Investing

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

One of the key, rarely noticed, skills of the best investors out there is that they often separate their hard work from their action. What this means is that the moment they identify as good business worth investing in may not be the moment they actually buy it. There is sometimes a pause, a wait, a re-reflection, and only then if it is warranted, an action.

This is unlike what we do most of the time, in life and in investing. We do the hard work, and we act on the conclusion. There is rarely a moment of pause and reflection.

I interviewed Vinod Sethi, ex-MD and CIO of Morgan Stanley India, in the second episode of The One Percent Show. Out of the many insights he shared over our 150 minutes of interaction, here is one that stood out for me that led me to appreciate even more the idea of pausing and waiting for the right time to invest in an idea I have worked upon.

Vinod said –

People have this natural urge that if I have spent 100 hours doing something, then I must act. Whereas my view is that act when prices are going to go up or down, not when you have completed your homework. The market is not waiting for you to complete your homework for the prices to go up or down. I would always urge a lot of my analysts, including myself, to delink analysis from decision-making. Because you have spent a hundred hours on something, you don’t need to act.

The key to being a good money manager is to not act, or not link your hard work to your action. Delink the two. Keep working, because the point of conviction and intuition comes when it comes. But at that time, your homework should be complete. That time you shouldn’t be running around doing homework, because that intuition point will happen when it happens. It is all sitting in your brain. But you act when your intuition wakes up. In a way, the market whispers in your ear.

At the end of the day, I’d say that’s what it is. Because there are 10,000 listed stocks and why would you zone in on something? You need to do a lot of work, but don’t believe or don’t live under the delusion that your work has got you this brilliant idea.

The work has given you the foundation for good seeds to grow. It’s like a garden, which has been well fertilized and watered for some roses to bloom. That’s your research on a daily basis. But the act of the rose coming is when there is a confluence of events, like when a stock is dirt cheap or forgotten or expensive. There’s the real world out there and you’re ready with your homework.

Let’s put it this way. It is like there’s a woolly mammoth coming at you and I give you a gun with a few bullets. There are two ways you can respond. I’ve given you a gun with bullets, so you can start firing. The other way to look at it is to just sit and fire when the woolly mammoth shows up. So, research is like loading the gun, having the bullets. The opportunity is the mammoth showing up. They’re not linked. Having a gun gives you the arrogance that I will fire and can hit the mammoth. That is a classic mistake of most analysts.

This has been one of the most wonderful insights I have received from anyone on The One Percent Show so far.

What Vinod suggested is that you must keep doing your work of identifying good investment opportunities, but if the prices are not right, and there is no margin of safety, don’t act. Least of it, don’t act just because you have done the hard work. Stocks do not bother about your hard work.

But when the time is right – and you are ready with your idea and capital – the market will whisper in your ear.

Wait for that whisper. And only when you hear it, act.

[Read more…] about The Classic Mistake Most Investors Make

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

The world often looks, and is, like a disorderly place, full of random events. And the irresistible urge to seek patterns can get us into serious trouble when we take this tendency to the field of finance and investing.

As investors, it is important to know that we are dealing with something where randomness and chance can distort the expected outcome in the short term.

Nassim Taleb wrote in Fooled by Randomness –

…risk-conscious hard work and discipline can lead someone to achieve a comfortable life with a very high probability. Beyond that, it is all randomness: either by taking enormous (and unconscious) risks, or by being extraordinarily lucky. Mild success can be explainable by skills and labor. Wild success is attributable to variance.

Time and again it has been proved that majority of stock price changes are nothing more than random jitters in the system for which no explanation is ever required. Yet you can find people obsessing over every movement and explaining it like kids spotting animal shapes in the clouds.

You don’t have to be one of those.

In fact, you just have to do your work, and then let randomness do its own.

Like Taleb advises, risk-conscious hard work and discipline can lead you to achieve a comfortable life with a very high probability.

If you are trying to seek anything else through your investments in the market, you may be playing with fire.

[Read more…] about Never Take a Risk You Do Not Have to Take

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

You or me are not the market. Earning the long-term returns of the market, of the past or the future, is not in our control. Managing our risks and avoiding ruin, mostly is.

“Rationality is avoidance of systemic ruin,” Nassim Taleb writes.

Peter Bernstein writes in his brilliant book Against the Gods –

Survival is the only road to riches. Let me say that again: Survival is the only road to riches. You should try to maximize return only if losses would not threaten your survival and if you have a compelling future need for the extra gains you might earn.

Trying to avoid the ruin the stock market system enforces upon people who disregard its workings is rational.

Believing that you can beat the system at it, by playing the game mindlessly, isn’t.

[Read more…] about The Only Road to Riches

When you invest in a business you don’t understand but just because its stock price is rising…

When you invest in stocks with money that, if you lose, can hurt you badly…

When you invest purely based on tweets and “influencer” videos who promise you quick, easy riches…

When you invest in “assets” that you – and most other people – do not understand but just out of the fear of missing out…

Remember it’s your – or your mom’s or dad’s – hard-earned money.

Don’t lose it chasing easy money.

Sir John Templeton said the four most dangerous words in investing are “this time it’s different.”

What he meant was that there are fundamental laws with respect to investment risk and return that can bend for a while but do not ultimately break.

I may be old school, but I see many-many more people trying to bend these fundamental laws – most in their 20s – than I have ever seen in the past 18+ years of being in the market.

We are certainly in a new age economy, and this may just be the dawn of a new era for the Indian economy (though a lot of variables need to work perfectly for that to happen). But the level of outrageousness that I see in the behaviour of masses is too difficult to ignore or not be concerned about.

This is especially true of those betting on cryptocurrencies without understanding the underlying fundamentals.

As per stats, India has more than 10 crore cryptocurrency owners, the largest in the world by far (US lags far behind at 2.7 crore). Just imagine this number for a country where it has taken more than 40 years for 5 crore people to invest in equities.

The way things are going, I fear it’s going to end badly for a lot of people.

As little as I understand it, there certainly is a future for new age tech, blockchain, cryptocurrency, etc. It will take its own time to unravel. Most of us away from the front-end of tech can’t even make proper sense of that future. But that should not lead us to use our hard-earned money to bet on it to get rich fast.

It’s like playing Russian roulette with one bullet and five empty chambers and believing that the bullet would come only after you pull the fifth trigger, by when you would have already become a billionaire and will obviously not pull the sixth trigger.

But who knows when the bullet will strike, and you will become a statistic? Like, who knows when the cryptocurrency madness would hit a peak and instead of making you rich fast, it may lead you to lose everything you earned the hard way?

It’s easier for celebrities to appear on advertisements and tell you that “Crypto is not hard, it’s very easy.” But remember that they get paid for their acting, not for their advice. Plus, they have nothing to lose when you lose.

This is also true for financial influencers who are all over YouTube and other social media showing you (often live) where and how much there are investing in such currencies (and stocks, and IPOs). Remember that they get paid for how much time you spend on their channels, not for their advice. Plus, they also have nothing to lose when you lose.

I believed the world couldn’t get noisier 10 years back. Then I believed it couldn’t get noisier 5 years back. How wrong I was!

The level of noise all around is unprecedented, and amidst this, your behavior with your money is your only edge and guard to help you survive this noise and the madness it is causing.

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.

I wish you a very happy Diwali, and a peaceful, sane, year ahead.

I did my first ever YouTube Live Ask Me Anything (AMA) session yesterday, and received a great response. The idea was to try and answer questions on stock market investing (except on specific stocks), investing process, basic personal finance, starting up, failing, blogging, minimalism, and living a good life.

Here is the video of the entire session, with timestamps, so that you can jump straight to your topics of choice.

I plan to do such AMA sessions at regular intervals. If you wish to know about them and join them, just subscribe to my YouTube channel here.

If you are not able to watch the video above, click here to watch.

China was saturated with disabling infectious diseases near the end of 1940s. Tuberculosis, plague, cholera, polio, malaria, smallpox, and hookworm were killing a lot of people in the country. More than 11 million people were infected with the water-borne liver parasite diseases. Cholera epidemics raged through the population freely, some years killing tens of thousands. Infant mortality was as high as 300 per 1000 live births.

The country was going through a political and social transition, and thus creating a national public health system and eradicating entrenched diseases was an obvious first step in improving the lives of its people.

The Chinese Communist government began initiating massive vaccination campaigns against the plague and smallpox, vaccinating nearly 300 million people. Sanitation infrastructures for clean drinking water and waste disposal were implemented throughout the country.

[Read more…] about Of Sparrows and Bull Markets: A Lesson from History

In March 2020, when the Sensex cracked to below 28,000 level caused by the onset of the Covid-19 crisis, I wrote a post about how I was investing my money through the crisis.

Today, just 18 months later, the Sensex has touched the 60,000 mark, or almost 120% up from its March 2020 lows, and I got down to writing another post on how I am investing my money through this euphoria.

But then I stopped, for except my stocks doing well like everyone else’s, nothing has changed as far as “how I invest” is concerned.

I quickly changed my idea for today’s post, and thought why not share with you some of the most important “sanity-check” lessons that I have learned from some of the wisest investors around.

So, here are a few relatively unknown but timeless quotes from some of the investing greats that have served me well and stay grounded over the years, and may also serve you good lessons on how you should view stock investing from the current perch, and not give in to the mindlessness that such times foster.

Don’t just read these quotes. Pause and think about them. Maybe, write them down by hand in your notebook so you remember them for long. As you will realize while you are reading them, they contain the essence of many investment books.

Let’s start.

Are You Rising, Or Is It the Pond?

Bull markets go to people’s heads. If you’re a duck on a pond, and it’s rising due to a downpour, you start going up in the world. But you think it’s you, not the pond.

~ Charlie Munger

No God Wants You to Get Rich

Once a bull market gets under way, and once you reach the point where everybody has made money no matter what system he or she followed, a crowd is attracted into the game that is responding not to interest rates and profits but simply to the fact that it seems a mistake to be out of stocks. In effect, these people superimpose an I-can’t-miss-the-party factor on top of the fundamental factors that drive the market. Like Pavlov’s dog, these ‘investors’ learn that when the bell rings – in this case, the one that opens the New York Stock Exchange at 9:30 a.m. – they get fed. Through this daily reinforcement, they become convinced that there is a God and that he wants them to get rich.

~ Warren Buffett

Things Don’t Get Better (or Worse) Forever

Very early in my career, a veteran investor told me about the three stages of a bull market. Now I’ll share them with you. The first, when a few forward-looking people begin to believe things will get better. The second, when most investors realize improvement is actually taking place. The third, when everyone concludes things will get better forever. Why would anyone waste time trying for a better description? This one says it all. It’s essential that we grasp its significance.

~ Howard Marks

Know What ‘You’ Believe In

When prices go up enough, everybody believes something, even if it is only that everybody else is just about to believe.

~ Adam Smith, The Money Game

Survival is the Only Road to Riches

Survival is the only road to riches. You should try to maximize return only if losses would not threaten your survival and if you have a compelling future need for the extra gains you might earn.

~ Peter Bernstein

There’s Only One Side of the Stock Market

There is only one side to the stock market; and it is not the bull side or the bear side, but the right side.

~ Jesse Livermore

Buy Cheap, Never Bad

My experience teaches me that by far the largest losses have been sustained by investors through buying securities of inferior quality under favorable general conditions.

~ Benjamin Graham

Don’t Just Get Sucked In

As a runaway bull market persists, its relentless vacuum cleaner eventually sucks everyone in. Investors who are skeptical about the perceived overvaluation are forced to watch as their career prospects melt down and security prices melt up. New rationalizations, disguised as rationales, enter the higher levels of discourse to justify jumping, or creeping, onto the asset-price train despite disdaining it when it was dozens of percentage points lower. A feeling of fear and acrophobia then becomes replaced by the giddy and disorienting feeling of finally being on track to make money along with the crowd and not feeling isolated in Cranky Valueland.

~ Paul Singer

Think About Your Wealth Like Your Children

Your wealth is like your children — the primary link between your present and the future. You should try to think about it in the same way. You want your children to have freedom but you also want them to be good people who can take care of themselves. You don’t want to blow it, because you don’t get a second chance. When you invest, it’s not your wealth today, but it’s your future that you’re really managing.

~ Peter Bernstein

* * *

“If we are facing in the right direction, all we have to do is keep on walking,” goes a Buddhist proverb.

It captures the essence of how we can train ourselves to be calm and patient, in life and while investing our hard-earned money, whatever be the situation.

When euphoria or fear runs high, don’t run with it. Instead, keep a calm mind, think well through things, and be patient. Avoid hasty decisions and keep playing according to your plan.

Things go bad after good times, like they go good after bad. But if you maintain your sanity before they go good or bad, you won’t be excessively elated or disturbed when they actually do.

That’s what intelligent investing should be all about.

Rework by Jason Fried is one of the best books I have ever read on starting up. Jason has condensed his wisdom in starting and running a business into pithy, one-page, chapters.

One of the interesting chapters from the book is about the idea of being a curator. In this, Jason writes –

You don’t make a great museum by putting all the art in the world into a single room. That’s a warehouse. What makes a museum great is the stuff that’s not on the walls. Someone says no … There is an editing process. There’s a lot more stuff off the walls than on the walls. The best is a sub-sub-subset of all the possibilities.

Re-reading this chapter reminded me of Costco, one of the world’s largest wholesale retailers and among the very few that have shown remarkable resilience in an industry that has been subjected to increasing pressures from online retail.

[Read more…] about Is Your Stock Portfolio A Museum or A Warehouse?