Investing

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Poke the Box: Embrace your constraints

Let’s Start with Safal Niveshak
Just in case you missed any of this on Safal Niveshak over the last few weeks…

If you want to know anything and everything about what Safal Niveshak is and what it stands for, you will find in this presentation.
Beware of the Curse of a Bull Market for it makes you forget the risk of losing money.
Why good people do bad things: A Conversation With My Daughter.
5 Things I Learned from Elon Musk on life, business and investing.

Book Worm
If you are familiar with the terms ‘value investing’ and ‘behavioural biases’ then chances are that you have heard about ‘checklists’ too. The idea of checklist has been made popular in recent times by Dr. Atul Gawande through his book The Checklist Manifesto.
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Latticework of Mental Models: Gambler’s Fallacy

Let’s start with a small riddle.

A man, probably a statistician, believes that his next child will be a girl since his wife has already borne him three sons.

Do you find his argument convincing?

The argument intuitively doesn’t feel right. Isn’t it? But why?

We’ll circle back to this puzzle but before that let me indulge you in another interesting thought experiment.

Imagine yourself as a spectator in a coin flipping tournament. You notice that in one of the plays, the coin has landed on heads for 5 consecutive flips. If you were given an opportunity to bet on the next flip, would you bet on heads or tails?

I know you’re a value investor and don’t believe in speculating or gambling away your hard earned money on frivolous coin flipping tournaments, but this being a thought experiment I would request you to play along.

So what’s your answer?

Big Idea from a Super Investor: Howard Marks on Contrarianism

Note: This article formed part of the May 2015 Special Report sent to subscribers of our premium newsletter Value Investing Almanack.

What do you do if Warren Buffett calls you personally and offers to write the foreword for your book? First, you write the book as soon as possible and second, you make it worthy and useful enough to deserve an endorsement from Buffett. (source: Google talk)

That’s precisely what Howard Marks did with his book –The Most Important Thing: Uncommon Sense for the Thoughtful Investor. He runs Oaktree Capital, a $90 billion hedge fund, and has more than four decades of investing experience. Just like Buffett he has been writing memos to his investors for last twenty five years.

These client memos contain insightful commentary and a time-tested philosophy about sensible investing. Howard Marks is not only a super investor but a thoughtful author too. His writings are not to be missed and that’s what Buffett seems to say in this statement –

When I see memos from Howard Marks in my mail, they’re the first thing I open and read. I always learn something, and that goes double for his book.

In this post, I try to draw one big lesson from his writings and offer them to you for reflection. The big idea for today is contrarian investing. Let’s dive in right away.

Poke the Box: Combine Ideas

Let’s Start with Safal Niveshak
Just in case you missed any of this on Safal Niveshak over the last few weeks…

Introducing Safal Niveshak’s University of Value Investing and Multidisciplinary Thinking.
Vishal interviews Terrible Mr. X – Lessons on What NOT To Do in Stock Market.
We kick started Safal Niveshak’s Value Investing Meetups from Bangalore and Mumbai. The initiative aims to bring the tribe members together, face to face.
Vishal recently delivered a lecture on Value Investing and Behavioral Finance at Goa Institute of Management. Click here to download the presentation slides.
Vishal received an autographed (by Charlie Munger) copy of Poor Charlie’s Almanack and Anshul joins Safal Niveshak as full time partner. Click here to find out more.

Latticework of Mental Models: Reciprocation Tendency

Few months back I was watching a bollywood action crime drama movie called ‘Badlapur’. The movie portrays the human emotion of ‘revenge’ and how far someone can go to seek it. The protagonist in the movie patiently waits 15 years to avenge his wife’s and son’s murder.

The urge to take revenge can manifest in smallest of things. Someone cuts you off in the traffic and the first thought that comes to mind is to get back at him and settle the account. In fact people getting shot dead in road rage incidents isn’t uncommon these days.

So what could be the reason for this strong force, a need to reciprocate the wrongdoing, in human behaviour?

Is it just the anger? Or is it the resentment for receiving an unfair treatment?

Let’s use the inversion mental model and turn the question around. If humans can have such a strong need to reciprocate to an injustice, can they also have a similar need to reciprocate a favour?

To answer that question in a truly multidisciplinary way, let’s explore the field of Psychology.

Robert Cialdini, a professor of Psychology and author of wildly popular book Influence: The Psychology of Persuasion, has done extensive research on human behaviour. One of the human biases that he talks about in his book is Reciprocity Bias. According to Cialdini – the rule for reciprocation is one of the most potent weapons of influence around us.

Results: Value Investing Contest 2015

The Safal Niveshak Value Investing Contest 2015 We recently concluded the second edition of Safal Niveshak’s Value Investing Contest. Today, I feel happy to announce the winners of the same.

We received 24 entries in total and found it extremely tough to rank them in terms of quality and simplicity of analysis. Thus, we have chosen four winners for the first three positions.

While our choice of winners does not devalue the quality of analyses sent by others, it’s just that we had to pick the best very few, and here they are –

1st Prize

Ankit Kanodia – Mahindra Holidays

2nd Prize

Vikas Kasturi – NESCO
Depesh Kashyap – MT Educare

3rd Prize

Samar Srivastava – Poddar Developers

Here are the prizes winners have won –

1st Prize – Books of choice, worth Rs 5,000/-
2nd Prize – Books of choice, worth Rs 2,500/- each
3rd Prize – Books of choice, worth Rs 2,000/-

Congratulations to all the winners, and thanks to all who participated!

Click here to view/download all the submitted entries.

Latticework of Mental Models: Twaddle Tendency

Open any financial news channel and often you can find a so called expert being interviewed on his opinion about the direction of the stock market and health of the economy.

On being asked such macro questions, the answer usually goes something like this –

Maybe the gentleman above has a point. But I just don’t see it. Do you? All I see is that his verbal diarrhea was completely useless.

In most cases, the right (and honest) answer is – I don’t know.

But how can experts not know? They are interviewed because they’re supposed to know about everything. And even if they don’t know, what is Google for? All the facts and figures are few key strokes away, so it’s a sin to not have an opinion about everything, especially if you’re considered an expert and probably being compensated by pay per word.

Life 2.0: Recycling Wealth

People generally go about philanthropy the wrong way. Like money, the social impact of your efforts has a tendency to compound provided you get involved early.

Philanthropy is harder than business. You are tackling important problems that people with intellect and money have tried in the past and had a tough time solving. ~ Warren Buffett

Few years back, one of my friends asked me if I would donate money for charity. My smart-alec answer to him was, “Charity begins at home. So I choose to donate myself first.”

And then, to further flaunt my deep thinking abilities, I backed it up with another logic.

“In case of emergency, recommends the flight safety announcements, you should wear the oxygen mask yourself first and then help the other person. So I believe that I should first get rich myself and then only think about charity and giving back to society.”

I thought it wasn’t a selfish attitude. It was a perfectly rational answer to anybody who wanted to exploit my guilt about not giving back to society.

“So how much money do you think you should have before you can call yourself rich?” asked my friend.

Of course I didn’t have any answer to that question, which made me wonder if I was just making up rational sounding excuses to avoid thinking about a difficult subject. Perhaps I was.
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Latticework of Mental Models: Status Quo Bias

Do you own a smartphone? Chances are that you’re reading this on a smartphone or a tablet.

One of the most interesting thing about these smartphones is that they allows you to customize everything – data usage, app synchronisation, phone encryption, even how loud you want the camera shutter to sound.

How many of these customization settings have you used? In my case – almost none!

Although I’m not technically challenged, but do suffer from, just like most of the other human beings, a cognitive bias.

Earlier in the latticework series, I wrote about Do Something Bias. It’s a cognitive bias where people get an urge to take action or make unnecessary decisions when ‘not doing anything’ is required.

Now let’s turn the table, and talk about a bias which is exactly opposite of Do Something Bias. It’s called Status Quo Bias. The tendency of people where they don’t do anything and continue to maintain the current state of affairs.

If we could boil down this cognitive bias to a more fundamental body of knowledge, it would be Physics. I am sure you must have heard of Newton’s laws of motion. The first law of motion states –

An object either remains at rest or continues to move at a constant velocity, unless acted upon by an external force.

This characteristic, called inertia, is exhibited by all physical bodies. And when it comes to human behaviour, this tendency manifests in the form of Status Quo Bias.

I Might Be Wrong

On the morning of the Battle of Waterloo in 1815, Napoleon Bonaparte smugly assured his generals – “I tell you Wellington is a bad general, the English are bad soldiers; we will settle this matter by lunchtime.”

Just before the Titanic was about to embark on its maiden journey in 1912, one passenger asked a ship’s agent for extra insurance on some valuables in her luggage. The agent replied, “Ridiculous. This boat’s unsinkable.”

Captain Smith himself was asked about the safety of the Titanic. He answered – “I cannot imagine any condition which would cause a ship to founder. I cannot conceive of any vital disaster happening to this vessel. Modern shipbuilding has gone beyond that.”

[Read more…] about I Might Be Wrong