Investing

This page contains our best articles on the subject of value investing and investment behaviour.

If you wish to receive these and all future such articles straight into your email, subscribe below to my free newsletter - The Safal Niveshak Post - that offers practical, time-tested insights to help you navigate stock market with confidence. Subscribers call it a "gold mine" for investors, and it's read by 80,000+ people across 120+ countries.

* No charge. No spam. Only wisdom.

Safal Niveshak Stream – October 12, 2016

Some amazing stuff we are reading, watching, and observing during the middle of this week…

Investing/Stock Market

Warren Buffett’s Berkshire Hathaway’s unique managerial model is lauded for its great value. However, here is a discussion paper that highlights its costs…

Most costs stem from the same features that yield such great value, which boil down, ironically, to Berkshire trying to be something it isn’t: it is a massive industrial conglomerate run as an old-fashioned investment partnership.

The most visible—and measurable—costs of the Berkshire model appear in capital allocation, principally acquisitions and investments. Buffett relies on himself in making these decisions, without board or executive input or oversight. While most such decisions have succeeded, many spectacularly so, some bloopers have appeared, the best-known being Dexter Shoe and Gen Re. The costs of error from such self-reliance could readily be mitigated by broader distribution of decision-making power. Buffett does so by periodically consulting vice chairman Charles Munger. Yet since the net costs of this approach have been modest, thanks to Buffett’s acumen and stature, there is no reason for reform while Buffett is at the helm. But some additional power sharing and oversight would be appropriate for his successors, as Berkshire’s succession plan contemplates.

[Read more…] about Safal Niveshak Stream – October 12, 2016

How I Missed a 10-Bagger, and Why I’m Proud of That

It was sometime in the middle of 2006 when I met the management of a banking company for the first time. It was HDFC Bank, and I met one of their top executives along with my banking analyst colleague.

The bull market in banking and financial stocks was just beginning to pick up pace and, in hindsight, there we were at the right place and at the right time. We ended up recommending a ‘Buy’ on the stock, which turned out to be a big wealth creator for our clients. Trusting the analysis skills of my colleague, I wanted to buy the stock a month after she recommended it to clients, but stopped at the last moment.

Why? I did not understand the head or tail of HDFC Bank’s balance sheet (I still don’t). Of course, I understood how it made money – by earning interest on its loans, advances and investments – but my competence ended there.

I had no clue on how the bank priced its loans, how it tested credit abilities of borrowers (do they really test that?), and how it accounted for its investments and liabilities on the balance sheet. I knew that if India were to do well, banks would be a direct beneficiary. But it was a tough nut to crack for me, and I gave up there and then.

So, unlike our clients, some of whom would have made a 10-bagger in the stock, I missed this bus. Only that, unlike Warren Buffett who talks about sucking his thumb while missing such obvious opportunities, I had all my fingers tied behind my back, and it was my own choice.

Safal Niveshak Stream – October 8, 2016

Some amazing stuff we are reading, watching, and observing at the start of this weekend…

Investing/Stock Market

One of the most dangerous places to be as an investor is…

…when you’re the smartest person in the room. Smarts, when not combined with a heavy dose of humility, can get you into trouble because it can lead to overconfidence. Overconfidence can lead to overthinking which can be a deadly combination when managing money.
Do you know about the most overlooked trait of investing success, especially when you are managing other people’s money? Hint – It’s a trait not directly related to investing. Go, figure. 🙂
Many investors and investment managers have taken to copying Buffett’s approach, but is it really possible to become a value investor by reading a few books and desiring to make money? In a letter to investors several years ago, Seth Klarman of The Baupost Group warned of value pretenders, investors who brand themselves as value investors but actually miss the essence of value investing. So are you one i.e., a value pretender? Here’s a nice post from John Mihaljevic on ways to determine if you are a value investor or pretender. One of the ways John writes about is…

If you base your purchase decisions on the likelihood that the market will assign a higher P/E or other multiple to a stock in the future, you may not be a value investor. You may instead be engaging in John Maynard Keynes’s “beauty contest”, an exercise centered on guessing the behavior of others. Value investors independently appraise the value of businesses in order to make an informed investment decision.

[Read more…] about Safal Niveshak Stream – October 8, 2016

Investing and the Art of Suffering

Pain is a complex experience involving sensory and emotional components: it is not just about how it feels, but also how it makes you feel. And it is these unpleasant feelings that cause the suffering we humans associate with pain.

Photo credit: Christopher Macsurak (Creative Commons)
When it comes to investing, there is a third angle to this thought – What you do when you feel the pain? How do you react to it?

Like what you do when the share market is going through a bad phase, and when your portfolio is giving you sleepless nights for reasons outside your control. I believe most people reading this associate the 2008 crisis with one such painful period that’s fresh in their memories.

I attended a lecture yesterday from a famous Indian investor, who has grown his wealth from Rs 0 to Rs 1,000 crore over a span of around 30 years. And what I understood from what he said about his journey was that he has been through several painful periods in his long experience in the markets. And apart from the fact that luck has played a very important role in this wealth creation process – being at the right place at the right time with the right people – it was also his capacity to suffer during the painful times that has helped him reach where he is now.

Safal Niveshak Stream – October 5, 2016

Some interesting stuff we read, watched, and observed today morning…

Investing/Stock Market

It’s very normal to find such magazine covers appearing in bull markets. They sell well, given the various biases they instantly spark in the brain of the reader..
By the way, the average P/E of the 25 stocks mentioned in this report is 40x, and there are a few at 69x, 71x, and 85x. Let’s talk about wealth “creation”. 🙂 [Read more…] about Safal Niveshak Stream – October 5, 2016

100 Ideas on Living with Courage, Wisdom, and Peace (Special E-Book)

Being human means you’re going to experience a range of emotions throughout your life. They could be positive emotions like love, kindness, compassion or they could be negative ones like fear, frustration, and envy.

To get the maximum out of our short lives, we need to ensure that our days are filled with more positive feelings than the negative ones.

No matter how rich, healthy and happy you are, the pangs of depression or feeling low will hit you sometime. That’s when you may need some doses of inspiration to lift your spirit and take you out from the dump.

Now, what’s an inspiration?

Safal Niveshak Stream – October 1, 2016

Some interesting stuff that would be worth your time today …

Investing/Stock Market

For the September edition of our Value Investing Almanack newsletter we had compiled the thoughts of many well known value investors on the subject of “when to sell”. Ian Cassel, a full-time micro-cap investor, was gracious enough to provide his insights on this topic for Almanack readers. Recently he penned a wonderful post on his blog expanding on the idea…

Qualitative analysis and field based research acts like corrective lenses that will let you see further. You will have an edge on most investors if you make investments based on expected 3 – 5 year returns instead of 3 – 12 month returns.

One of the biggest mistakes or wrong reasons to sell a stock is boredom. Don’t be a bumble bee buzzing around from one position to the next. Find a few great companies early and FOCUS on evaluating their business performance, not stock performance. The hardest part of achieving multi-baggers is having the patience and conviction to hold through multi-year periods of under-performance. Successful investors can disconnect emotion from investment decisions and can differentiate business performance from stock performance.

Boredom is an offshoot of Do Something Bias. In investing, having a loaded gun (cash) helps but firing it because of an itchy finger is a mistake.

Be Risk Averse, not Loss Averse

Note: This post was originally published in the August 2016 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.

On April 10, 2003, Pepsi announced a contest called “The Pepsi Billion Dollar Sweepstakes”. It was scheduled to run for 5 months starting from May in the same year.

For the contest, Pepsi printed one billion special codes which could be redeemed either on their website or via postal mail. According to Pepsi’s estimate, about 200-300 million of these codes were redeemed. Out of these, 100 codes were chosen in a random draw to appear in a two-hour live gameshow-style television special. Each of these 100 people were assigned a random 6-digit number, and a chimpanzee (to ensure a truly random number and of course to rule out any monkey business) backstage rolled dice to determine the grand prize number. This number was kept secret and the 10 players whose numbers were closest to it were chosen for the final elimination. On the evening of September 14, the final day of the contest, the event, titled Play for a Billion, was aired live. If a player’s number matched the grand prize number, he would win US$ 1 billion.
(Source: Wikipedia)

Given the scenario, it was highly unlikely that anyone would win a billion dollar. The chances were literally 1 in a billion. In spite of that, Pepsi was unwilling to bear the risk of the possible billion-dollar prize. So they arranged for an insurance company to insure the event. They paid US$ 10 million to Berkshire Hathaway to assume the risk. Yes, Warren Buffett’s Berkshire Hathaway. The same guy who is famous for his two iron rules –

1. Never lose money
2. Don’t forget rule number 1.

Then why would Buffett expose his company to such a big risk for a relatively paltry premium of US$ 10 million? Isn’t this akin to playing Russian roulette?

My Lecture on Mental Models

I recently delivered a lecture on Mental Models and how financial advisors and other business owners can use them to grow their businesses. It was to a group of 200+ advisors at a session organized by my friend Sadique Neelgund of NetworkFP.

Talking to advisors always makes me nervous (as you can see in the picture above), largely because my work at Safal Niveshak is all about helping people learn to manage money on their own, thus avoiding the need of advisors. 😉

By the way, in case you haven’t checked out our latest ebook – Mental Models, Investing, and You (2,000+ people have already got their hands to it) please click here to get it now.

Safal Niveshak Stream – September 28, 2016

Some interesting stuff that would be worth your time today …

Investing/Stock Market

Shareholder value can’t be pursued. Like happiness, it must ensue, argues Roger L. Martin in his article in HBR …

…pursuit of shareholder value maximization does a crummy job of maximizing shareholder value. The reason is that it cannot be pursued directly. Shareholder value only grows when other things – like making customers happy, creating a create environment for employees, being a great corporate citizen – happen. As Aristotle once opined: if you seek happiness, you probably won’t end up happy; but if you seek to lead a worthy life, you are likely to end up happy. Shareholder value and happiness are counterproductive to pursue directly; rather they will happen when other things are pursued.
When to fire your financial adviser

..unlike the pizza with everything on it, a portfolio with everything on it is just expensive without giving you a return kicker…Ask for the details of what is sold and what is bought from your adviser. If you see funds being recommended for a ‘sell’ within 2 years of being put on the buy list, ask why. There could be a genuine reason—such as a fund house sale or the exit of a star fund manager —but it could be that the guy is churning you; maybe to win a junket his fund house is offering.

Reading/Thinking

John Medina’s Brain Rules for Baby is a must read for every parent. And even if you aren’t a parent, you’ll find quite a few remarkable insights in it. John uses Evolution, the big idea from the field of Biology, to explain why human beings have relatively shorter gestation period for their unborn offspring and a pretty long period of dependent childhood. He writes –

It’s a question that bothers many evolutionary scientists: How come it takes so long to raise a human child? Aside from perhaps a whale or two, we have the longest childhood on the planet. Where did this decades-long sojourn come from, and why don’t other animals have to endure what we go through?

Blame our big, fat, overweight, gold-plated, nothing-else-like-it brains. We evolved to have larger brains with higher IQs, which allowed us to move from leopard food to Masters of the Universe in 10 million very short years. We gained those brains through the energy savings of walking on two legs instead of four. But attaining the balance necessary to walk upright required the narrowing of the Homo sapiens pelvic canal. For females, that meant one thing: excruciatingly painful, often fatal births. An arms race quickly developed, evolutionary biologists theorized, between the width of the birth canal and the size of the brain. If the baby’s head were too small, the baby would die (without extraordinary and immediate medical intervention, premature infants won’t last five minutes). If the baby’s head were too big, the mother would die. The solution? Give birth to babies before their skulls become too big to kill mom. The consequence? Bringing kids into the world before their brains are fully developed. The result? Parenthood.

Because the bun is forced to come out of the oven before it is done, the child needs instruction from veteran brains for years. Clearly, childhood is a vulnerable time. More than a decade passes between the birth of a baby and its ability to reproduce—an eternity compared with other species. This gap shows not only the depth of the brain’s developmental immaturity but also the evolutionary need for unflinchingly attentive parenting.

Business

India’s most important business group is socially responsible but financially disappointing…

Tata remains active in 100 different business lines, many of which are themselves diversified. Far from slimming down, Tata is eyeing still further expansion: defence, infrastructure and financial services are the latest targets…One former adviser to several Tata CEOs says that “the risk is that Tata uses its long-term emphasis and ethical way of doing business as an excuse to tolerate underperformance.”…Mr Mistry has shown some signs that he knows what needs to be done. For the moment, however, he appears dangerously content just to sit atop what has grown into an impressive but lumbering pachyderm.
Trying to predict the future is futile. However, imagining future as a spectrum of probabilistic outcomes can turn out to be an interesting thought experiment. Today India is leaning on the edge of massive technological disruption. Here’s a stimulating discussion on what could unfold, not as a prophecy but as an alternative view of the future, over next few decades in Indian economy as a result of this disruption.

Fortunately, I was in the audience when the talk was being delivered. It was a pleasant surprise to find this on youtube and I just couldn’t help sharing it.

Life/Learning

William Zinsser, in his book On Writing Well, sites the World War II incident when the government drafted the order for blackout. The 1942 memo read –

Such preparations shall be made as will completely obscure all Federal buildings and non-Federal buildings occupied by the Federal government during an air raid for any period of time from visibility by reason of internal or external illumination.

President Franklin Roosevelt saw the memo and said, “Tell them that in buildings where they have to keep the work going to put something across the windows.”

“Simplify, simplify.” Thoreau said it and Roosevelt practiced it. Clear thinking becomes clear writing. Journaling is an effective way to crystallize thinking but it too demands simplicity.
A science-backed guide to taking truly restful breaks.

Psychologists and business scholars have recently started studying the most effective ways to relax during a workday – they call them “micro breaks”…[But] Cognitive activities during work breaks actually made fatigue worse, likely because reading websites or checking emails taxes many of the same mental processes that we use when we’re working.

Pomodoro technique is very effective in this context. It essentially allows you to work in bursts of 25-30 minutes followed by 5 minutes of break.

There’s a work zeitgeist today that says you have to be constantly busy to succeed. If you’ve got time to go for a short walk, you’re obviously not consumed by drive and ambition, so the mistaken ethos goes. The psychological reality is that your mental and physical reserves are limited and it is only by taking frequent short breaks of a truly restful nature that you will fulfil your true potential.

Want to receive our daily reads in your inbox? Click here to sign up to The Safal Niveshak Stream.