A couple of announcements before I begin today’s post – 

1. Mastermind Value Investing Course Admissions: I invite you to join my premium, online membership and course in Value Investing – Mastermind – at a special discount of ₹2,000, available till 25th June 2024. Mastermind teaches a structured, step-by-step process of stock picking as practised by the world’s most successful investors. And it’s not just a course anymore, but an all-in-one membership to my most detailed value investing course, plus exclusive members-only content like special articles, ebooks, transcripts of my podcasts, notes from the books and other timeless resources I am reading, and curated content that I am consuming and learning from. Click here to know more about this session and join.

2. Rethinking Financial Freedom Masterclass: I am holding a 2-hour online session on the subject of “Rethinking Financial Freedom.” The session is free for Mastermind members. However, if you are not one, you can join the session by registering now. The session will be on Saturday, 29th June 2024, 8 to 10 PM IST, on Zoom. Recording will also be available after the class. Click here to know more about this session and join.

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Investing is often perceived as a game of selection. Pick the right stocks, and you’re on your way to financial freedom. The allure of discovering the next big thing, the company that will skyrocket and bring unimaginable returns, is powerful.

However, this perspective only captures part of the story. The stocks you choose not to own can have an even more significant impact on your success as an investor.

This counterintuitive notion underscores the importance of discernment and restraint in investment decisions.

I drew this illustration a few years ago, to explain the process of selecting the “right” businesses worth investing in for the long run –

Counterintuitively, this process also shows how the funnel helps you reject the “wrong” businesses – that do not pass either your circle of competence filter, or financial stability filter, or moat filter, or valuation filter.

The 100 (assumed) stocks you start with at the top of the funnel, are left with 20 at the end of it. This is because you choose to say ‘no’ to the remaining 80.

Warren Buffett remarked –

The difference between successful people and really successful people is that really successful people say no to almost everything.

Warren was talking about life in general, but this principle applies very well to investing. The difference between successful investors and really successful investors is that really successful investors say no to almost every business/stock.

By rejecting the majority of investment opportunities and focusing on a select few high-quality businesses, you can avoid the pitfalls of overexposure and poor investment choices.

This is also a matter of patience. The market always presents opportunities that seem too good to pass up. However, not all opportunities are worth pursuing. By exercising patience and waiting for the right opportunities, you can avoid the trap of impulsive decisions that often lead to suboptimal outcomes.

Patience also involves the willingness to hold on to cash when there are no compelling investment opportunities. This goes against the common belief that one must always be fully invested to maximize returns. In reality, holding cash can be a prudent strategy during periods of market exuberance or uncertainty, allowing investors to take advantage of opportunities when they arise.

Not to forget that such behaviour – of saying no to most things – is also a test of your independent thinking, which is a great character attribute of a good invetsor. When you follow the crowd, it can lead you to herd mentality, where investors make decisions based on popular opinion rather than sound analysis. Look no further than the Twitter, Instagram, or YouTube apps on your mobile phone for proof.

Independent thinking involves conducting your own research and due diligence before making any investment decision. It means questioning the prevailing narratives and being skeptical of big promises.

When you develop a disciplined investment process and stick to it, you can avoid the traps of herd mentality and make more informed investment decisions.

Saying ‘no’ also aligns well with long-term thinking. Investing is not about getting rich quickly, but about building wealth over time. This requires a long-term perspective and aligning investment decisions with one’s financial goals. Chasing short-term gains by saying ‘yes’ too often, leads to dud investments that can jeopardize your long-term financial security.

Before I end, let me say it again that the power of saying no cannot be overstated, in life or investing. Sticking with investing, it involves –

• Avoiding bad businesses,
• Exercising patience,
• Thinking independently,
• Aligning with your long-term goals,
• Learning from mistakes,
• Building a margin of safety, and
• Maintaining emotional discipline.

When you focus not just on the stocks you own but also on the ones you consciously choose not to own, you can significantly enhance your chances of investment success.

Bruce Lee got it dead right when he said –

It is not daily increase but daily decrease, hack away the unessential.

This is one of the most critical lessons I have learned and practiced in my life and as an investor. And that has helped me simplify my life considerably and brought me tremendous peace.

A couple of announcements before I begin today’s post – 

1. Online Value Investing Workshop: Admission is now open for the June 2024 cohort of my online Value Investing workshop, which has already been taken by 1500+ students since I launched it two years ago. Here is what you get when you sign up for this workshop –

• 30+ hours of pre-recorded lectures and Q&A videos
• 60+ questions answered in the Q&A
• Live Q&A session of 3 hours on Sunday, 23rd June 2024 (7 PM IST Onwards)
• One-year unrestricted access to the entire content
• 7 readymade screens to filter high-quality stocks
• Stock analysis spreadsheet (otherwise priced at ₹1999)

I am accepting 100 students for this cohort, and now have just 20 seats remaining. Click here to read the details of the workshop and sign up.

2. The Sketchbook of Wisdom: Special Discount until 15th June 2024: Buy your copy of the book Morgan Housel calls “a masterpiece.” It contains 50 timeless ideas – from Lord Krishna to Charlie Munger, Socrates to Warren Buffett, and Steve Jobs to Naval Ravikant – as they apply to our lives today. Click here to buy now at a special discount (available only till 15th June 2024).

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It was mid-1974.

Fred Smith, the founder of FedEx had a problem at hand. FedEx was a young company, just three years old, and primarily due to rising fuel costs, found itself millions of dollars in debt and on the brink of bankruptcy.

As per demands from oil companies that provided fuel to run FedEx’s planes, every Monday, the latter was required to prepay for the anticipated weekly usage of jet fuel. It was one of those Fridays and FedEx had just about $5,000 in its bank account, while it needed $24,000 for the jet fuel payment for the coming week.

[Read more…] about When to Bet Big in Life and Investing, and When Not To

A couple of announcements before I begin today’s post – 

1. The Sketchbook of Wisdom: Special Offer until 20th April 2024: I have published an abridged version (44 pages) of my upcoming book, “The Worldly Wisdom of Charlie Munger.” This version contains 30 of his best lessons on life, decision-making, and investing. It’s not available for sale separately as of now, but you can get it for free until 20th April 2024 with your order of The Sketchbook of Wisdom. Read more and order here.

2. Value Investing Meetups in Dallas and New York: I am organising in-person meetups on Value Investing in –

• Dallas (US): Saturday, 27th April
• New York (US): Saturday, 11th May

If you are in or around these cities and wish to attend, kindly register here.

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Here is the latest issue of The Journal of Investing Wisdom, where I share insightful stuff on investing I am reading and thinking about. Let’s get started.

A Thought: Beware the Winning Streak

Howard Marks of Oaktree Capital, wrote this in his seminal book The Most Important Thing –

In bull markets – usually when things have been going well for a while – people tend to say ‘Risk is my friend. The more risk I take, the greater my return will be. I’d like more risk, please.’

The truth is, risk tolerance is antithetical to successful investing. When people aren’t afraid of risk, they’ll accept risk without being compensated for doing so… and risk compensation will disappear. But only when investors are sufficiently risk-averse will markets offer adequate risk premiums. When worry is in short supply, risky borrowers and questionable schemes will have easy access to capital, and the financial system will become precarious. Too much money will chase the risky and the new, driving up asset prices and driving down prospective returns and safety.

Risk, which Marks and Warren Buffett have often defined as losing significant amounts of money and permanently, often moves in the same direction as valuations.

In other words, risk increases/decreases as valuations rise/fall. At the same time, high valuations imply weak prospective returns, while depressed valuations imply strong prospective returns. Consequently, both Marks and Buffett suggest that risk is lowest precisely when prospective returns are the highest, and risk is highest precisely when prospective returns are the lowest.

Economist and investment strategist Peter Bernstein said –

The riskiest moment is when you are right.

In much of life, doing things right over and over again is a sign of skill. Consider chess players or expert musicians. They rarely make a wrong move or hit a wrong note. Also, the skill of one good musician does not cancel out the skill of other musicians, that is, it does not make it harder for others to be equally good. This is not true of financial markets. ‘Skilled’ investors’ actions cancel each other out as they quickly bid up the prices of any bargains, which makes luck the main factor that distinguishes one investor from another.

Skill in investing shines through over the long term, but a streak of being right in the short term can make anyone forget how important luck is in determining the outcome.

Watch out for that streak of being right, dear investor.

[Read more…] about Beware the Winning Streak