Investing Behaviour

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In his thought-provoking book “Fooled by Randomness,” Nassim Taleb presents a compelling analogy that sheds light on how we perceive risk and reality. He writes –

First, reality delivers the fatal bullet rather infrequently, like a revolver that would have hundreds, even thousands of chambers instead of six. After a few dozen tries, one forgets about the existence of a bullet, under a numbing false sense of security.

Second, unlike a well-defined precise game like Russian roulette, where the risks are visible to anyone capable of multiplying and dividing by six, one does not observe the barrel of reality. One is capable of unwittingly playing Russian roulette – and calling it by some alternative “low risk” game.

• Why it matters: What Taleb has done is compare the infrequency of life’s critical risks to a revolver with hundreds, even thousands, of chambers, rather than the mere six of Russian roulette. His analogy encapsulates a significant problem in human psychology, and that is our tendency to underestimate risk due to its infrequent occurrence, which ultimately leads us to a dangerous false sense of security.

After 20 years in the stock market, and through a few cycles where I have sensed such false security myself and have suffered due to it, I can completely vouch for what Taleb has written.

You see, when we engage in activities or make decisions, like in the stock market, where the consequences of our decisions will be seen a few years or decades later, we often overlook the potential risks involved. This oversight is not because these risks are nonexistent, but because they are infrequent.

The rarity of a fatal outcome, like the rare chance of a bullet being fired from a gun with thousands of chambers, leads us to complacency. Like when it comes to investing, you may become overconfident after a few years of favorable market conditions, forgetting the possibility of a steep or prolonged market decline. Or when it comes to health, you might ignore the risks of a sedentary lifestyle or unhealthy diet because the consequences are not immediate.

The Invisible Barrel of Reality

Taleb also delves deeper into the human psyche. Unlike the clear and present danger in a game of Russian roulette, where the risks are obvious and quantifiable, real-life risks are often hidden or misunderstood.

We might be engaging in risky behaviors without even realizing it, thinking we are playing a “low risk” game. This lack of awareness is a critical factor in many of the poor decisions made in various fields, from finance to personal health.

Now, our understanding of probability plays a significant role in how we perceive risk. We are notoriously bad at assessing probabilities, especially when it comes to rare events. We either overestimate the likelihood of extremely rare events like plane crashes, or underestimate more common but less sensational risks, like market crashes or even car accidents. This miscalculation is compounded by the fact that our perception of risk is heavily influenced by personal experiences and emotions, rather than objective analysis.

The Illusion of Control

Another factor contributing to the false sense of security is the illusion of control. We tend to believe we have more control over events than we actually do. This belief leads to an underestimation of risk.

For example, a stock market trader or investor might think his skill is the main reason for his success in the stock market, ignoring the role of luck and external factors. Similarly, someone might believe their good health is solely due to their lifestyle choices, discounting the influence of genetics and environment.

History is replete with examples where a false sense of security led to disastrous outcomes. The financial crises of the past few decades, including the 2008 global financial crisis, serve as stark reminders of what can happen when risks are underestimated.

In these scenarios, what was perceived as a low-risk environment turned out to be a game of Russian roulette with dire consequences.

Applying Taleb’s Insights

To apply Taleb’s insights in our lives and investing, the first step for us is to acknowledge and accept our tendency to underestimate risk.

We should also strive to improve our understanding of probabilities and be aware of our psychological biases. This awareness can help us make better decisions that may lead us to better long term outcomes.

The key takeaway from Taleb’s analogy is the importance of acknowledging and preparing for the improbable. Just because a risk is infrequent does not mean it is nonexistent.

By recognizing the potential dangers in our decisions and actions, no matter how unlikely they seem, we can better prepare for the uncertainties of life.

This preparation does not mean living in fear but rather embracing the unknown with a balanced perspective.

In doing so, we can navigate the complexities of the world of investing or otherwise with a more realistic and prudent approach, enhancing our ability to make informed decisions and, ultimately, leading a more resilient and fulfilling life.

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I recently announced admission to the January 2024 batch of my most comprehensive classroom course in Value Investing titled – Value Investing Blueprint.

This residential course is scheduled to be held from 11th to 14th January 2024, at the campus of Pune-based FLAME University. The last date to apply is 10th December, 2023.

Click here to read more and apply if you are interested in joining this course.

Since it’s a classroom course, seats are limited.

The course will take you through the entire process of practicing value investing to identify long term wealth creating stocks. This includes helping you:

• Create the right value investing mindset and build a behavioural framework to avoid biases and create the right investment thought process.
• Assess business quality – separating good from gruesome
• Analyze financial statements to find well-performing businesses
• Calculate intrinsic valuations using various methods
• Identify competitive moats and whether they are sustainable
• Build a portfolio of sound, wealth-creating businesses

Click here to read more and apply if you are interested in joining this course.

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I have started work on a series of short videos – titled The Inner Game – to share my thoughts around investing, decision making, learning, and just the practice of trying to live a good life. You can watch them on my YouTube channel, including these recent ones –

• How to ‘Never’ Fail in #Life or #Investing (English)
• How to Escape the Hedonic Treadmill and Be Happier (Hindi)
• Your Path to Financial Freedom: Let’s Start from the Start (Hindi)
• The Light of Humility (Hindi)

You can also find these and all past sessions on Apple Podcasts, Spotify, Google Podcasts, and Amazon.

Hope you like these and find some value. Please let me know your feedback and/or suggestions for improvement. Thank you.

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That’s about it from me for today.

If you liked this post, please share with others on WhatsApp, Twitter, LinkedIn. Or just email them the link to this post.

If you are seeing this newsletter for the first time, you may subscribe here.

Stay safe.

Regards, Vishal

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It’s almost always an –

• I don’t know who I am problem
• I don’t know how much pain I am willing to take problem
• I don’t have the patience to give my stocks time to grow problem
• I bought on the tip of that popular social media influencer and did not do my homework problem
• I did not diversify well problem
• I bought the stock just because it dipped problem
• I cannot resist my friends getting rich problem
• I love to fall in love with my stocks problem
• I cannot differentiate between stock price and intrinsic value problem
• I suffer from a buy at any price problem
• I borrowed to invest problem
• I invested the money I needed soon problem
• I don’t have time on my hands to see through market cycles problem
• I trade too much and too often problem
• I keep watching and worrying about stock prices problem
• I will watch the market and my portfolio again after reading this post problem

And so, I must remind myself this at all times –

A market crash is ‘never’ the problem. ‘I’ am the problem, and I must sort myself out, because that is only what I control. And if I can control the ‘I’ better, a market crash will never be a problem.

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I recently announced admission to the January 2024 batch of my most comprehensive classroom course in Value Investing titled – Value Investing Blueprint.

This residential course is scheduled to be held from 11th to 14th January 2024, at the campus of Pune-based FLAME University. The last date to apply is 10th December, 2023.

Click here to read more and apply if you are interested in joining this course.

Since it’s a classroom course, seats are limited.

The course will take you through the entire process of practicing value investing to identify long term wealth creating stocks. This includes helping you:

• Create the right value investing mindset and build a behavioural framework to avoid biases and create the right investment thought process.
• Assess business quality – separating good from gruesome
• Analyze financial statements to find well-performing businesses
• Calculate intrinsic valuations using various methods
• Identify competitive moats and whether they are sustainable
• Build a portfolio of sound, wealth-creating businesses

Click here to read more and apply if you are interested in joining this course.

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Read a newspaper headline – “Blood on street for sixth day in a row.”

My first reaction? Blood? Already?

The headline reminded me of my younger self, utterly scared of injections (still am). I started wailing even before the doctor pulled out the syringe. For people already seeing “blood” on the street, just the syringe is out for now. “Blood” is still some time away. Stop wailing.

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I have started work on a series of short videos – titled The Inner Game – to share my thoughts around investing, decision making, learning, and just the practice of trying to live a good life. Have published ten videos so far, which you can watch on my YouTube channel, including these recent ones –

• The Power of Changing Your Mind (and Four Things I Have Changed My Mind on in Investing)
• The 10 Demons of Investing
• How to Win At Investing (And At Anything in Life)
• What Nobody Told You About Financial Freedom
• The Baggages We Carry

Hope you like these and find some value.

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Here’s a nice note from Byron Wien, American investor and vice chairman of Blackstone Advisory Partners, who passed away just two days back. I came across this note recently, and immediately thought of sharing with you. It contains Wien’s lessons that he learned in his “first 80 years” (he died at 90). These are more a set of life principles, one of which is –

Every year try doing something you have never done before that is totally out of your comfort zone.  It could be running a marathon, attending a conference that interests you on an off-beat subject that will be populated by people very different from your usual circle of associates and friends or traveling to an obscure destination alone. This will add to the essential process of self-discovery.

Starting a solo podcast – The Inner Game, as mentioned above – is that act I have undertaken to push myself out of my comfort zone. I also see it as part of my process of self-discovery. Let’s see how far I go with it.

Anyways, here’s a second nice lesson from Wien –

When your children are grown or if you have no children, always find someone younger to mentor.  It is very satisfying to help someone steer through life’s obstacles, and you’ll be surprised at how much you will learn in the process.

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That’s about it from me for today.

If you liked this post, please share with others on WhatsApp, Twitter, LinkedIn. Or just email them the link to this post.

If you are seeing this newsletter for the first time, you may subscribe here.

Stay safe.

Regards, Vishal

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One story from World War II that I found as tragic as it was magnificent was that of Anne Frank.

Frank was born in Frankfurt, Germany but moved to the Netherlands for safety in 1934, five years after she was born. The Frank family hid in their basement with four other Jews when Germany took control of the Netherlands.

Anne then began to write, at age thirteen, in a diary of her life, feelings and the outside world. She wrote in the diary every day for two years until their hiding place was found and she was forced into a concentration camp where she died with her sister due to a sickness. She was just fifteen when she died.

Although Anne wasn’t only a tragic girl in this war, her diary that is available to read as The Diary of a Young Girl displays the strength of her character. The diary portrays her as a brave and hopeful girl, character traits that are hard to manage in the kind of hardship that she was a part of.

[Read more…] about The Most Important Thing That Counts in Investing

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…because most of us in the stock market, most of the time, do not do investing, which is…

• Thinking how markets work,
• Understanding how other investors behave and why not to behave like most of them,
• Studying businesses,
• Sticking only with what is simple and what we understand,
• Buying stocks at appropriate valuations,
• Owning those businesses knowing they are ‘businesses’ and not just symbols on your screen, and
• Being patient with those businesses and holding on till they remain good businesses.

Instead, we are busy…

• Envying (others making money fast or losing money slow),
• Cloning (others’ stock ideas mindlessly),
• Predicting (future of markets, stock prices, and economy),
• Fearing (missing out on future gains),
• Regretting (past mistakes),
• Avoiding (accepting current mistakes),
• Denying (reality, especially when it’s harsh), and
• Indulging (in useless information and noise)

And if that’s not all, these often lead us to –

• Trading (frequently, which adds to our costs),
• Averaging down (on bad businesses),
• Boasting (about our lucky short-term gains), and sometimes
• Trolling (other investors on social media, who have not performed as well as us in the recent past).

With such a busy schedule, where is the time to practice investing?

Countless wise people have advised us for centuries that to become good at anything, we do not need to always add more things but give up on some of them.

However, when it comes to investing, giving up on everything mentioned above is not as easy as it sounds. All these (mis)attributes and (mis)behaviours make us human (except trolling others), and thus there is no point trying hard to eliminate all of them from our lives at one go.

But if we work towards minimizing these – some starting today, and others over a period of time – we may end up with an outcome better than we had ever imagined.

I would leave you with a couple of quotes, which signify how what we think and do now, help us create our destinies –

Watch your thoughts; they become words.
Watch your words; they become actions.
Watch your actions; they become habits.
Watch your habits; they become character.
Watch your character; for it becomes your destiny.

– Lao Tzu

You are what your deep, driving desire is.
As your desire is, so is your will.
As your will is, so is your deed.
As your deed, is so is your destiny.

– Brihadaranyaka Upanishad

For good or bad, investing does not follow any other path.

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Howard Marks of Oaktree Capital wrote this in one of his 2006 memos to shareholders titled ‘Risk‘ –

In the investing world, one can live for years off one great coup or one extreme but eventually accurate forecast. But what’s proved by one success? When markets are booming, the best results often go to those who take the most risk. Were they smart to anticipate good times and bulk up on beta, or just congenitally aggressive types who were bailed out by events? Most simply put, how often in our business are people right for the wrong reason?

These are the people Nassim Nicholas Taleb calls “lucky idiots,” and in the short run it’s certainly hard to tell them from skilled investors.

Warren Buffett, in his brilliant 1984 article titled The Superinvestors of Graham-and-Doddsville, describes a contest in which each of the 225 million Americans starts with US$ 1 and flips a coin once a day. The people who get it right on day one collect a dollar from those who were wrong and go on to flip again on day two, and so forth. Ten days later, 220,000 people have called it right ten times in a row and won US$ 1,000.

Buffett writes –

Now this group will probably start getting a little puffed up about this, human nature being what it is. They may try to be modest, but at cocktail parties they will occasionally admit to attractive members of the opposite sex what their technique is, and what marvelous insights they bring to the field of flipping.

After another ten days, there are 215 ‘survivors’ who have been right 20 times in a row and have each won US$ 1 million. By this exercise, each have turned one dollar into a little over $1 million.

…this group will really lose their heads. They will probably write books on “How I turned a Dollar into a Million in Twenty Days Working Thirty Seconds a Morning.” Worse yet, they’ll probably start jetting around the country attending seminars on efficient coin-flipping and tackling skeptical professors with, “If it can’t be done, why are there 215 of us?”

By then some business school professor will probably be rude enough to bring up the fact that if 225 million orangutans had engaged in a similar exercise, the results would be much the same — 215 egotistical orangutans with 20 straight winning flips.

This is a very important story and the reason I am reminding you of this today is because there are now more than 215 egotistical orangutans that are talking about how they have turned small amounts of money into millions investing in stocks and elsewhere and how you can do that easily too.

Worse, each of these 215 have a following of more than 215,000, so you can understand the multiplier effect of the ‘how to get rich easily from stocks’ theory.

Even worse, they are not chest-thumping hanging on trees of some far off jungle, but in a computer or mobile screen right in front of you, on Twitter, YouTube, and everywhere.

Buffett said –

Only when the tide goes out do you discover who’s been swimming naked.

Sir John Templeton said –

The four most dangerous words in investing are: this time it’s different.

This time is not any different, and I wish you realize this now and not when the tide goes out.

There will be a lot of naked swimmers then. I wish you are not one of them.

Watch out.

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That’s about it from me for today.

If you liked this post, please share with others on WhatsApp, Twitter, LinkedIn. Or just email them the link to this post.

If you are seeing this newsletter for the first time, you may subscribe here.

Stay safe.

Regards, Vishal

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I received an email recently where one reader asked – “What you say about long-term investing in the stock market is all good. But doesn’t it get boring after a time? I mean, first the process of reading annual reports to find good businesses, and then if you find some, holding on to them for the long run doing nothing. How does one maintain interest in this thing? How does one make this process and journey exciting?”

I thought these were good questions. In fact, questions like these used to bother me when I started out on my journey of reading annual reports, analyzing financial statements, and practicing long term investing more than a decade back.

In fact, I was talking to an investor friend recently, who confessed of boredom because he was not able to find stocks worth buying in this rising market. “Even if you are a long-term investor, what do you do but feel bored when you don’t find anything worth buying because everything seems to be so inflated?” he questioned.

“I agree,” I said.

[Read more…] about Beware the Boredom of Bull Market

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Not losing money is a critical part of the stock investing process. Successful investors say it in different ways, but the point is always the same.

Warren Buffett has often said – “Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.”

But he has also said – “If you don’t make mistakes, you can’t make decisions.”

You see, the problem is not in making mistakes. The problem is in not knowing when you have made a mistake and thus not learning from it.

Unfortunately, openness to making mistakes and recognizing them is beyond most of us. Why is that?

Two reasons. The first, our society’s phobia for making mistakes, something that begins at school, where we learn to learn what we are taught rather than to resolve problems. We are fed with facts, and those who make the fewest mistakes are considered to be the smarter ones. So we learn that it is embarrassing to not know and to make mistakes. We feel bad when we find out we have made a mistake or do not know something.

[Read more…] about Stock Investing is a Humbling Game

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Blaming the system is soothing because it lets you off the hook. But when the system is broken, we wonder why you were relying in the system in the first place.

~ Seth Godin

This story dates to September 2008. I remember this clearly because it happened on the day Lehman went bust.

The event is more vivid for me because, when the news broke out, I was less than a mile away from Lehman’s headquarters, with a school friend.

My friend, who was working in the tech division of another investment bank in the city, met me to discuss his India investments. His portfolio had already taken a beating in the financial crisis that had started at the beginning of 2008.

[Read more…] about Influencers are Not the Problem