Investing Behaviour

Admission Open: Safal Niveshak Academy of Stock Market Failure

“We learn wisdom from failure much more than from success. We often discover what will do, by finding out what will not do; and probably he who never made a mistake never made a discovery.” ~ Samuel Smiles

“Fools say that they learn by experience. I prefer to profit by others experience.” ~ Otto von Bismarck

If, like me…

You hold a PhD or post-graduation in making mistakes in the stock market – as an investor / trader / speculator
Some of your teachers in the stock market have had the following surnames – Mr. Blunder, Ms. Mistake, Mr. Error, Ms. Fault, Sir Omission, Mr. Hit and Miss, Ms. Oversight, Mr. Slip, Ms. Trip, Mr. Stumble, Ms. Mess, Mr. Misfortune, Mr. Downfall, Mr. Bite the Dust, and Mr. Lose Your Shirt.

…I welcome you to join the Safal Niveshak Academy of Stock Market Failure.

The idea of this Academy is to bring together all those who have attained graduation or PhD in making mistakes in the stock market (and I am one of those), so that…

We learn vicariously from the stock market mistakes others have indulged in and we haven’t (as yet)
We confess the blunders we have committed so that others may know what they must avoid

The Stock Market is Getting More Expensive

One of the most underrated but among the most valuable skills required to succeed in stock market investing is resilience i.e., the ability to properly adapt to stress and adversity – either in the market, or in the businesses one is owning.

How easily can you bounce back from a market crash? What would be your reaction to a sharp decline in your stocks’ prices? How many ‘surprises’ can you withstand in quick succession? How safe are your overall finances in light of extreme stress on the equity component of your portfolio?

These are extremely important questions you must ask yourself every time you are looking at your portfolio, or looking to spend cash to buy more stocks.

Surprisingly, despite its importance, resilience is least talked about by stock market investors and experts alike, and rarely considered an important mental model in investment decision making.

The Mother of All Investing Mistakes

What would you do if you had something coming at you at 110 km an hour and less than half a second to react?

Soccer goalkeepers saving penalty kicks face this situation often. While watching penalty kicks looks like a lot of fun for the audience, it’s often a tricky situation for the person facing the penalty i.e., the goalkeeper. He has to make a decision in less than a second and that too a decision on which the balance of his team’s fortunes hangs.

Penalty kicks are a great way to understand one of the biggest mistakes investors make. More on that later, but first let’s talk about the options in front of the goalkeeper saving the kick.

He has three choices available – He can dive left, dive right, or stays put.

Latticework of Mental Models: Status Quo Bias

Do you own a smartphone? Chances are that you’re reading this on a smartphone or a tablet.

One of the most interesting thing about these smartphones is that they allows you to customize everything – data usage, app synchronisation, phone encryption, even how loud you want the camera shutter to sound.

How many of these customization settings have you used? In my case – almost none!

Although I’m not technically challenged, but do suffer from, just like most of the other human beings, a cognitive bias.

Earlier in the latticework series, I wrote about Do Something Bias. It’s a cognitive bias where people get an urge to take action or make unnecessary decisions when ‘not doing anything’ is required.

Now let’s turn the table, and talk about a bias which is exactly opposite of Do Something Bias. It’s called Status Quo Bias. The tendency of people where they don’t do anything and continue to maintain the current state of affairs.

If we could boil down this cognitive bias to a more fundamental body of knowledge, it would be Physics. I am sure you must have heard of Newton’s laws of motion. The first law of motion states –

An object either remains at rest or continues to move at a constant velocity, unless acted upon by an external force.

This characteristic, called inertia, is exhibited by all physical bodies. And when it comes to human behaviour, this tendency manifests in the form of Status Quo Bias.

I Might Be Wrong

On the morning of the Battle of Waterloo in 1815, Napoleon Bonaparte smugly assured his generals – “I tell you Wellington is a bad general, the English are bad soldiers; we will settle this matter by lunchtime.”

Just before the Titanic was about to embark on its maiden journey in 1912, one passenger asked a ship’s agent for extra insurance on some valuables in her luggage. The agent replied, “Ridiculous. This boat’s unsinkable.”

Captain Smith himself was asked about the safety of the Titanic. He answered – “I cannot imagine any condition which would cause a ship to founder. I cannot conceive of any vital disaster happening to this vessel. Modern shipbuilding has gone beyond that.”

[Read more…] about I Might Be Wrong

How to Live and Invest Without Failure

Early this year, a close friend of mine, Rajiv, had his eyes set on finishing the Mumbai half-marathon (approx. 21 km) in less than 180 minutes.

So, crossing the finish line in 160 minutes was something of a major triumph for him. He was genuinely happy.

One another friend, Sameer, ran the same distance and recorded the exact same time of 160 minutes. However, this guy wanted to cover the distance in 150 minutes or less. Consequently, he was shattered.

He described his experience as a massive failure and as a result, his mind and body language were both a reflection of his belief (the belief that he had failed).

Sameer could have labelled his run many things but he chose ‘failure’.

Lecture on Value Investing at Goa Institute of Management

I recently delivered a lecture on Value Investing and Behavioral Finance at Goa Institute of Management.

Click here to download the presentation slides PDF (7 MB file), or read it in the panel below.

I have been extremely fortunate to be able to share my thoughts and experience with budding minds.

Please share this presentation with the young around you. Even if you can enlighten one mind and get him/her on to the right path of managing his money and behaviour sensibly, it would be a great job done.

By the way, on Safal Niveshak’s 5th birthday, I had invited tribe members to subscribe to Value Investing Almanack, promising to give away 100% proceeds to Nirvanavan Foundation to part-fund the purchase of a minibus to ferry kids from a few villages in rural Rajasthan to their schools.

I’m happy to report that that bus has arrived, and they call it the ‘Dream Bus’…and rightly so, as you can see from the smiles all around…

Here’s my heartfelt thanks to the tribe members who helped me in this cause!

That’s another great way to lighten up a few budding lives, isn’t it? 🙂

Dear Jealousy

Dear Jealousy,

I ask for an apology in advance because you may not like what you will read in this letter below.

You see, we have lived together in peace for years now. But, off late, I have started feeling dizzy having you on my side. Please don’t feel bad because I will soon explain my reasons for what I’m feeling now with respect to our relationship.

I remember you as early as the age of five, when you clouded my mind as soon as I saw my richer cousins with remote-controlled cars, nicer clothes, and bigger houses.

You stayed with me even as I was passing through high school. Those years, you made me jealous of my friends who scored higher marks then me and thus got a greater appreciation from the girls in the class. Then, when I was in college, you held my hand tight as I saw other classmates who arrived in their own cars while I took rickety buses. When I saw them also having cell phones, I felt your hug even tighter.

There were also times I found myself jealous of people who had no conscience and were famous for that. You made me think that I should become just like them. Thank God I didn’t!

[Read more…] about Dear Jealousy

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.

How to Avoid Getting Cheated by Bad Investment Advice

“Come what may, I will not listen to anyone’s advice before investing my money this year,” said my friend Ravi. “I’ve had enough of bad advice last year!”

“Is this your New Year resolution?” I asked him.

“Yes! And this time I am not going to break it!”

“Let’s see,” I said while infuriating my friend who thought I did not believe he was really going to adhere to his resolution this year.

“See Ravi,” I told him, “I don’t want to disappoint you. But you have to go past a great obstacle to meet your resolution of not falling for your advisor or broker’s advice.”

“What do you mean?” he questioned.

“Okay, let me be very clear with you now.”
[Read more…] about How to Avoid Getting Cheated by Bad Investment Advice