Investing

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Thinking in Bets, Lessons from Howard Marks, and Few Insights on D-Mart

Here’s some stuff I am reading, watching, and thinking about this weekend…

Book I’m Reading – Thinking in Bets
In this book, Poker champion turned business consultant Annie Duke shares insights on how we can get comfortable with uncertainty and make better decisions as a result. It’s a lively read that presents a useful and novel framework for analyzing decisions when we are faced with less than perfect information: that is, the situation we likely find ourselves in daily. Annie writes –

Life, like poker, is one long game, and there are going to be a lot of losses, even after making the best possible bets. We are going to do better, and be happier, if we start by recognizing that we’ll never be sure of the future. That changes our task from trying to right every time, and impossible job, to navigating our way through the uncertainty by calibrating our beliefs to move toward, little by little, a more accurate and objective representation of the world.

The most charming parts of the book are where the principles presented can be applied in much of my daily life, from those facing me as a father of two kids to better considering possible outcomes when making investment decisions.

It’s a nice, practical book – Thinking in Bets.

What We (Don’t) Know

“Within infinite myths lies the eternal truth, who sees it all? Varuna has but a thousand eyes, Indra but a hundred, you and I, but two.” ~ Devdutt Pattanaik

“Accepting that you don’t know — and can’t know — what the future holds should be liberating, not frustrating.” ~ Jason Zweig

I was recently reading an old post by Jason Zweig titled I Don’t Know, and I Don’t Care.

Jason wrote about –

How he graduated from not believing in indexing and instead picking sector funds and small cap funds,
And then realizing that he was not good at fund-picking and that beating the market was amazingly hard,
And then starting to invest in index funds that he said liberated him from the feeling that he needed to forecast what the market was about to do,
And that gave him more time and mental energy for the important things in life.

If I were to chart out my own life as an investor, I am still at the first stage as described by Jason above. In fact, about six years back, I wrote about my reasons for not investing in index funds as I believed well-managed, low-cost, actively managed funds were a better bet for investors.

[Read more…] about What We (Don’t) Know

One Big Investing Lesson I Learned Late in My Life

One of the most profound thoughts I’ve ever read on the child-parent relationship comes from the noted Lebanese-American artist and poet Kahlil Gibran, who wrote the following under the title “On Children” –

Your children are not your children.
They are the sons and daughters of Life’s longing for itself.
They come through you but not from you,
And though they are with you yet they belong not to you.

You may give them your love but not your thoughts,
For they have their own thoughts.
You may house their bodies but not their souls,
For their souls dwell in the house of tomorrow,
which you cannot visit, not even in your dreams.
You may strive to be like them,
but seek not to make them like you.
For life goes not backward nor tarries with yesterday.

You are the bows from which your children
as living arrows are sent forth.
The archer sees the mark upon the path of the infinite,
and He bends you with His might
that His arrows may go swift and far.
Let your bending in the archer’s hand be for gladness;
For even as He loves the arrow that flies,
so He loves also the bow that is stable.

The first time I read these thoughts, my first reaction was – “If my children are not my children, then whose are they? And what do you mean they are not mine?”

Stock Analysis Excel Template Version 4.0

Whether you’re training for a marathon or going on an adventure trip, being ready can make a world of difference.

The same is true for the stock market. It’s important to be prepared with a watchlist of fundamentally sound stocks ready to be bought at the right prices. Whether the market is in rally mode or in a phase of correction, being prepared with a watchlist is key.

Here is Version 4.0 of my Stock Analysis Excel Sheet that will help you with exactly that – identify high-quality businesses to create your watchlist and buy them when the prices are right.

Download this sheet on your computer, read carefully through the instructions to follow a few simple steps, and then analyze not just the past performance of a company but also arrive at its approximate intrinsic value range.

Click Here to Download Stock Analysis Excel Template Version 4.0

Like the previous version 3.0, this latest version feeds in data automatically from Screener.in website, which subsequently feeds into my sheets on financial analyses and intrinsic value calculations. So, please thank Screener’s creators and my friends Ayush and Pratyush before thanking me. 🙂

If you have been into financial modeling in the past, this excel file may seem like a child’s play. But, if my 15+ years of experience as an analyst is anything to go by, this is most of all you require to “quantitatively” analyze stocks…not models running into hundreds of rows and tens of sheets.

Saving Your Retirement from a Stock Market Crash

Disclaimer: I am not a financial advisor. The advice given below is not a financial advice even though my excitement might make it look like such. In fact, what follows below are just my thoughts, those of an ordinary person who works hard, and tries to save and invest as sensibly as he can.

I received a call from a 59-year old gentleman, a distant relative, yesterday. We have not met in the past two decades, so the sudden call was surprising. But not after the first minute of our talk when he asked, “I’ve heard from your aunt that you work in the stock market. I wanted to discuss my investments. Can you please help?”

“Hmmm…sure,” I said, “almost sensing that he wanted to discuss his stock portfolio with me.”

But he started talking about his upcoming retirement – planned for 2019 – and about a plot of land sitting in his hometown waiting to build his retirement home next year.

He said he had been saving and investing as much money as he could for his retirement and for building this home.

How to Deal With the Harsh Reality of a Stock Market Crash

Short practical advice (may skip) – If you cannot withstand losing a bit of your money in a stock market crash (where things easily go from bad to worse to brutal), please stay away from stocks. But if you are fine with the risk of losing some money in the short run in return of wealth creation in the long run, keep owing your good stocks and/or good mutual funds. Buy more (and keep buying) if you believe the quoted (now lower after the crash) prices offer great value in the long run. Then, once you are with your chosen good investments, just get going with other more important things in life like family, work, and self-development…and let go of the outcome of your investments. Accept that whatever happens, happens.

Slightly long theoretical advice (must read) – I read a nice article earlier today on dealing with life’s harsh realities – sharp fall in stock prices is one such reality for most investors – and here is an excerpt from the same…

…the only intelligent thing to do when such turbulent change occurs is for us to sit back and realize that we are only to be witnesses to change, and to respond to it rather than to react to it — much like we would watch a movie unfold on the screen and laugh at the funny bits and cry at the sad bits, while always knowing that what is happening before our eyes is unreal.

Modern quantum physics after Einstein also points us this way — it says that what occurs depends upon the observer, and not on what is observed. So, in effect, as a witness, I am free to choose my response, and therefore the reality I actually experience.

3 Iron Rules of Life and Investing

You seem to be stressed out today?” asked my Yoga teacher, a gentleman in his late fifties.

“Oh, not really!” I said.

“No, you look a bit stressed. Are you unwell?”

“Not at all. Just feeling a bit confused.”

“May I help?”

“Knowing you, I think you can.”

“Shoot!”

“You see, I have been a stock market investor for many years now, and now also don the role of a teacher trying to help people make saner and better investment decisions. But I am often faced with a dissonance.”

“And what’s that?”

On Stories We Tell

For my twin toddlers, the instant attention-grabbing words are — Once upon a time. They drop everything and dash to whoever uttered those words.

It’s my only weapon to break their fights and tantrums. But once those words slip out then there is no escape.

“Tell me the story, Papa. Please tell me the story.” To their relentless prodding, I give in every time.

It doesn’t matter how interesting or boring the story is. Neither does it matter if I am telling them the same narrative for the hundredth time. Fed up they’re not. Any pause to catch my breath is cut short by an impatient stare demanding an exciting twist in the tale. Their eyes widen as if it’s not the ears but eyes they’re listening with.

Kids are suckers for stories. So are adults. Aren’t we?

The content may change but the fascination for stories is deeply ingrained trait that evolution has bestowed on the human brain.
[Read more…] about On Stories We Tell

What Are You Afraid Of?

I am in Chennai for my Value Investing Workshop that happened yesterday.

After my session, I went to meet a friend in the evening. His residential society had organized a bicycle race for kids. I saw more than 50 kids out there jostling for space meant for not more than 10 cyclists. Worse, most of them were without a helmet.

Now, letting your child cycle without a helmet may be ten times riskier than feeding him a course of dangerous non-steroidal anti-inflammatory drugs. And a thousand times riskier than flying in an airplane.

Moving in the front seat of a car without a seatbelt (which most people, especially teens, do when the policeman is not watching) is hundred times riskier than many common and ‘scary’ diseases in India, like swine flu.

Yet we obsess about the low probability events and take big chances with the high probability ones. Why?

The Tyranny of Screening Tests: From Medicine to Investing

A few months back I had written a post on Benford’s Law. It’s a fraud detection method to estimate if a given financial statement could be fake. In other words, it tells you if the numbers in a document are cooked up or real. When I first learned about Benford’s Law, I was like a kid with a new toy. I wanted to play with it immediately. Being a programmer, I wrote a small piece of code to extract the numbers from an annual report and test those numbers against Benford’s rule.

The next logical thought was to use my code and run it on the annual reports of all the publicly listed companies. This way, I could immediately identify all the companies which could be faking numbers. Wouldn’t that be cool? For some time, I even dreamed of floating a startup with this killer fraud detection product. I was going to be rich.

Now, instead of building my million dollar startup, I am writing this post. That should already give you a hint how that story turned out.
[Read more…] about The Tyranny of Screening Tests: From Medicine to Investing