Investing Behaviour

Wit, Wisdom, Charlie: Elementary Worldly Wisdom from Charlie Munger (Issue #5)

“I hated discussing ideas with investors, because I then became a defender of the idea and that influences your thought process.” ~ Michael Burry (The Big Short)

I’m sure this is one statement most of you will relate to. We often discuss stock ideas which, we understand, are contingent to future events but if we declare/discuss the ideas in public, irrespective of how the events unfold, it becomes extremely difficult (subconsciously) for us to change the stance we have taken in public.

Mohnish Pabrai of Pabrai Funds has often repeated during his annual investor meetings that he doesn’t discuss current stock investments as it clouds judgment.

I practice the same rule (but for a different reason – that of avoiding extreme embarrassment in future). 🙂

A 2-Year Course to Become a Smarter, Independent Investor

A reader, who joined the Safal Niveshak tribe recently, sent an email to me a part of which I am reproducing below…

I am just getting started into the world of investment and just like you I am also a strong believer of the fact that wealth is created over period of time and you need to have patience and time on your side if you really want to create wealth in equities.

But I am struggling to get my fundamentals right so that I can do my own research as well as understand the research article penned by people like you. I hope I will be able to educate myself with your help. Any suggestions here are highly welcome.

This is a question that has been raised by several other tribesmen in the past – “I am new to investing and would like to become a sensible, long-term, value investor. But where do I start?”

If this question bothers you as well, here is my small attempt to dispel some of your doubts on where and how you can start your journey to become a smarter, independent investor.

How to Become Graham’s “Intelligent” Investor

In 1949, when asked what it means to be an “intelligent” investor, Benjamin Graham, the father of Value Investing, said…

The word “intelligent”…will be used…as meaning “endowed with the capacity for knowledge and understanding.” It will not be taken to be “smart” or “shrewd”, or gifted with unusual foresight or insight. Actually the intelligence here presupposed is a trait more of the character than the brain.

Then, in 1976, he summed up “investing” with these words…

The main point is to have the right general principles and the character to stick with them.

Warning: A Big Investing Mistake You May Commit in these Rising Markets

A simple definition of investing is that it is the process of laying out money now in the expectation of receiving more money in the future.

In simpler words, investing is the transfer to others of purchasing power now with the well-calculated expectation of receiving more purchasing power in the future.

Even simpler, investing is forgoing consumption now in order to have the ability to consume more at a later date.

I would’ve made this even simpler, but then as Albert Einstein said, “Everything should be made as simple as possible, but not simpler.” 🙂

But isn’t “simplicity” what you as an investor looking for in your investment life?

Ask any expert his view on the latest sharp rise in stock prices and where does he sees the market going forward, and you may hear words like – monetary policy, fiscal policy, current account deficit, QE, shifts in Philips curve, inflationary expectations, interest rates, etc.

As an individual investor, I have little interest in such esoteric terms. I hope you are sailing in the same boat as I am.

Wit, Wisdom, Charlie: Elementary Worldly Wisdom from Charlie Munger

Charlie Munger There are only two ways of clearing an exam. The first involves rigorous reading of the books and understanding the fundamental concepts which a subject is trying to teach, and develop a framework.

Once you have a framework, you then assimilate additional information (either via theory or via practical in labs) on that framework to see whether it makes sense or not.

If you are able to do it, the new information is understood and is stored in your knowledge repertoire to be recalled at ease and also to help you understand other things in future.

If you are not able to do it, you improve upon the framework.

The second way, which if not everyone, at least 90% of engineers will agree upon is as follows.

Dear Me

Dear Me As adults, we all nurture the secret wish to go back in time and change a few things here and there, so that our life gets better than it is now, in the present.

“Ah, I wish I had studied harder during my masters!” some might resent.

“Only if I had chosen Commerce over Engineering!” is another common wish.

Some would say, “I would have been richer only if I had behaved better as an investor when I was just starting out.”

And then, “I wish I had started saving and investing 15 years back!”

Well, imagine you are given a chance to flip a switch to go back in time when you were young. What would you do?

[Read more…] about Dear Me

Take Control, Investor!

Okay, this is going to be my smallest post on Safal Niveshak so far. But I hope this will leave you with something to introspect. 🙂

There are five key aspects of investing…

Risk = Not knowing what you are doing
Cost = Broking commission + Financial planning fee + Entry loads + Administration fee + Subscription fee for magazines, stock research + Consultation fee + Taxes
Time = Long term compounding
Emotion = Your behaviour
Return = Future gains/losses

Now…

So it beats me why…

Is this really true of you?

If yes (thanks for being honest!), tell me what you are doing to change this?

If not, hail Mogambo! 🙂

Applying Behavioral Finance to Value Investing

“Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ…Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.” ~ Warren Buffett

We call ourselves rational beings. The truth is that we aren’t rational but rationalising beings.

The brain that sits on the top of your head isn’t a flawless machine. Yes, it is powerful. But it has its weaknesses. In everyday terms, we call such weaknesses as ‘biases’.

The good part is that while we cannot exchange our brains with other people nor can we upgrade it at a hardware shop, we can reduce the number of mistakes that our biases cause by just taking notice of them.

How Will You Measure Your Life?

I recently shared with you the secret mission of Safal Niveshak, which has not much to do with the field of stock market investing.

Then, I also shared the best advice I ever got, which again was relevant not just for my investing pursuits but also for my life.

Today, I’m sharing with you another amazing article I read recently on the subject of “life”.

You might wonder why I’m writing (or covering) so much on the subject of “life” on a platform dedicated to investing.

Well, that’s the entire point of becoming a “Safal Niveshak” – one who is not just successful in investing his financial capital, but also enriches his human capital.

The Best Advice I Ever Got

While doing my MBA during 2001-03, I was a very energetic guy…like most MBAs usually are.

So whether it was completing my assignments on time, making clean presentations, participating in extra-curricular activities, and spending time studying for the exams…I was full of energy and drive to do something in life…

…something that earns me a good name and money, and that can make my parents proud.

This is usually the dream that a small town boy harbours while working hard to achieve his goals of a good education, and then a good career. In that way, I was no different.

So I was energetic, and also thought that I possessed a reasonable amount of intelligence to achieve whatever I wanted to achieve in life.

It was here that I came across this snippet from a lecture that Warren Buffett gave at the University of Florida School of Business in 1998.

I had no idea about Warren Buffett then, except that he was one of the richest men in the world. And in following my dreams of a nice career with a nice starting salary, I was excited to read something that a ‘rich man’ said.