Switching Costs

How many times in last 6 months have you bought something from any of the these websites –

Flipkart
Amazon
Snapdeal

In my case I have used all three, at least once, in last 6 months. With two infants at home, my wife’s favourite online shopping destination is firstcry.com these days. But when it comes to buying diapers, I order from Amazon. Why? Whichever website offers better discount, we go for it. I am not loyal to any particular online store.

Now let me ask you another similar question. How many times have you switched your bank in last 6 months?

In last 1 year? Or in last 5 years?

Well even if another bank comes with an offer of higher savings interest rates, how many people actually take the pains of shifting all their cash and bank deposits to another bank? Very few I guess. My father hasn’t changed his bank in last 30 years.

But why is it that we change our online shopping stores in the blink of an eye but never really change our banks. Even credit cards or demat brokers don’t see too much churning in their customers base. If you talk to bankers, you’ll find that the average turnover rate for deposits is around 15 percent, implying that the average customer keeps his or her account at a bank for six to seven years.

Poke the Box: Choose Must

Let’s Start with Safal Niveshak
As Mr. Market behaves like a drunkard trying to get on a horse, here’s time to revisit some old posts dealing with how to behave during a stock market turbulence like we are seeing now –

Simple thoughts on how to deal with stock market turbulence.
Stock prices may be falling, but the stock market is getting an expensive place. Intrigued? Read this post.
Your 10 big questions on the stock market crash answered.
An old, but highly relevant presentation on the return of uncertainty, and how you can deal with it.
Curse of the bull market is back to haunt investors.

Latticework of Mental Models: The Bystander Effect

“Madness is a rare thing in individuals – but in groups, parties, peoples, and ages it is the rule.” ~ Friedrich Nietzsche

Just after 3 a.m., March 13, 1964 in New York City, Catherine Genovese, a 28-year old woman, was stabbed to death in a parking lot in front of her apartment complex. Catherine’s murder story could have drowned in the middle pages of most newspapers like many other crime stories, except that it didn’t.

Catherine’s murder wasn’t a quick, muffled death. It had been a long, loud, tortured, public event. The killer had chased and attacked her in the street three times over a period of thirty-five minutes before his knife finally silenced her cries for help.

Shockingly, thirty-eight people, all in the surrounding apartments, witnessed at least one of her killer’s three attacks from the safety of their apartment windows for 25 minutes without calling the police.

The story has since been thoroughly debunked, a case of sensational reporting, but at the time it was written it led to intense interest in the phenomenon from psychologists. Even if there is a ten percent truth to above story, it’s a baffling account of a crime, not because it was a murder, but because “good people” failed to call the police.

Why didn’t the neighbours help? Were they indifferent? Frightened? Why should they be afraid of calling the police from the safety of their own homes? Has the violence on TV and movies made people so insensitive? Was it the beginning of a new epidemic known as large scale social apathy?

Interview with the witnesses revealed none of these explanations was the real reason behind people’s inaction.

Poke the Box: Don’t Set a Bad Goal

Let’s Start with Safal Niveshak
Just in case you missed any of this on Safal Niveshak in the last week…

In investing, knowledge is cumulative and the relation between effort and results is nonlinear, so focus on the process and keep practicing the art of investing.
For investors, like airline pilots, the job entails hours of boredom punctuated by moments of terror. If you can stomach the stock market turbulence you’ll end up with very satisfactory results over long term.

Book Worm
Derek Sivers is the perfect example of what one might want to call as an accidental entrepreneur.

He was a musician who simply wanted to sell his music CDs online. In 1998 the internet was still picking up and e-commerce was pretty much an unknown phenomenon. So Derek started his own website to sell his music CDs online which, to his utter surprise, grew into a multi-million dollar business. He eventually sold his business, CDBaby.com, for $22 million.

Derek’s approach to business is very unconventional but makes a lot of sense. He has compiled his business philosophy in a small book called Anything You Want. It was an absolute treat to read this book. I just couldn’t put it down and ended up finishing this 100 page book in one sitting.

How to Deal with Stock Market Turbulence

“Ladies and gentlemen, please fasten your seatbelts; the captain has just announced that we will be encountering some unexpected turbulence.”

I hate hearing this phrase whenever I am flying, but there is no way an airplane can completely avoid turbulence (unless it is standing still in a hangar). When flying, captains don’t choose the route where there will be fewer clouds or less turbulence. Instead, they choose the safest, fastest way to get their passengers where they need to be. This, more often than not, means hitting a bit of unexpected turbulence.

Now, not unlike a flight, any journey you embark on is undoubtedly going to be a bumpy one. And investing in the stock market is not any different.

A lot of people fear stock market crashes and ‘unexpected’ turbulence like we are seeing now. But if your investment plan will only succeed if there is no turbulence at any time, it’s probably not a very good plan. If you follow a sound process, you need to embrace the turbulence, which I believe is a better option than avoiding it, if you actually want to get somewhere in your investment journey.

Poke the Box: Practice Deliberately

Let’s Start with Safal Niveshak
Just in case you missed any of this on Safal Niveshak in the last week…

How to create your circle of competence. A video from Mastermind Value Investing Course.
Latticework Series: Another mental model from psychology – Reason Respecting Tendency.

Book Worm
A lot of professors give talks called ‘the Last Lecture’ reflecting on what matters most to them and what they’d like to pass on. in September 2007 computer science professor Randy Pausch delivered a last lecture called ‘Really Achieving Your Childhood Dreams’. Ironically, it really was his last lecture, as this youthful, energetic and cheerful man had just been diagnosed with pancreatic cancer and had only months to live.

His lecture video soon went viral on the internet and it was later adopted into a book titled The L ast Lecture. Let me share some of the things which I learned from this book.

I liked the idea of ‘head fake’ introduced by Randy in his book. He writes –

“There are two kinds of head fake. The first is literal. On a football field, a player will move his head one way so you’ll think he’s going in that direction. Then he goes the opposite way. It’s like a magician using misdirection. Coach Graham used to tell us to watch a player’s waist. “Where his belly button goes, his body goes, “ he’d say.

The second kind of head fake is the really important one – the one that teaches people things they don’t realize they’re learning until well into the process. If you’re a head fake specialist, your hidden objective is to get them to learn something you want them to learn.”

Life 2.0: Sugar – The Sweet Killer

Sugar should be treated like an illicit drug, a kind of legal form of heroin, a dark force to be avoided, and a substance whose use leads to physical ruin.

“My God! It’s everywhere!” I almost blurted out while scanning the food section in a supermarket in an attempt to find at least one product which didn’t have sugar in it.

If you thought that sugar is mostly in candies and desserts, you are too naive. Tomato sauce, yogurt, dry fruits, corn flakes, and bread – sugar is added in all of these. I realized that it’s difficult to find any processed food item which doesn’t contain sugar.

I suspect that even the shampoos and the soaps have sugar in it. You know, just in case it goes in your mouth while bathing, they don’t want to miss that one chance to feed you sugar.

And do you know the biggest disguise used by processed food industry to hide sugar is the term – low fat. Products labelled “low-fat” could still contain, and usually do contain, a lot of sugar. And remember, it’s not just fat that makes your fat. Sugar is the biggest culprit in making obesity an epidemic.

Am I complaining too much? Let me change the mood for a bit. Time for some fun trivia.

Did you know that until few hundred year ago, sugar used to be a very expensive item? In fact, it was considered a fine spice and was only available to rich. But from about the year 1500, technological improvements turned sugar into a much cheaper bulk commodity.

Ironically, sugar was imported by Greeks and Romans for its medicinal properties. When it was scarce and expensive, it was a fine spice. Now when it is abundant and cheap, it has turned into a fine poison.

Sugar is slower to impact our health (as we don’t die from an overdose right away), and it’s that slow destructive process that is the most dangerous. Unfortunately, most people don’t know the damage until it has already been done (diabetes for example).
[Read more…] about Life 2.0: Sugar – The Sweet Killer

Latticework of Mental Models: Reason Respecting Tendency

Next time when you approach an ATM machine and find a queue in front of it, try this hack – tell the person in front of the queue “Excuse Me. May I go before you because I have to withdraw money?”

I am sure you haven’t tried this before, neither have I. But at first look it sounds like a lame idea. Why would they let you go ahead unless you have a genuine reason. Isn’t withdrawing money a redundant excuse? Isn’t it obvious that everybody in the queue is there to withdraw money?

But there might be some merit to above idea because in 1970s Harvard psychologist Ellen Langer conducted a similar experiment. She went into a library, where there was a long waiting queue in front of the photocopier, and approached the first person in the queue and asked, “Excuse me. I have five pages. May I use the Xerox machine?” That would probably infuriate a lot of people because everybody was there to make copies. Naturally most people refused to oblige to Langer’s request.

In the second part of the experiment she gave a reason while making a request. “Excuse me. I have five pages. May I use the Xerox machine, because I’m in a rush?” This time most people gave in to her request and allowed her to go ahead. This is reasonable because if people are in a hurry, you would often let them cut into the front of the queue. But then came the interesting twist in the experiment.

In the final part of the experiment she tried another approach, this time saying, “Excuse me. I have five pages. May I go before you, because I have to make some copies?” Now that’s a lame excuse. Everybody in the queue has to make copies, but surprisingly the result in this approach was amazing. She was allowed to pass to the front of the queue in almost all cases.

How to Create Your Circle of Competence (Video Post)

Here is a video I created for students of my Mastermind Value Investing Course.

I thought it would be useful for you as well, so sharing it here.

If you can’t see the video above, see here.

Tom Watson [the founder of IBM] said – “I’m no genius. I’m smart in spots and I stay around those spots.”

The entire idea about the Circle of Competence concept is to help you find your spots, which is so very important to your success as an investor. And that’s exactly what the above video will help you learn.

Poke the Box: Recycle Your Wealth

Let’s Start with Safal Niveshak
Just in case you missed any of this on Safal Niveshak over the last few weeks…

Safal Niveshak’s sent out the first annual letter to tribe members.
Mr. Huzaifa Husain, a value investor and Head of Indian Equities at PineBridge Investments, shares investing insights in his interview with Safal Niveshak.
Learn some new mental models in Latticework Series – Social Proof, Game Theory and Matthew Effect.
As we begin 2016, here are a few things one should aspire to do each day – Safal Niveshak’s eight rules to live by in 2016.

Book Worm
So how do you judge if a book is worth reading or not? One is, if you find a book which starts with a foreword from Warren Buffett. Don Keough’s The 10 Commandments of Business Failure is one such book.
[Read more…] about Poke the Box: Recycle Your Wealth