Investing Behaviour

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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.

[Read more…] about A Lazy Marwari’s Guide to Stock Market Investing

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.

[Read more…] about Should You Sell in May and Go Away?

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.

[Read more…] about The Biggest Danger of Investing in Bad Businesses

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.

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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.

[Read more…] about The Need for an Investment Premise

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One of the biggest flaws in my decision-making process caused me a lot of anguish and a few losses in the early part of my investing career.

It was the idea of averaging down or buying more of the stocks from my portfolio after they fell from my original buying prices just so that I could ‘average down’ my costs.

The math is simple. Assume you buy 100 shares of ABC Co. for ₹120 per share. Your total investment is ₹12,000. The stock falls to ₹90, because the stock market falls, and you buy 100 more shares. Your new investment is ₹9000. Your total investment is ₹21000 (12000 + 9000) and for a total holding of 200 shares, your average cost now stands at ₹105. You have ‘averaged down’ your cost.

Now, this is not a problem if the underlying business remains good but the stock has fallen just because the overall market has taken a hit.

Anyways, ABC Co. falls from ₹90 to ₹60 because there is a rumour in the market about some mismanagement in the company, but you ignore that. You buy 100 more shares for a total investment of ₹6000. Your total cost now is ₹27000. Your total holding is 300 shares. Your average cost of total holding is ₹90.

You feel happy seeing your average cost come down, from ₹120 for the first transaction to ₹90 for the total of three transactions.

[Read more…] about The Dangers of Averaging Down

…is almost always more profitable than investing when everything seems certain.

Investors, like most people going about their daily lives, don’t like doubts and uncertainties – like the Covid-19 pandemic, or the Russia-Ukraine crisis. So, we would anything we can to avoid it.

Of course, it’s a good idea to avoid entirely what you can’t totally get your mind around, successful investing is largely about dealing well with uncertainties.

In fact, uncertainties are the most fundamental condition of the investing world.

Seth Klarman wrote in Margin of Safety –

Most investors strive fruitlessly for certainty and precision, avoiding situations in which information is difficult to obtain. Yet high uncertainty is frequently accompanied by low prices. By the time the uncertainty is resolved, prices are likely to have risen.

Investors frequently benefit from making investment decisions with less than perfect knowledge and are well rewarded for bearing the risk of uncertainty. The time other investors spend delving into the last unanswered detail may cost them the chance to buy in at prices so low that they offer a margin of safety despite the incomplete information.

What Klarman suggests is that if you need reassurance and certainty, you’re giving up quite a bit to get it. Like high fees to experts who would predict the future (which you falsely believe as certainty, which it isn’t), or expensive prices for stocks (because everyone knows their future is clear, which often isn’t).

On the other hand, if you can get in the habit of seeking out uncertainty, you’ll have developed a great instinct. Plus, in the long term, it’s highly profitable.

[Read more…] about Investing in Uncertain Times

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.

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The small town I was born in West Bengal gets occasional loud and wild mud storms. Growing up there in my early years, though, no one really freaked out about it, not even the people residing in small mud houses surrounding my house.

They had built their houses so strong that any wild storm was rarely a problem. And so was the attitude towards the storms, that it was hardly a problem worth getting nervous about.

The case with the place in Rajasthan where I grew up in my teens was different. Temperatures during summers peaked at 50 degree Celsius, and dropped to 5 degree during winters. But we rarely went crazy because we had learnt to prepare for and live with both the extreme seasons.

Now, the weather where I have lived for the past 21 years i.e., Mumbai, is so humid throughout the year that people travelling from North India, who do not get freaked out about the extremes there, find Mumbai terrible. On the contrary, I find Mumbai’s weather much more comfortable than the extremes of the places I grew up in.

[Read more…] about The Secret of Investing

If someone had told me this in February 2020 that I would be writing this to you in February 2022, I would have laughed at that person. But here I am, writing to you, announcing my second hardcover book (first being The Sketchbook of Wisdom).

The book is titled – Shut Up and Wait: And Other Timeless Principles to Win at Investing and in Life. I am working on it and aim to release it in August 2022.

First, the credit where it is due. The idea of this title – Shut Up and Wait – came from a tweet from Morgan Housel of Collaborative Fund. I checked with Morgan if he would like to ever write a book with this title. He had no plans of doing this and so I sought his permission to use it for this book.

Shut Up and Wait is not a book of investing advice or secrets. Instead, it is a collection of notes I have written to myself over the past 20 years in my pursuit of becoming a better investor and a better person.

[Read more…] about Shut Up and Wait: My Upcoming Book on the Timeless Principles to Win at Investing and in Life

Here is the latest issue of The Journal of Investing Wisdom, where I share insightful stuff on investing I am reading and thinking about. Let’s get started.

A Thought

In most fields, studying the patterns of success is a standard way to learn. So when people come to financial markets they try the same approach. All new investors get busy investigating how successful investors made their money in the stock market. They want to know the secret behind the winning strategies. But investing is a world of counterintuitive ways.

All successful investors and traders have made their money in widely varying ways and more often than not, their strategies often contradict each other. If one market pro vouches for his or her winning method, another market savant would seem to oppose it ardently.

Jim Paul, in his book What I Learned Losing A Million Dollars, wrote —

Why was I trying to learn the secret to making money when it could be done in so many different ways? I knew something about how to make money; I had made a million dollars in the market. But I didn’t know anything about how not to lose. The pros could all make money in contradictory ways because they all knew how to control their losses. While one person’s method was making money, another person with an opposite approach would be losing — if the second person was in the market. And that’s just it; the second person wouldn’t be in the market. He’d be on the sidelines with a nominal loss. The pros consider it their primary responsibility not to lose money.

The truth is that like there is more than one way to skin a cat, there is more than one way to make money in the markets.

Obviously, there is no ‘one’ secret way to make money because the people who have achieved success in this game over the long run have done it using very different, and often contradictory, approaches. But one big lesson that almost all these people have agreed to settle for is this – Learning how not to lose money is more important than learning how to make money. 

Which means if you are looking for success in investing, your chances are better if you take the indirect approach, i.e., finding the ‘anti-patterns.’ In other words, finding ways which most often lead to losses and then actively try to avoid those patterns.

Some such anti-patterns include –

• Chasing performance
• Looking to get rich quick
• Ignoring market cycles
• Letting emotions guide decisions
• Failure to accept mistakes and cut losses
• Venturing beyond circle of competence
• Ignoring margin of safety
• Driven by FOMO – fear of missing out

The list is long, but the idea is simple. To win in investing, find the anti-patterns, and then try to avoid them.

[Read more…] about Identifying Investing’s Anti-Patterns