Blog on Value Investing | Safal Niveshak

Latticework of Mental Models: Complex Adaptive Systems

This article is the first of this new weekly series called ‘Latticework of Mental Models’, which will be authored by my friend and partner in writing the Value Investing Almanack, Anshul Khare. Anshul will write on various mental models – big ideas from various disciplines – which can help you think more rationally while analyzing businesses and making your stock investment decisions.

Let me share with you two very interesting case studies. The first one is set in the time of British India.

The British government was concerned about the number of venomous cobra snakes in Delhi. The government therefore offered a bounty for every dead cobra. Initially this was a successful strategy as large numbers of snakes were killed for the reward. Eventually, however, enterprising people began to breed cobras for the income. When the government became aware of this, the reward program was scrapped, causing the cobra breeders to set the now-worthless snakes free. As a result, the wild cobra population further increased. The apparent solution for the problem made the situation even worse. (Source – Wikipedia)

Now there is no way to validate the authenticity of above story but the second one is very recent and a true incident set again in the city of Delhi. It’s equally amusing.

Corporate Governance: How They Pay Themselves

The organizers of a tennis tournament needed money. They approached the CEO of a big company and asked him to sponsor the tournament.

“How much?” asked the CEO.

“One million,” said the organizer.

“That is too much money,” said the CEO.

“Not if you consider the fact that you personally can play one match, sit at the honorary stand next to a member of the presidential family and be the one that hands over the prize,” said the organizer.

“Where do I sign?” said the CEO.

That’s the power of incentives, you see. People do what they perceive as in their best interest and are biased by incentives.

Look at the brokerage business. Stock brokers have a strong incentive to get us to trade. They advise us what to buy and sell. Volume creates commissions. Investment bankers encourage overpriced acquisitions to generate fees. Investment bankers have every incentive to get initial public offerings (IPO) deals done, regardless of the company’s quality. Their compensation is tied to the revenues the deal brings in. Analysts are rewarded for helping sell the IPO. Brokers want to move the stock.

What did Groucho Marx say? “I made a killing on Wall Street a few years ago…I shot my broker.”

Similarly, in the medical field, some psychologists ensure themselves future income by telling their patients that another visit is required. And they don’t talk about the limits of their knowledge. Their careers are at stake. As American actor Walther Matthau said, “My doctor gave me six months to live. When I told him I couldn’t pay the bill, he gave me six more months.”
[Read more…] about Corporate Governance: How They Pay Themselves

Measuring the Moat – Part 1

“We like stocks that generate high returns on invested capital,” Warren Buffett told those in attendance at Berkshire’s 1995 annual meeting, “where there is a strong likelihood that it will continue to do so.”

“I look at long-term competitive advantage,” he later added, “and [whether] that’s something that’s enduring.”

According to Buffett, the economic world is divided into a small group of franchises and a much larger group of commodity businesses, most of which are not worth purchasing.

He defines a franchise as a company whose product or service (1) is needed or desired, (2) has no close substitute, and (3) is not regulated.

Individually and collectively, these create what Buffett calls a ‘moat’ – something that gives the company a clear advantage over others and protects it against incursions from the competition.

Poke the Box: There Are No Silver Bullets in Investing

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

I have opened admission to the 4th batch of my Mastermind Value Investing Course. Click here to know more and join now.
Read my interview with Niveshak, the monthly magazine released by the Finance Club of Indian Institute of Management, Shillong.
Aswath Damodaran shares two bitter truths of stock valuation, and how you can avoid them.
Read when I (almost) dumped Ben Graham’s The Intelligent Investor, and why you mustn’t.
Hilarious but honest take on how a lot of companies that come out with their IPOs really operate and sell their shares to public.

Mastermind Value Investing Course: 4th Batch Admission Now Open!

Admission to the fourth batch of The Safal Niveshak Mastermind – my eight-month online course in Value Investing – is now open, and will remain so for the next 10 days.

Click Here to Join Mastermind Now
My idea through Mastermind is simple – to help you with a simple, common-sense approach to successful investing, so that you can avoid the uncertainty and outlandish time you would otherwise spend doing it all alone.

I’ve lined up a lot of things that you will receive when you become a part of The Safal Niveshak Mastermind. Here’re the key ones…

50+ lessons and few hours of video classes that will help you learn the nuances of Value Investing and how you can apply it to create long-term wealth through stock investing.
Lessons on identifying moats and analyzing specific sectors to help you build your circle of competence.
Lessons on building a latticework of mental models – the Charlie Munger way – to make better investment decisions.
Lessons on calculating Intrinsic Values of stocks.
Lessons on creating a portfolio of high-quality stocks.
Exclusive Forum to participate in learning exercises and discuss practical examples so that you can gain experience in doing your own independent analysis.

Over the past few years, I’ve sifted through a mountain of amazing books, documents, lectures, websites, and the last twelve years of my personal experience as an investor – to ensure that I bring the best ideas and lessons for you in investing and building wealth.

The goal of The Safal Niveshak Mastermind Course is simple – To help you get richer every single day.

This is your opportunity to become a simpler, sensible, long-term investor, and avoid the uncertainty and outlandish time and pain that you would otherwise spend doing it all alone.

Here are the key features of the Course –

100% online, self-study course
Convenient 24X7 online availability of all lessons
Downloadable basic excel models and templates
Members-only Forum for discussions and performing exercises after each lesson
Quizzes to test your understanding of key concepts
Premium access to the exclusive Mastermind website

Now, if you are willing and ready…

Let Me Offer You a Deal
The Safal Niveshak Mastermind, with all its invaluable contents and benefits as I have mentioned above, is priced at Rs 12,500/- (incl. taxes).

However, if you are among the first 100 subscribers, you can claim an early-bird discount of Rs 1,000.

Click Here to Join Mastermind Now

By the way, here is what a couple of Mastermind students have to say about their experience with the Course…

I am very humbled by Vishal’s approach in the Mastermind Value Investing Course. The course is created to strengthen us in our investment skills and techniques, allowing individuals to know which stocks are fundamentally sound.

One thing that really differentiate the Mastermind course from the other investing courses is the emphasis and build up on the mindset of an investor which is really very important. I highly recommend anyone who wants to build his wealth in a wise way to be part of Vishal’s Mastermind community.

~ Sean Seah

This is one of the best courses I have ever done. As a true value investor, this is one of the best investments I have made. I thoroughly enjoyed the course and would be happy to recommend the course to anyone who is interested in value investing.

Your course is the true example of ‘The more you learn, the more you’ll earn.’

~ Antony Sakkariyas

If you have any further question(s) about the Course, please write to me at vishal@safalniveshak.com, or call me at +91-8097073918.

How to Handle Your Money

Benjamin Graham was one of the most successful investors who ever lived and remains the most influential investment thinker of all time.

He was the one who taught Warren Buffett the art of investing, and was also his first boss.

Graham worked on Wall Street for more than four decades, ran a market-beating mutual fund, taught finance at Columbia Business School and wrote two classic books on investing.

Security Analysis (1934) is still the bible for professional money managers. The Intelligent Investor (1949) is, in Buffett’s words, “by far the best book about investing ever written.”

In June 1955, Graham gave an interview on the basics of handling money. Almost 60 years have passed since then, but a large number of investing ideas that Graham talked about then, remain valid to this day.

The Story of a Fraud IPO

A tribe member shared this video with me some time back. This is a hilarious take on how a lot of companies that come out with their IPOs really operate and sell their shares to public.

You must understand Hindi to understand this video.

If you can’t watch the video above, click here.

The underlying lesson is simple – Avoid (most) IPOs.

Over my 12 years of experience in the stock market, I have rarely come across an IPO that was launched keeping in mind the interest of minority investors. In fact, a majority of them were launched in the form of legalized looting by company promoters and their investment bankers.

Warren Buffett says this on IPOs…

It’s almost a mathematical impossibility to imagine that, out of the thousands of things for sale on a given day, the most attractively priced is the one being sold by a knowledgeable seller (company insiders) to a less-knowledgeable buyer (investors).

If the stock market continues its climb and the IPO line lengthens, I’m afraid you’ll have plenty of opportunities to see that Buffett’s right.

My Interview with Niveshak

I recently did an interview with Niveshak (not related to Safal Niveshak), the monthly magazine released by the Finance Club of Indian Institute of Management, Shillong.

Here I present that interview verbatim for the benefit of tribe members.

1. We are aware that you are an avid blogger and some of us are regular readers of Safal Niveshak blog. If we ask you to tell our readers about the 3-5 most vital investing lessons what would they be?
Thanks for reading Safal Niveshak! It’s good that you have a word limit to this interview, because the lessons I have learned as an investor over the years would have run into several pages.

But if I were to list down just 3 of them, they would be –

Have extreme patience
on process, and outcome will take care of itself
that you will make (a lot of) mistakes

Talking about patience, it’s important for investors to understand that ‘t’ or time is the most important variable in the compounding formula, even more important than ‘i’ or rate of return. So, the more patience you have to sit on your investments (assuming they are good investments), the greater is the amount of wealth you can create. In fact, patience – the art of sitting quiet – is the most important skill an investor can have, even more important than knowing what stocks to pick.

Poke the Box: You Are Not God, So Beware of Hubris

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

I had an interesting email exchange with Prof. Sanjay Bakshi on the subject of valuations.
Warren Buffett teaches us not only how to invest well, but also to live well. In a recent post, I shared Buffett’s advice on how to succeed in life.
Holding cash in portfolio is one of the most painful decisions an investor makes, because we always want to remain in the thick of action – playing around with our cash. Read here how you should handle this painful situation of holding cash.
Buffett (again) on what an investor must look at while researching a business.

18 Lessons for Investors and Managers from Warren Buffett’s 2014 Letter to Shareholders

One of my favourite Warren Buffett letters is from 2014. The reason I find this letter so special isn’t just because it marked the completion of 50 years of Buffett being at helm at Berkshire, but also because it contained a bonus – Charlie Munger’s words of wisdom and vision for Berkshire over the next 50 years.

What follows below are 18 big lessons Buffett and Munger have outlined in the 2014 letter, which are relevant for both investors and corporate managers. Though I suggest you read the original letter in its entirety by downloading it from here.