Investing Behaviour

What We (Don’t) Know

“Within infinite myths lies the eternal truth, who sees it all? Varuna has but a thousand eyes, Indra but a hundred, you and I, but two.” ~ Devdutt Pattanaik

“Accepting that you don’t know — and can’t know — what the future holds should be liberating, not frustrating.” ~ Jason Zweig

I was recently reading an old post by Jason Zweig titled I Don’t Know, and I Don’t Care.

Jason wrote about –

How he graduated from not believing in indexing and instead picking sector funds and small cap funds,
And then realizing that he was not good at fund-picking and that beating the market was amazingly hard,
And then starting to invest in index funds that he said liberated him from the feeling that he needed to forecast what the market was about to do,
And that gave him more time and mental energy for the important things in life.

If I were to chart out my own life as an investor, I am still at the first stage as described by Jason above. In fact, about six years back, I wrote about my reasons for not investing in index funds as I believed well-managed, low-cost, actively managed funds were a better bet for investors.

[Read more…] about What We (Don’t) Know

How to Deal With the Harsh Reality of a Stock Market Crash

Short practical advice (may skip) – If you cannot withstand losing a bit of your money in a stock market crash (where things easily go from bad to worse to brutal), please stay away from stocks. But if you are fine with the risk of losing some money in the short run in return of wealth creation in the long run, keep owing your good stocks and/or good mutual funds. Buy more (and keep buying) if you believe the quoted (now lower after the crash) prices offer great value in the long run. Then, once you are with your chosen good investments, just get going with other more important things in life like family, work, and self-development…and let go of the outcome of your investments. Accept that whatever happens, happens.

Slightly long theoretical advice (must read) – I read a nice article earlier today on dealing with life’s harsh realities – sharp fall in stock prices is one such reality for most investors – and here is an excerpt from the same…

…the only intelligent thing to do when such turbulent change occurs is for us to sit back and realize that we are only to be witnesses to change, and to respond to it rather than to react to it — much like we would watch a movie unfold on the screen and laugh at the funny bits and cry at the sad bits, while always knowing that what is happening before our eyes is unreal.

Modern quantum physics after Einstein also points us this way — it says that what occurs depends upon the observer, and not on what is observed. So, in effect, as a witness, I am free to choose my response, and therefore the reality I actually experience.

What Are You Afraid Of?

I am in Chennai for my Value Investing Workshop that happened yesterday.

After my session, I went to meet a friend in the evening. His residential society had organized a bicycle race for kids. I saw more than 50 kids out there jostling for space meant for not more than 10 cyclists. Worse, most of them were without a helmet.

Now, letting your child cycle without a helmet may be ten times riskier than feeding him a course of dangerous non-steroidal anti-inflammatory drugs. And a thousand times riskier than flying in an airplane.

Moving in the front seat of a car without a seatbelt (which most people, especially teens, do when the policeman is not watching) is hundred times riskier than many common and ‘scary’ diseases in India, like swine flu.

Yet we obsess about the low probability events and take big chances with the high probability ones. Why?

Investing and the Art of Stillness

This is the fourth issue of Outside the Box newsletter, and is authored by my friend Arpit Ranka.

In this post, Arpit talks about how we, as investors, need to embrace the good, bad, and ugly side of every investment thesis/strategy and be willing to live through all the seasons, if we have to stand a chance to succeed in the long run. Over to him.

The Art of Stillness
by Arpit Ranka

The noted English singer and songwriter John Lennon said, “Life is what happens while you are busy making plans.”

As an investor, I can tweak this thought to — “Investing is what happens when you are busy pursuing the next big investment idea.”

No doubt that ideation is a very integral part of any investment process but then equally central is to develop a mindset, which allows us to capitalize on the full potential of that investment strategy.

Remembering the 2008 Crisis, and A Few Lessons Learned

It seems like yesterday, but it was ten years ago. I was in the US for a conference and, on 15th September 2008, was visiting the Wall Street to check out the heart (maybe, the dark underbelly) of the global financial system.

I had just reached there after a visiting the site of the World Trade Center, which was tragically brought down on 11th September seven years ago.

Now, another tragedy was about to happen just five miles from where I was. This time it wasn’t about loss of lives but of livelihood.

Lehman Brothers declared bankruptcy and the world financial system was on the verge of collapsing. It was, and remains, the largest bankruptcy filing in the US history, with Lehman holding over US$ 600 billion in assets, supported by less than US$ 25 billion of own capital. That’s around 23-times debt to equity. In such a highly leveraged structure, a 4-5% percent decline in asset values would wipe out all capital, which it did.

Of Politics, Biases, and Investing

First, an update. I did my Value Investing Workshop in Bangalore yesterday, and received an overwhelming reponse…

The upcoming sessions are in Chennai (23rd Sept), Mumbai (30th Sept), and Hyderabad (7th Oct). If you wish to register for any of these, please click here.

Coming to this post, this is the third issue of Outside the Box newsletter, and is authored by my friend Ninad Kunder.

The 9 Biases of Value Investors

“The first principle is that you must not fool yourself — and you are the easiest person to fool.” ~ Richard Feynman

In the 1970s, two psychologists – Daniel Kahneman and Amos Tversky – proved, once and for all, that humans are not rational creatures. They discovered what we now know as “cognitive biases,” showing that humans systematically make choices that defy clear logic.

Now, having these biases and getting influenced by them is often not a bad thing. These have helped us survive for ages. Also, while we don’t always make decisions by carefully weighing up the facts, we often make better decisions as a result. This is applicable to most of what we do in life.

However, when it comes to investment decision making, our biases may get us into (big) trouble. What is more, the irony about these biases is that the more we read about them, the more we believe that we don’t suffer from them as much as others do.

In this second issue of Outside the Box newsletter, my friend Neeraj Marathe pokes a hole in this kind of thinking.

The Dangers of Persistence

Value Investing Workshop in Bangalore (9th Sept), Chennai (23rd Sept), Mumbai (30th Sept). Click here to register now. Few seats remain!

A few months back, during my lecture to a class of MBA students, I asked them to finish a sentence. The sentence was – “If you play a slot machine in a casino long enough, eventually you will ………” *

The class yelled out in unison “WIN!”

As most people reading this know, that is exactly the wrong answer. Slot machines are engineered to make everyone but the casino a loser in the long run. But MBA kids don’t know that, and they are never taught that. I assumed they confused the benefits of persistence with the actual odds of succeeding.

Anyways, I met a couple of my neighbours in the gym today, who smiled – as if mocking me – when I told them about my work that is to teach people to make lesser mistakes with their money and also learn to make sensible investment decisions for the long term.

What You Need to Succeed in Investing (Hint: It’s Not Genius Brain)

“Hey Vishal, have you read about how Albert Einstein lost so much money in the stock market?” asked my friend Ravi as we met for dinner over the weekend.

“Yes Ravi,” I said. “In fact, he lost most of his winnings from the 1921 Nobel Prize in the stock market crash of 1929.”

“Wow!” Ravi exclaimed. “And we are talking about one of the genius minds to have ever walked this planet.

“Right Ravi. And I’m sure you’ve also heard about Mr. Newton, who was wiped out while chasing the stock market bubble in 18th century England.”

“Yes Vishal, you only told me about Mr. Newton’s misdoings when we met a few months back.”

“Sometimes I fail to understand,” Ravi continued, “how men with such high levels of intelligence fail at such petty things as the stock market, even when you hear of investment stories about individuals who’ve made fortunes because of exceptional insights or sheer genius!”

“Because, my dear friend, the best rewards in investing don’t generally go to investors with the smartest brains but to those with the strongest stomachs.”

“Stomach? Are you serious?”

Process, Practice, Perseverance

Have you ever wondered why a doctor’s clients are called ‘patients’? Even a more interesting question, why do doctors call their work as ‘practice’?

Well, one of the reasons is that you can’t become a good doctor without practicing what you learn in textbooks. For that matter, any work done under any profession is nothing but practice. And that doesn’t exclude investing in the stock market.

I recently read a nice post from John Huber on his investment process. Here’s something John wrote that caught my attention –

…stop trying to read everything under the sun and get out there and actually start investing—start valuing companies, make investments, learn, repeat, etc…Whether you’re playing the piano, hitting a sand wedge, shooting a jump shot, riding a bike, or even driving a car—the way you learned was through repetition. The same can be said for valuation. Reading books is fine, doing case studies is better, but actually valuing companies and making investments—practicing—is the best way to learn.