Investing

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Before Your Song Is Over

Warren Buffett wrote this in his 2000 letter to shareholders…

The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities—that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future—will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands.

Buffett was talking about the irrationality he was seeing around during the heydays of the dotcom boom. What followed next i.e., the bust, is deeply etched in most investors’ memories who participated in that irrationality.

As I was reading this text from Buffett last night – thanks to my habit of reading and re-reading a small super-text each night before I sleep – I could relate this to the irrationality with which most of us live our lives, ignoring the beautiful things that happen around us while we race towards achieving name, fame, and of course, lot of money…

Safal Niveshak Value Investing Contest 2018

Here’s your chance to showcase your analysis skills to the Safal Niveshak tribe, and in the process win a prize if your entry gets chosen amongst the best.

Contest Rules

Write a 3,000 word (max.) report on one listed Indian company of your choice.
You may submit more than one report, but will be eligible for only one prize.
Deadline for report submission is 25th March 2018
Email your report in a Word file to vishal[at]safalniveshak[dot]com with the subject line as – “Value Investing Contest 2018 – Company Name – Your Name”
The stock must have a market capitalization of more than Rs 500 crore
The idea must be well researched (by you). Your analysis must cover these areas:
- Company history and business
- Moat analysis (if moat exists)
- Competition
- Financial strength (provide data/charts to support your analysis)
- Management quality (have they been good or bad allocators of capital)
- Risks (what can go wrong)
- Valuation (no price targets required; challenge the market’s current valuation instead of calculating your own)
The report would be exclusive to Safal Niveshak. But you can post an abstract at other places and link to the full report on Safal Niveshak.

What Not To Do

Avoid hard-selling the idea, especially if you already own the stock. 🙂

Also, in your report, please make a mention whether you own the stock or not.

Evaluation & Rewards

I will evaluate each submitted entry ONLY on the depth and simplicity of analysis, though good presentation and proper language is more than welcome (would save us editing time!)

There are three prizes to be won (delivery in India only) –

1st Prize – Books of choice worth Rs 5,000/-
2nd Prize – Books of choice worth Rs 3,000/-
3rd Prize – Books of choice worth Rs 2,000/-

All submitted entries would be published on Safal Niveshak (the author can remain anonymous if he/she wants).

This contest is now open. Remember, the deadline for submission is 25th March 2018.

Latticework of Mental Models: Benford’s Law

On 25 November 2003, Kevin Lawrence was sentenced to 20 years in prison for pulling off possibly the biggest financial fraud in Washington State’s history. Here’s the backstory.

Kevin Lawrence graduated from high school in 1984. After a brief stint with a brokerage firm Lawrence bought a bowling alley and converted it into a fitness gym. He equipped the gym with modern exercise equipment, computers and hired chiropractors, masseuses and a nutritionist for the facility. But that was just the beginning of his entrepreneurship dreams. Soon he started working on an ambitious business plan to create a chain of high tech health clubs. He pitched the idea to a lot of investors.

Lawrence claimed that his startup would be an industry innovator that integrated fitness and health care into one business model, i.e., consumers could do fitness workouts and obtain health care within the same facility. His proposition also included offerings for design, manufacturing, and marketing of fitness equipments. Plus, he planned to build software to analyze the club member’s physical performance.

Lawrence must have been a good storyteller for he was able to convince more than two thousand investors and raise close to $100 million.

How Much is Enough, and A Few Other Questions

Note: I gave this talk to a group of friends working in Silicon Valley during my recent trip to the US. Surprisingly, they liked what I spoke and wanted me to share the transcript, which I am doing today in a deeper and more refined form.

Hi Friends,

Thanks for inviting me to speak to you today. I have nothing intelligent to say. You guys score much higher than me on the IQ charts. And it’ll be for the benefit of us all that I speak less and that you keep your expectations from me low. In fact, very low.

So, given that I have been given the freedom to talk whatever I want to today, I have smartly avoided intelligent stuff because I completely believe in what Mark Twain said and I quote, “It is better to keep your mouth shut and be thought a fool than to open your mouth and prove it.”

Instead of talking intelligent stuff around stock market, investing, human behaviour, etc., let me focus on a few important questions I have tried to seek answers to at various stages of my life, and that have helped me tremendously in choosing a path that, when I look back at, I am glad I chose.

Latticework of Mental Models: Thinking From First Principles

First principles thinking is one of the most effective mental tools for solving problems, especially the hard ones. And no one embodies this philosophy of first principles thinking better than Elon Musk, founder of PayPal, SpaceX, Tesla Motors and SolarCity.

Musk, in one of his interviews, said –

It’s most important to reason from first principles rather than by analogy. The normal way we conduct our lives is we reason by analogy. We’re doing this because it’s like something else which was done or it’s like other people are doing. It’s mentally easy to reason by analogy rather than by first principles. First principles is the Physics-way of looking at the world. What that really means is that you boil things down to the most fundamental truths and then reason up from there. That takes a lot more mental energy.

For example, somebody could say that battery packs are really expensive and that’s just the way they’ll always be because that’s the way they’ve always been in the past. No! That’s pretty dumb. If you apply that reasoning (analogy) to anything new then you won’t be able to get to that new thing.

For batteries people say, historically it has cost $600 per kilowatt hour and it’s not going to be much better than that in the future. First principles thinking would say, what is the market price of the basic constituents of the battery? It’s got Carbon, Nickel, Aluminium, and some polymers for separation. So breakdown on the material basis and ask, “If we bought that in London metal exchange, what each of those things cost?” Oh! It’s like $80 per kilowatt hour. Clearly, you need clever ways to take those material and combine them into the shape of a battery cell and you can have batteries much much cheaper than anyone realized.

How to Get Rich

“What’s keeping you from being rich? In most cases, it’s simply a lack of belief. In order to become rich, you must believe you can do it, and you must take the actions necessary to achieve your goal.” – Suze Orman

Well, that was the theory of getting rich. Here are the pratical tips, the actions necessary to get rich –

Also Read –
1. Getting Rich vs. Staying Rich
2. How to Get Rich, Stay Rich And Be Happy

My Notes on Warren Buffett’s 2017 Letter to Shareholders

Warren Buffett recently released his 2017 letter to shareholders of Berkshire Hathaway. As outlined on the first page of the letter, Berkshire’s share price has increased by, hold your breath, 2,404,748% over the last 53 years.

The big idea worth noting here is that the annualized return Berkshire’s stock has earned for its shareholders to achieve such magnificent result over 53 years is less than 21% – something people basking in the limelight of current bull run would discard as too less!

Anyways, I have prepared some notes on Buffett’s 2017 letter. Click on the image below or click here to download the document.

Notes on Warren Buffett's 2017 Letter to Shareholders - Safalniveshak.com

I suggest you read the original letter in its entirety by downloading it from here.

Inattentional Blindness Bias

Note: This post was originally published in the July 2015 issue of Value Investing Almanack. To read more such posts and other deep thoughts on value investing, business analysis and behavioral finance, click here to subscribe to VIA.

“Where is it?” I asked my wife, while my eyes scanned the kitchen cupboard again. I was looking for the sugar jar. The plan was to impress her with my exceptional tea making skills which I acquired after watching few YouTube videos.

“It should be there. Right in front!” informed my wife from the other room.

“It’s not here. I can’t see it.” I again scanned all the shelves in the cupboard.

“Look again. I kept it there in the morning.” My wife sounded very sure about it.

“No! It’s not here. I am sure.” I confirmed while closing the cupboard. What happened next shouldn’t be surprising for you because most of you have experienced it before.

She came, opened the cupboard, grabbed the sugar jar which was obviously sitting right in front and handed over to me. I stood there flabbergasted. How could I miss it? What’s wrong with my eyes? Have I gone blind? It felt as if the jar manifested itself out of thin air. It was like…magic.
[Read more…] about Inattentional Blindness Bias

Charlie Munger on Bitcoins, Banking, AI, and Life

I recently attended the annual shareholder meeting of Daily Journal Corp, a publishing company based in Los Angeles, US. I am not a shareholder in DJCO, but this was a chance to hear the 94-year old Charlie Munger, who is its chairman and director.

Mr. Munger answered questions from the audience for around two hours – on wide-ranging topics like bitcoins, banking, artificial intelligence, and life – including one from me (see below). Here are excerpts from the notes prepared by Adam Blum (see the link to entire notes at the bottom of the post).

On searching for ideas – The two rules of fishing are to fish where the fish are, and don’t forget the first rule. Investing is the same thing. In some places, no matter how good a fisherman you are, you won’t do well. Life is a long game. Take it as comes and do the best you can, and if you live to an old age, you will get your full share of opportunities, which will be two in total, maybe, but seize one of the two, and you will be alright.

On personal success – Approach life like [Thomas] Carlyle, and get up every day doing the best you can. Marry the right person. Everyone here who’s your age will do well. You’re not that mad at the world; instead you’re trying to cope with how to make it a little better. If you were here with placards shouting, you wouldn’t have bright future. Avoid extremely intense ideology, because it ruins your mind. The kids with the placards are pounding the idiocy in instead of shouting it out.

Latticework of Mental Models: Hot Hand Fallacy

One of the most embarrassing moments of my childhood was the day when my class teacher asked me something about Sachin Tendulkar. I replied, “Who is Sachin Tendulkar?”

I was in 6th standard. The entire class, including the teacher, burst into laughter. That was the day when I started taking an active interest in cricket. Of course, the motivation was to avoid looking like a fool in a cricket crazy nation.

“Dravid is not in form these days.” Claimed one of my friends.

“I hope he comes back in form soon else they will drop him from the national team.” Argued other friend.

I nodded in agreement. I was faking because one thing that still baffled me was the idea of a player being “in-form” or “out-of-form.”

“What’s this in-form and out-of-form business?” I asked my best friend. Typically, looking-like-a-fool fear goes away when you’re with your best buddies, right? He was the only one who I didn’t feel the need to impress with my cricket knowledge.

Well, if a player plays consistently well for many innings, we say he is in good form. Otherwise, he is considered out of form, he explained, “An in-form player is always in demand because he’s expected to continue playing well.”

Why does an in-form player play well? If it’s the past performance that determines the present form then how does it ensure the future performance? Isn’t this form business based on circular logic?