Investing Behaviour

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One of the first lessons I learned from my yoga teacher was that “yoga is not about rapid movements but long pauses. Slow down, calm down, don’t hurry, and trust the process.”

The thing about yoga — or any exercise — is that there isn’t a comfort zone. But if you have a sound process, and practice it diligently, over time it starts to work for you.

The act of investing your money, as I realize, isn’t much different from practicing yoga. A superior process and greatness often go hand in hand in yoga, and also in investing. For serious investors, thus, it’s wise to learn to trust the process that generates winning investment results.

I came across one such time-tested process framework while reading Michael Mauboussin’s “Reflections on the Ten Attributes of Great Investors.” Mauboussin is Head of Consilient Research at Counterpoint Global, Morgan Stanley Investment Management, and author of some amazing books like The Success Equation and More Than You Know. He is a highly successful value investor, and thus the process he has laid out in his note is a great help for any serious investor seeking a winning investment process.

Here are my reviews of the ten attributes Mauboussin has laid out in his note.

This is for you. This is from someone like you.

It is an Investor’s Manifesto.

It is something you can reflect back on if you ever felt stuck in your investing life.

If you believe in it, follow it, and stand for it, your investing life will be good.

Click here to download the manifesto.

Read it. Print it. Frame it. Face it. Remember it. Do it.

This is YOUR Manifesto.

And if you find value in it, please share it.

A Few Ideas I’m Thinking About

Here are a few ideas I have been thinking about over the last few days.

How to Manage Risk of Randomness in Investing

“All of life is a management of risk, not its elimination,” writes Walter Wriston, former chairman of Citicorp.

Randomness is the fabric that weaves the interaction of everything around us. Since you can’t remove randomness from our affairs, you can’t get rid of the risk also. Peter Bernstein in his book Against the Gods writes –

The essence of risk management lies in maximizing the areas where we have some control over the outcome while minimizing the areas where we have absolutely no control over the outcome and the linkage between effect and cause is hidden from us.

This is in continuation of the previous post on my single biggest advice to a 26-year-old investment analyst on what she should be doing to do well in her career as an analyst and an investor.

My advice to her was this – Play games that you can win.

After reading the post, she came back with a follow-up question – But how do I know which games to play where I can win?

This was another important question. And since I knew this would come, I was better prepared this time.

I met a 26-year-old investment analyst yesterday, who sought my single biggest advice to, well, a 26-year-old investment analyst, on what she should be doing to do well in her career as an analyst and an investor.

Despite being involved in this work for the past 11 years of offering advice even when I am not asked for, her question led me to think, and so I sought some time to get back to her with my response.

There are, after all, so many things I can advise to a young investor or analyst, based on what I have learned in the past 17 years, that is, since I was 26 myself –

• Invest with an inner scorecard – Don’t change who you are to fit in.
• Have courage, even in the face of adversity – and there are a lot of adversities you would face in investing.
• Accept whatever outcome you attain, for what’s in your control is how you react to the outcome, and never the outcome itself – you can either rue over a bad outcome or take it as a lesson and move on.
• Keep learning, for nothing builds an investor’s career better than continuous learning. Learn from your own experiences and mistakes but more importantly from the experiences and mistakes of others.
• Avoid predictions, because you are rarely going to make a correct one. Also work with the intellectual humility that you know nothing, even if you are the smartest person around.
• Be patient, like a grasshopper, for that is how wealth is created.

All this is very useful advice. But since I have to offer just one advice as requested by that young investment analyst, it would be something that I learned from Charlie Munger and Warren Buffett many years ago –

Coming from a Marwari business family, I have grown up on the idea of ‘opportunity costs,’ which is simply the value of the lost opportunity, or the benefit of the thing you could have done instead of what you are doing now.

For a Marwari businessman, opportunity cost is at its most expensive when he misses opportunities. Standing by as something important is happening without him, or not moving funds to where they are most productive, are like wasted opportunities. Most Marwari business houses act like venture capitalists and keep scouting for opportunities to grow and for their heirs to run.

I keep receiving questions from readers about what they should be doing with their investments, and more so when the markets are falling. Here is my attempt to answers a few such questions I have received over the past few days.

You won’t find perfect answers below, but this is just my attempt to help you get over your fears, which may otherwise lead you to act in haste, which can cause some damage to your process of long term wealth creation.

Let’s start right here.

1. Why is the market crashing?
It hasn’t crashed…so far! The BSE-Sensex is down just 11% from its peak one-month ago. And so are the BSE-Smallcap and BSE-Midcap indices. 11% down isn not a crash!

If you think it is, you maybe be suffering from ‘denominator blindness’, which is the tendency to focus on the absolute number than the percentage decline. Or you just seem to have been spoilt by rising markets over the past few years, that a 11% fall seems like a crash.

I still see rampant speculation and short-termism around. Like Warren Buffett said at the recent Berkshire meeting –

My general assumption — there’s no way to prove it — but essentially, people are now behaving somewhat more tribal than they have for a long time. It’s fun to participate in, but it can get very dangerous when people say two plus two is five and the other says two plus two is three, you know, and they’re gonna give you those answers.

I also see companies with extremely poor financials and track record are quoting at market capitalisations and valuations more than much established, profitable, dividend paying companies. So, we are still not on a slippery slope as of now.

Focusing on what can go wrong has long been a mantra of sound investing.

The legendary investor Seth Klarman put it the best in an investor letter –

We are big fans of fear, and in investing it is clearly better to be scared than sorry.

But chances are that even the biggest pessimists among us can have their focus on risk muted by extended periods of generally favourable market conditions.

This is an excerpt from my upcoming book – Shut Up and Wait: And Other Timeless Principles to Win at Investing and in Life – which I aim to release in August 2022. Click here to read more about the book and download five chapters.

One of the most important lessons I have learned as a writer is that every great story, bestselling novel, or a blockbuster movie’s screenplay began with a ‘premise, that, in simple words, is the foundational idea that expresses the plot in simple terms.

A strong premise in writing or storytelling ideally includes three elements. First, the description of the main character or protagonist of the story – “misfit team of deep-core drillers.” Second, the protagonist’s goal – “save Earth from the impact of a large asteroid.” And third, the situation or obstacle the protagonist find themselves in – “how to destroy the asteroid the size of Texas.”

A good premise serves as both a hook for the reader or the audience and a guiding light for the writer, providing a storytelling roadmap from the start of a story to its end.