Investing Behaviour

How to Stop Worrying about Falling Stock Prices

My friend Rohan visited me on the weekend, and here is how our discussion went. Rohan’s comments are in red.

“Hey Vishal, did you notice the crash last week? I am pained to see my portfolio again and again!”

“Crash? Where?”

“Stop fooling dude! You know I am talking about the stock market and the crash in the Sensex!”

“Oh that! No, I was busy somewhere else, so didn’t notice that!”

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“How could you miss a 1,200 points crash in the last 8 days? And you seem to be writing an investment blog, huh!”

I Confess!

“How much – in percentage terms – has been your biggest ever booked loss in a stock? And which stock was that?”

I asked this on Safal Niveshak’s Facebook and Twitter walls yesterday. And before I could realize, the walls was full with people confessing how they have earned 50-100% losses on their stocks.

While some have booked these losses, there are a few who are hopeful to get their money back. 🙂

Anyways, my friend Vidyanshu suggested that it might be a great exercise to get the learnings of a lot more people from their investment failures, which has resulted in me writing this post.

[Read more…] about I Confess!

How to Be Happy and Get Rich

I have been re-reading Poor Charlie’s Almanack over the past few days in preparation of my upcoming Mastermind course.

This is my fifth reading of this wonderful book, and it seems I am going through it for the very first time.

Unlike what many people think, this book is not a ready reckoner on how to become a successful investor. In fact, it’s much more than that.

It’s a book on how to live a happy, sensible and rich life and in the process become a better thinker and investor.

As you read through the book, some of Munger’s ideas will inspire you, and some will make you uncomfortable. But all will challenge you to think outside the box.

The third chapter of Poor Charlie’s Almanack captures “Mungerisms”, where Munger dispels hundreds of ideas on subjects ranging from life, investing, academia, financial engineering, accounting, money management business, and managements.

Can Money Buy Happiness? Yes!

This post has been written by Janardhanan Vembunarayanan (Jana), the lucky tribesman 🙂 who recently attended Warren Buffett’s 2013 shareholder meeting in Omaha.

Dan Ariely recommended the book, “Happy Money-The Science of Smarter Spending“. I went to the public library and got the book. It is a very good read and here are my notes.

What This Book Talks About…

Most of us seek professional advice on how to earn, save and invest our money. When it comes to spending money, we follow our intuitions. Research shows clearly that our intuitions are wrong most of the times. This book explains how to get more happiness when spending our money. It uses 5 principles…

Buy experiences
Make it a treat
Buy time
Pay now, consume later
Invest in others

1. Buy Experiences

In 2010, according to the U.S. Bureau of Labor Statistics, the average American household earned about $62,000 before taxes and spent a total of around $48,000. Housing costs along came to $16,500, which accounts for 27% of the cost. This clearly shows that we spend a lot of money in housing either in the form of rent or mortgage. Does buying a big beautiful house increase our happiness?

There is almost no evidence that buying a home or a newer, nicer home increases happiness.

Between 1991 and 2007, researchers tracked thousands of people in Germany who moved to a new house because there was something about their old house they didn’t like. Immediately after settling in to their new abodes, these movers reported being much more satisfied with their new homes than they’d been with their old ones. Humans are adaptable creatures, however, and research show that people often get used to whatever they’ve got. So we might expect that this initial spike in housing satisfaction would wear off, leaving people no happier with their home than they were before moving.

But that’s not what happened.

Satisfaction with the new home only were off a little bit, and in the subsequent five years, movers remained significantly more satisfied with their new home than they’d been with their old one.

Sounds promising, but there’s just one problem…

While movers satisfaction with their houses increased substantially, their satisfaction with their lives – their overall happiness – didn’t improve at all.

Long after the crash of 2008, almost 90 percent of Americans continued to describe home ownership as a central component of their dream.

In a carefully controlled study of more than six hundred women in Ohio, homeowners weren’t any happier than renters, though they were 12 pounds heavier.

Virgin Galactic, is a company which makes it possible for people to pre-book a ticket for a six minute spaceflight.

But wait it will cost $250,000 per person. Does this make any sense? Excerpt from the book…

As a child, Marcia Fiamengo, thirty-year-old nuclear engineer, dreamed of being an astronaut. When she and her husband John (also a nuclear engineer), first heard about Virgin Galactic, they talked about buying two tickets – when they were old and retired, since the six-figure fee was out of their price range as young professionals. Then in 2010, Marcia’s life change in an unexpected and devastating way. John became sick and passed away when Marcia received the money from John’s life insurance policy, she couldn’t imagine doing anything with it, and put it away while she grieved.

And then one day…

What better way to use this money than to honor their dream and buy a ticket to space? As Marcia put it, John’s death reminded her that “life is short and fragile” These amazing experiences shouldn’t be put off until a better time. You may never get the chance to experience them.

This story reminded me of the movie “Up”…

The point the authors are trying to make is…

Purchases which buy experience makes people more happier than the materialistic ones.

The happiness I got from visiting Berkshire Annual Meeting is much greater than the Laptop that I purchased. You see the difference.

I am standing in front of Buffett’s house 🙂

2. Make It a Treat

I used to drink ‘Cafe Mocha’ from Starbucks everyday. When I started drinking it used to be a treat. After sometime I did not have the same enjoyment. So why I am drinking it? It is because of the Habit. Should I spend $3.25 everyday for it, even though I do not really enjoy? Why am I not enjoying?

Because we lack mercury’s amnesia, the enjoyment of chocolate coffee typically declines over a period of time

So, what is the solution?

Switch to regular coffee at home or work. This helps to save some money. Once in a while treat myself with Starbucks Coffee and it becomes a treat for me. The point authors are making is…

Limiting our access to the things we like best may help to “re-virginze” us, renewing our capacity for pleasure. It also helps us to save money.

3. Buying Time

Today lots of professionals are making a decent amount of money. But the only problem is, most of them do not have time to do what they want to do.

At Intel an employee receives 350 emails every week. It takes 20 hours to manage them. Around 30% of the emails are unnecessary. What did Intel do?

Intel recently experimented with “email-free Tuesdays” encouraging a group of employees to spend four hours unplugged from email and phones, giving them an uninterrupted period to, you know, think.

This feeling of time affluence has important implications for happiness once these employees leave work for the day.

Google Engineers spend 20% of their time on pet projects, that are outside their day to day work. Some of the innovative products like Google Sky and Gmail came out of this.

When people at google talk about what they like, it’s one of the things they like about. It is culturally important. Knowing that it exists causes people to fee more free.

4. Pay Now, Consume Later

In today’s world most use credit cards, It follows the policy of “Consume now and pay later” The problem with this is, we overspend. American household had an average of more than $6000 in credit card debt in 2010. By doing the opposite – by paying upfront and delaying consumption we get the following.

Less spending
More happiness

Delaying consumption allows spenders to reap the pleasures of anticipation. This reminds me of my childhood days. Deepavali is a festival of lights and it is very famous in India. I anticipate its arrival one month before. The excitement I receive in the anticipation is same as the enjoyment I have during the festival.

Tripadvisor.com business runs on this pleasure of anticipation.

Barbara Messing, Chief Marketing Office at Tripadvisor.com, says: I think of tripadvisor as being in the happiness business. We are really upstream in the planning process and I believe that people derive as much pleasure from that phase as from the trip itself.

5. Invest in Others

Bill Gates and Warren Buffett asked American billionaires to pledge the majority of their wealth to charity. Buffett decided to donate 99% of his wealth to charity. He claims his happiness increased when he gave.

DonorsChoose.org is an online charity that makes it easy for anyone to help students in need. Public school teachers request what they need on the website. The requests can range from pencils to microscopes. Anyone can donate any amount to the project that most inspires them.

In all research has shown that spending money on others provides a bigger happiness boost than spending money on yourself.

Makes sense, isn’t it?

Investing, a Loser’s Game?

In fulfilling a dream I have seen ever since I saw Pete Sampras hitting those aces, graciously walking to the other side while bowing his head, and then hitting another ace, I started learning to play lawn tennis recently.

Then, while I was reading Howard Marks’ The Most Important Thing, I came across the three major influences on his thinking, which includes two books (one of them Nassim Nicholas Taleb’s Fooled By Randomness), and a 1975 article in The Financial Analysts Journal written by Charles D. Ellis.

I searched for this article, and found a masterpiece, not just for the insights but also because it instantly related to the kind of (terrible) tennis I am playing these days.

Titled “The Loser’s Game“, this article mostly concerns the game of tennis. It talks about how the approach taken by good and bad tennis players is also seen in investing.

In this article, Ellis cites a study done in a book called Extraordinary Tennis for the Ordinary Tennis Player written by Simon Ramo.

The study shows, and as Ellis had written in his article, that…

Professionals win points, amateurs lose points. Professional tennis players stroke the ball with strong, well-aimed shots, through long and often exciting rallies, until one player is able to drive the ball just beyond the reach of his opponent.

Amateur tennis is almost entirely different… the ball is fairly often hit into the net or out of bounds, and double faults at service are not uncommon. The amateur duffer seldom beats his opponent, but he beats himself all the time. The victor… gets a higher score because his opponent is losing even more points.

The part on amateur tennis sounds so similar to how small investors invest.

Most wealth destruction happens owing to those unforced errors – hitting into the net or out of bounds, and repeating double faults at service (while making buying decisions).

So, not anyone else but the small investor beats himself all the time!

Hey, you loser!
I imagine my tennis partner saying this every time I hit an easy ball into the net or out of the line.

But then, he needs to understand that I, being an amateur in amateur tennis, will mostly hit unforced errors till I learn to play better.

You don’t have such an excuse when it comes to investing your money.

You will purely lose the plot due to your own unforced errors – mistakes in stock picking – than due to your bad luck.

That’s exactly what Charlie Munger meant while saying, “All I want to know is where I’m going to die so I’ll never go there.”

That’s exactly what Ben Graham meant through his concept of “margin of safety”.

And that’s exactly what Seth Klarman meant when he wrote this in “Margin of Safety“…

Warren Buffett likes to say that the first rule of investing is “Don’t lose money,” and the second rule is, “Never forget the first rule.”

I too believe that avoiding loss should be the primary goal of every investor. This does not mean that investors should never incur the risk of any loss at all. Rather “don’t lose money” means that over several years an investment portfolio should not be exposed to appreciable loss of principal.

While no one wishes to incur losses, you couldn’t prove it from an examination of the behavior of most investors and speculators. The speculative urge that lies within most of us is strong; the prospect of a free lunch can be compelling, especially when others have already seemingly partaken.

It can be hard to concentrate on potential losses while others are greedily reaching for gains and your broker is on the phone offering shares in the latest “hot” initial public offering. Yet the avoidance of loss is the surest way to ensure a profitable outcome.

You can win
Investing can become a winner’s game for you only if you work towards reducing those unforced errors – errors in picking up stocks, and misbehaving.

Of course that will come only after you start playing the game, learn to play the right shots, and keep playing them for some time.

Remember that your opponent Mr. Market can get you to be overly optimistic by showering you with good news and promises, and then scare you with bad news and threats – all leading you to making those unforced errors!

But you can learn to win, as Ellis write in his follow-up article in 2003, this time called “The Winner’s Game”.

One way to do that is to learn to hit the first shot (making the first investment decision) so nicely that it makes the next shot easy.

The other is to avoid those unforced errors.

What do you say? Is your investment philosophy and checklist geared to reduce those unforced errors?

What Value Investing Is, and Isn’t

Charlie Munger stated it quite clearly. “All intelligent investing is value investing — acquiring more than you are paying for.”

So, value investing equals intelligent investing.

Ask anyone who has a faintest idea about value investing, and the general view is that it is same as bottom fishing, or buying cheap stocks – those that are trading at low price to earnings (P/E) or low price to book value (P/BV).

But this is far from truth.

Value investing is much more than buying cheap stocks.

8 Investing Lessons from the God of Cricket

The fast bowling legend Merv Hughes made a casual prediction 20 years back in the Australian dressing room in Perth. This is what he told his captain Allan Border after the Australians failed to get an “18-year old kid” out after trying for an entire day – “This little prick is going to get more runs than you, AB.”

The rest, as they say, is history.

Today, that “little prick”, also known as Sachin Tendulkar, is past his 40…and is celebrated as the God of Cricket (if not the Godzilla!).

The day Hughes made the above prediction, Sachin had just hit his third century in international cricket. Today, he has crossed the 100 centuries milestone…and has the hunger to take the count even higher.

Ask Me a Question

I completed (well, almost) the 2013 edition of my Art of Investing Workshops last week.

The Workshops spanned 4 months and covered 7 cities, 11 sessions, 90 hours of discussions, and around 350 tribesmen (and a lot of tribeswomen).

There were intense debates on specific topics around investing, lot of questions answered, and yes, a lot of questions unanswered for the lack of time.

So, now, I have a proposal for you, whether you attended my Workshop or not.

If you and I sat down to have a coffee (or tea/water) and you could only ask me ONE question around money and investing, what would it be?

[Read more…] about Ask Me a Question

How to Create Your Circle of Incompetence

One of the oft-asked questions in my Art of Investing Workshops is…

“How can a small investor create his circle of competence?”

This is a very important question, because “circle of competence” is in itself one of the most important facets of successful investing.

Fear, Investing and You (Yes, You!)

In the course of my Art of Investing Workshops over the past three months, I have met several tribesmen who are fearful of starting out as investors.

Plus, there are those who have been investors but are extremely fearful of taking their next step, especially given the uncertainty around.