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Safal Niveshak’s Investor Psychology Survey: You Failed!

“A human being is a dark and veiled thing; and whereas the hare has seven skins, the human being can shed seven times seventy skins and still not be able to say: This is really you, this is no longer outer shell.”

This is what the noted German philosopher and poet Nietzsche said, and this is what the Austrian neurologist Sigmund Freud agreed – we are ignorant of ourselves!

And the biggest problem with such ignorance is that it is just so expensive.

Now, even Darwin struggled to explain why we would evolve a response that lets others know that we have cheated or lied. Darwin would be trembling in his grave knowing how easily we have learned to cheat ourselves.

Poke the Box: Face Your Problem…Like that of Being a Bad Investor

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

Launched The Safal Niveshak Mastermind – one-year course to help your reinvent how your invest, work, and live – and have received a great response so far. So that you don’t miss out on this Course, subscribe before it closes on 25th August. Know more and subscribe here.
Recently started a survey on investor psychology, and the results have surprised me! Before I share the results and my analysis on coming Monday, please participate in it by visiting this page.
There was a massacre on Dalal Street this week. If you are worried about falling stock prices, first delete you online portfolio tracker :-), and then read this.
I have 40 reasons you are a bad investor!

Mental Model of the Week: Contrast Effect

Robert Cialdini, in his book Influence, shares a story of two brothers, Sid and Harry, who owned a men’s tailor shop…

Whenever the salesman, Sid, had a new customer trying on suits in front of the shop’s three-sided mirror, he would admit to a hearing problem, and, as they talked, he would repeatedly request that the man speak more loudly to him. Once the customer had found a suit he liked and had asked for the price, Sid would call to his brother, the head tailor, at the back of the room, “Harry, how much for this suit?”

Looking up from his work — and greatly exaggerating the suit’s true price — Harry would call back, “For that beautiful all-wool suit, forty-two dollars.” Pretending not to have heard and cupping his hand to his ear, Sid would ask again. Once more Harry would reply, “Forty-two dollars.” At this point, Sid would turn to the customer and report, “He says twenty-two dollars.”

Many a man would hurry to buy the suit and scramble out of the shop with his “expensive = good” bargain before Poor Sid discovered the “mistake”.

Well, Sid and Harry made their moolah even as the customer thought he got a ‘great’ deal! 🙂

Now look at this image below. The black dots you see are fleeting, and any individual dot will turn white as soon as you focus on it. Clearly, all the dots are actually white, yet at a glance we still perceive some of them as being black.

This is due to a principle in human perception, called the “contrast effect”, which affects the way we see the difference between two things that are presented one after another.

The contrast affect also works when we are studying physical appearances of people. Research investigating attractiveness reflects the importance of physical appearance.

Despite common phrases such as ‘beauty is only skin deep,’ there is no longer any doubt that being attractive has its benefits.

Attractive individuals are consistently treated significantly better than their unattractive counterparts. Additionally, attractive adults are judged more positively in work-related competence than unattractive counterparts, and are perceived as higher in social appeal and interpersonal abilities.

These results hold true even when familiarity is taken into account. Not only are opinions influenced by attractiveness, but behavior towards attractive children and adults echo the importance of being physically attractive.

So if you are talking to a beautiful woman at a party and are then joined by an unattractive one, the second woman will strike you as less attractive than she actually is.

Just look at how big accounting scams are created.

Here is what Ramalinga Raju’s aides at Satyam must have told him before the scam came to light – “If we slowly and gradually over time manipulate the numbers, the auditors won’t notice it.”

Incidentally, in this case, even the auditors were involved! But the Satyam scam did not come to light till Raju confessed of riding a tiger.

You see, contrasts may blind us to change until it’s too late. For example, we often don’t notice the bad behavior of others (like we ignore “small” accounting manipulations at companies) if it goes sour gradually over time. Often we see reality as constant, although it gradually changes.

It is, after all, the small, gradual, invisible changes that harm us the most.

Book Worm
I recently bought Rolf Dobelli’s The Art of Thinking Clearly on the suggestion of Prof. Sanjay Bakshi. And I haven’t put it down ever since.

Here is what Dobelli has written about the Contrast Effect…

When we encounter contrasts, we react like birds to a gunshot: we jump up and get moving. Our weak spot: we don’t notice small, gradual changes. A magician can make your watch vanish because, when he presses on one part of your body, you don’t notice the lighter touch on your wrist as he relieves you of your Rolex.

Similarly, we fail to notice how our money disappears. It constantly loses its value, but we do not notice because inflation happens over time. If it were imposed on us in the form of a brutal tax (and basically that’s what it is), we would be outraged.

The contrast effect can ruin your whole life: a charming woman marries a fairly average man. But because her parents were awful people, the ordinary man appears to be a prince.

Stimulate Your Mind
Here’s some amazing content I read during the week gone by…

Sad to see this all around me, but from park swings to medical seats, competition to outsmart others and squeeze through the system starts early for the Indian child.
India’s capitalistic companies continue to believe in deal-making with the ‘babus’ than following the rules of the game ethically. Maybe, deal-making is what they consider a rule!
Leo Babauta of Zen Habits on why you must simplify your life and let go of your crutches.
Jana Vembunarayanan, a Safal Niveshak tribesman, writes on the five elements of effective thinking on his amazing blog.

Poke of the Week – Appreciate Your Problem

“That which opposes produces a benefit.” ~ Heraclitus

There was a time when I was slightly overweight and combined with the rigorous daily travel, suffered from a very bad backache. I didn’t feel in control of my health, because I couldn’t give enough time to improve it.

Or maybe the lack of time was just an excuse to not consider my health a priority. Thinking about my deteriorating health made me feel horrible, so I didn’t want to even think about it!

It was a downward spiral, and really hard to stop.

Most of us don’t like the problems, conflicts, and challenges we face in our lives, because these seem like roadblocks in the path of what we are trying to do.

But Heraclitus, as he writes in the above comment, invites us to consider how these problems — the headwinds we face or things that are moving against us — can benefit us.

If you are an investor in the stock market, your current portfolio of stocks may seem like a big problem to you achieving your financial goals, especially given that stocks across the board are falling like ninepins (and those talked about on Safal Niveshak are falling even faster :-))

So, as a result, one of the following might happen:

You eliminate the problem by selling duds from your portfolio even while suffering the losses but avoiding permanent loss of capital;
You find a few other stocks that are much better businesses and are available cheap after the crash;
You question whether you really want to stress out speculating in stocks and would rather learn the rules of sensible investing that will earn you lower short-term return than speculation, but much higher return per unit of stress.

In short, the problem you think you are facing currently can lead you to stop and re-think what you were doing all this while, and thus lead you to something good.

Think about it: the history of discovery and invention is filled with people whose routines were interrupted and who were forced to come up with alternative solutions.

Even America was discovered as a by-product of the Europeans’s search for pepper!

So, think of the biggest problem you are facing currently and positive things you can discover in seeking the solution?

Like, ask yourself this question now – “What would I have been doing if money was not a problem?”

Then, just do it!

Idea Source: Creative Whack Pack

Well, if you haven’t done it already, sign up here to receive Poke the Box in your email…and get ready for stimulating Saturday mornings.

Keep poking.

Appreciate your problem.

Subscribe to Mastermind. 🙂

And please watch Bhaag Milkha Bhaag!

Till next weekend…

Vishal Khandelwal
Chief Poker – Poke the Box

The Safal Niveshak Mastermind is Here!

“Your time is limited, so don’t waste it living someone else’s life,” said Steve Jobs.

I’m sure you relate to Jobs’ statement very well, for if you are like me, you want to reclaim the reins of your life in your hands.

To do that, it’s very important that you take complete control of your financial future, rather than let someone else decide where you will be 10 or 20 years down the line.

Now you may ask – “But how do I take control of my financial future when I am so busy taking care of my present survival?”

It’s a very valid question, my dear friend. I have been through this very phase just a few years back, when I was worried not only about my financial future, but also about how to do it while being busy taking care of my present then.

But after making numerous mistakes along the way, and in the process learning the right ideas and forming good money habits, I have achieved my financial freedom (well, almost!).

Thanks to the willingness to take control of my financial life, now I don’t work for money for more than a couple of hours a day. Instead, I spend a large part of my time travelling, reading, writing, thinking, and playing…not with my stocks but with my kids. 🙂

You see, I did not have anyone to guide me when I was searching for my personal financial freedom. But you have help at hand!

Now if you are willing, here’s something I propose.

If financial freedom means to you…

Freedom from having to work, yet still being able to enjoy life without concern over money
Having your life’s basic costs covered, where you’re not worried about car or house payments anymore
Having enough money to meet your life’s most important goals
Having more time to do the things you really want to do

…I have a plan for you!

After last few months of endless work and last few days of sleeplessness :-), I feel happy to announce at your service…

The Safal Niveshak Mastermind
The Safal Niveshak Mastermind is a one-year course to help you reinvent how you invest, do work that matters, and in the process, get started on creating your financial freedom.

My idea of launching The Safal Niveshak Mastermind is two-pronged. This course will help you with…

Deep and accelerated learning in value investing and personal finance to help you manage your money better; and
Step-by-step guidance on turning your passion into a money-generating small business so that you can live your life the way you want.

I’ve sifted through a mountain of amazing books, documents, lectures, websites, and the last ten years of my personal experience as an investor and two as an entrepreneur to ensure that I bring the best ideas and lessons for you in value investing, personal finance, and living life on your own terms.

The goal of The Safal Niveshak Mastermind course is simple – To help you get richer every single day.

What You’ll Get By Joining The Safal Niveshak Mastermind
I’ve lined up a lot of things that you will receive when you become a part of The Safal Niveshak Mastermind…

1. Premium Course in Value Investing
This course will include…

50+ lessons and several hours of video and audio classes apart from a few real-life case studies that will help you learn the nuances of Value Investing and how you can apply it to create long-term wealth through stock investing.
Lessons on identifying moats and analyzing specific sectors to help you build your circle of competence.
Lessons on building a latticework of mental models – the Charlie Munger way – to make better investment decisions.
Everything I teach through my “Art of Investing” Workshops, and much more.
Exclusive Forum to participate in learning exercises and discuss practical examples so that you can gain experience in doing your own independent analysis.

2. The Safal Niveshak True Wealth Letter
This will be a series of articles that will include…

Habit-Building Ideas on Investing & Personal Finance: You will receive practical and tested ideas in investing and personal finance that will help you bring about a sea change in the way you manage your money.
Book Reviews: If you have an excuse for not reading the amazing books on investing out there, don’t worry for I will present you the big ideas from some of the best investing books that I have read so far and will be reading over the next few months.

3. Course: Turn Your Passion into Paycheque
This is a course that a lot of tribesmen have requested me for. Here, you will learn the step-by-step method of turning your passion into a regular stream of money – or an alternative source of income – so that you can do what you love to do, and not be worried anymore about someone else deciding your financial life and future.

Through this course, I will share my experiences in changing my own life by reinventing the way I work, and guide you on how you can do it for yourself.

4. Special E-Books, Workbooks, Videos and Podcasts
From time to time, I will also send you special e-books, workbooks, videos and podcasts…all with the view of enhancing your learning in investing, personal finance, and turning your passion into lifelong earning.

How to Subscribe?
The Safal Niveshak Mastermind, with all its invaluable benefits as mentioned above, is priced at Rs 10,000/- (plus taxes) for an year’s subscription.

Please note that this is a “special, introductory price” for the Course and will be available till 25th August 2013 only.

It’s also the best I can offer you, given the immense value I believe The Safal Niveshak Mastermind will add to your life.

What is more, 20% of the fee I collect for The Safal Niveshak Mastermind, after meeting the costs of running the Course, would go towards sponsoring children through organizations like Akshay Patra, World Vision India, Against Malaria Foundation, and other such efforts.

So at the same time as you are transforming your relationship and results with your money, you will be helping to transform the lives of the underprivileged from poverty to self-reliance. I hope you appreciate that!

Now, if you are interested to reinvent how you invest, do work that matters, and create your own financial freedom, click below to subscribe to The Safal Niveshak Mastermind.

Click Here to Subscribe Now!
The Safal Niveshak Mastermind is your chance to break the shackles, reinvent the way you invest, do what you love, and create a new future.

The knowledge you’ll get here will be your great asset. It wouldn’t be stolen or confiscated. It would set your mind free. And that’s what true independence that you deserve is all about.

With respect,
Vishal Khandelwal
Chief Tribesman, Safal Niveshak

P.S. After you make the payment, I will create your Login and send you the details (Used ID and Password) within the next 5 days. Your Mastermind subscription will start only after that.

P.P.S. In case you face any issues making the payment, please write to me at vishal@safalniveshak.com or call me at +91-80970 73918.

P.P.P.S. Please read the “Frequently Asked Questions” to avoid future confusions/conflicts.

Safal Niveshak StockTalk: Gruh Finance

Statutory Warning: This report may cause a reaction, and acting on it can be injurious to your wealth.

Note: This StockTalk analysis has been written by Asif Nadaf.

1. About Gruh Finance
Gruh Finance (formerly Gujarat Rural Housing Corporation Limited) was set up in 1986 by HDFC with the objective of providing institutional structure to rural housing finance. HDFC owns around 60% stake in the company and provides it equity support. Gruh’s major focus is to provide home loans to individuals and families for purchase, construction and extension. It also provides loan for repair and renovation of houses. The company has a distinct target market segment, which complements HDFC’s market.

Association with HDFC
HDFC helps GRUH in many ways which include enabling funding at competitive rates, operational support, management support, operating policy, lending policy, loan sanctioning norms and loan schemes. GRUH benefits immensely by using well-established stringent credit appraisal and monitoring systems and processes, strong risk management systems and efficient recovery mechanisms of HDFC.

Although both GRUH and HDFC operate in the same industry, GRUH focuses primarily in the rural and semi-urban markets. This segment is distinct from HDFC’s target segment. GRUH also cross sells HDFC products.

Nature of Industry
There are three types of industries:

There are industries where only one or two players take away most of the profit eg. Google, Yahoo or NSE and BSE
There are others where nobody makes profits e.g. Airline industry.
Finally, there are industries where every player makes money. Housing finance (HFC) is one of them.

The success of an HFC is very much dependent on two things, as aptly described in the book “The Richest Man in Babylon” – Safety of principal and safety of interest.

Safety of principal is dependent on nature of collateral and value of collateral. Safety of interest is dependent on nature and ability of borrower to make timely payments.

Any HFC faces three broad risks:

1. Market risk is the risk of losses in positions arising from movements in market prices. HFCs face two broad type of market risks. There is adverse movement in price of collateral and high loan to book value (LTV).

After a loan is given, the value of collateral diminishes. For example, a bank gives a home loan of Rs 30 lac and after some time, the value of home declined to Rs 20 lac. In India, given that property prices have continued to rise in the past, HFCs have not faced risk on this account..

LTV is the ratio of loan given against the value of the collateral. The lower the ratio, the lower the market risk. In simple words, the market risk for an HFC reduces when the gap between the market value of collateral and loan taken is large. For example, if for a property worth Rs 50 lac a loan of Rs 20 lac is given, the market risk is low. On the other hand, if for a property worth Rs 50 lac, a loan of Rs 48 lac is given, the market risk is high for the HFC.

In case of Gruh Finance, the LTV is less than 80% for approximately 78% of the properties financed so far and LTV greater than 85% exists only in case of 4% of the properties financed. Therefore, the overall market risk remains low for the company.

2. Credit risk refers to the risk that a borrower will default on any type of debt by failing to make payments which it is obligated to do. The risk is primarily that of the lender and includes lost principal and interest, disruption to cash flows, and increased collection costs.

Credit risk could be mitigated by stringent credit appraisal of the borrower by HFCs. Credit appraisal looks for ability and willingness of borrower to make timely payment.

Non-performing asset (NPA) is a measure of strength of credit risk policies and processes.

An NPA is defined as a credit facility in respect of which the interest and/or installment of principal has remained ‘past due’ for a specified period of time. In India, an asset is considered an NPA when the HFCs do not receive interest and/or principal for a continuous period of 90 days. If a borrower stops payment of EMI for 3 months, the bank considers the loan (asset) as non-performing.

For Gruh Finance, asset quality remains above industry average due to low gross non-performing assets (Gross NPA) and low Net non-performing assets (Net NPA).

3. Operations risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events.

Examples of operational risk include fraud by employees, theft of information, hacking damage, third party theft and forgery, account churning, damage to assets due to disasters, system failure, accounting errors, and negligence. Correct operational risk policies and processes increase asset quality and decreases non-performing assets as seen above.

The profit and NPAs of two HFCs are quite depended on processes and policies defined for each of the above risks. HDFC is the best amongst housing companies for managing each of the three risks. Gruh, being a subsidiary of HDFC, has simply copied the processes and policies for managing the above three risks from its parent.

2. Checklist
I’ve analyzed GRUH by answering a few important questions that span its:

Business performance,
Financial performance,
Management quality, and
Competition.

Before we move ahead, here are the symbols that I’ve placed against each checklist point and that will tell you at a glance whether I have a positive or negative view on that particular point.

Indicates my positive view

Indicates my negative view

Let’s get started.

A. Business
1. Can I, in simple words, explain what the company does?
Yes. Gruh is a housing finance company where HDFC owns a 59.7% stake. Its major focus is to provide home loans to individuals and families for purchase, construction and extension in rural and semi-urban India. It also provides loans for repair and renovation of houses. The success of HFCs is highly dependent on managing market risk, credit risk and operational risk. The policies and processes covering these three risks determine both safety of principle and adequate returns.

2. Does the business have high uncertainty?
The inherent nature of Gruh’s business is not uncertain. Once a loan is given, it keeps receiving EMIs for the duration of loan which is usually between 10 to 20 years.

3. Has the business got an enormous moat?
Gruh has a weak moat. However, an HFC’s business comes under the service sector and there is scope for number of players to operate with decent profit. One moat here is switching cost. One incentive to switch to other HFC/bank would be lower interest rate. However, the interest rate of HFCs/banks do not differ significantly to offer this incentive. Also, a borrower who wants to transfer loan to other HFC/bank has to put in lot of efforts in doing the paper work. The pain of going through this paperwork during the switch does not compensate with the gain to be received by extra savings to be made by lower interest rate.

The second advantage for an HFC like Gruh is that the policies and processes designed to manage market, credit and operational risks differ from HFCs to HFCs. Gruh has stringent policies and processes for lending, copied from its parent HDFC, which are best in the industry.

4. Does the business generate strong free cash flow?
Yes. Since Gruh does not have to invest in any plant and machinery and also does not have to hold any receivables or inventory, whatever cash it generates from operations is almost free cash. Most of its assets are free cash and book value closely resembles liquid assets.

As can be seen for the year 2013, the fixed asset of approximately Rs 12 crore is very low compared total asset of Rs 5,600 crore. It means whatever profit after tax is generated (Rs 42 Cr in 2008 to Rs 146 Cr in 2013) is almost free cash.

5. What is the bargaining power of suppliers and buyers?

Gruh borrows from various entities – National Housing Banks, commercial banks, debentures, etc. – to meet its short-term and long-term borrowing requirements. Since the rate of interest charged by all HFCs/banks are not significantly different, the rural and semi-urban borrowers do not have bargaining power.

B. Financial Performance
6. Does the business have a consistent sales and profit growth history and is there room for future growth?
Gruh has an excellent track record of financial performance…

Both gross and net NPAs have been one of the best (lowest) in the industry.
Net interest margin is high compared to peers
Loan assets have been increasing steadily over the years.
Average annual growth in Profit after tax has been 28% for the past 6 years, which is quite robust

As far as the future is concerned, given the continuous demand for new residential housing in semi-urban and rural India, I do not see mush problem on the growth front for Gruh, though growth may not be as high as in the past owing to the higher base.

7. Does the company have a good dividend history?

Good enough. In terms of dividend payout (amount of dividend paid as percentage of net profit), Gruh has averaged around 60% over the past 10 years, which is a good payout.

8. Has it got a high and consistent return on equity?
Yes. A company’s return on equity is akin to you earning a certain amount every year on your investments (no paper profits but actual dividend and interest income plus any profit on sale of investments). Looking that way, Gruh’s average return on equity of 27% is a good number. This is reflective of the good yield its investments have earned for it over the years, which has largely been a result of an overall good performance by the stock market.

C. Management Quality
9. Is the management known for its capital allocation skill and integrity?

Being a HDFC group company, there is no doubt that Gruh has a management that considers integrity as a core business value. As far as capital allocation skill is concerned, that is reflected in the good 27% average return on equity the company has earned over the years.

As can be seen, the retained earnings is approximately 60% and balance is distributed as dividend.

10. Has there been any substantial equity dilution in the past?

No. Gruh had seen a 30% increase in its outstanding equity shares in the year 2006-2007. This was on account of rights issue in the ratio of 3:10

11. Are management’s salaries too high?
During the latest year, the Managing Director was paid gross remuneration of Rs 1.7 cr. This is around 1.19% of the company’s net profit and thus not a big figure.

12. What has the management done with the cash in the past?
Gruh has, over the last ten years, distributed around 40% of earnings as dividend and balance was reinvested in the business. The average return on equity has been around 27% and it has increased over the year. It means the, management does not hesitate to return the money to shareholders in the form of dividend, instead of employing them in business when returns are not going to be good.

D. Competition
13. Does the business face high competition?
As of now, not much, as there are not many big players catering to the rural and semi urban market. However, when these markets grow in future, many big players would enter them to gain market share.

14. Has the management focused on market share or profitability in the past?
Looking at good capital allocation decisions, decent return on equity, high asset quality and low NPAs, the management as focused exclusively on profitability.

3. Future Prospects
Gruh operates in seven states – Gujarat, Maharashtra Karnataka, Rajasthan, Madhya Pradesh, Chhattisgarh and Tamil Nadu. The bulk of revenue comes from Gujarat and Maharashtra. These two states accounts for 76% of its loan portfolio. Gruh has a total of 134 retail offices and employees strength of 517 in these seven states.

There is enough room for growth for the company in the future. Gruh has the financial strength and support of its parent HDFC to expand and establish branches in remaining 21 states. Looking at India’s growth story, the future growth in housing finance would come from rural and semi–urban market and Gruh is well establish to take advantage of this opportunity in future.

4. Risk Statement
Gruh’s business, when purchased at a good buying price can provide a great amount of stability to an investor’s portfolio. The one risk that remains very high is the price paid to acquire stocks.

I am not sure after the retirement of Mr. Deepak Parekh, how the new head of HDFC and Gruh would be able to carry the legacy forward. Remember what happened to Infosys after Mr. Narayan Murthy retired; he had to be called back to lead the company after the gap of seven years. Essentially, the company is too much dependent on the vision and management skills of its founder.

5. Financial Snapshot

Disclaimer: I, Asif Nadaf, have no position in the company or in any company related to the promoter group. Readers are advised to do their own independent assessment before taking any decision. You can expect some errors or forward looking statements, so do your own research as well.

You’re A Bad Investor!

Dalbar, a leading financial services market research firm in the US, recently conducted a study to determine how small investors have fared over the years compared to the stock market as a whole.

In fact, it has conducted a similar research for the past 12 years, and with conclusion that has said the same story each time, which is…

Small Investors are Bad Investors!
“Small investors are losers,” says the Dalbar report, “…and have consistently underperformed the broader market on a multi-year time frame.”

Here is a chart that shows the most recent decade’s rolling 20-year returns for the average mutual fund investor in the US compared to the S&P 500 index…

One Year Course in Value Investing
Join The Safal Niveshak Mastermind, my special one-year course in Value Investing to reinvent how you invest and take control of your financial life. Click here to know more and subscribe. Subscriptions for the first batch close on 25th August 2013!

Small Investors underperform the stock market

“But these numbers are for the American small investor,” you may say.

My dear friend, I’m sure the numbers for Indian investors won’t be any different!

Now, why do I say this? For two reasons:

First, like their US counterparts, a majority of Indian equity mutual funds, after fees and expenses, have underperformed the benchmark indices over long time periods.
Two, you know for sure how you – and other small investors around you – have moved in and out of the stock market and thus these mutual funds, thereby compounding your costs and cutting short your returns.

Over the years, thanks to your sudden excitement or sudden panic, you have hurt yourself as far as your stock market return is concerned.

Thus, I feel unfortunate to tell you this, but there are great chances that you have been a bad investor all these years!

If you have any doubt about it, I encourage you to compare your performance against that of the BSE-200 index (or any other broader index of your choice) over the past 5-10 years. You may be due for some humbling.

But if it makes you feel any better, know that you’re not alone. Most other small investors may have performed equally bad.

Another proof I have is the list of confessions drawn from my recent post where I had asked readers to list down their worst individual stock performances.

More than the actual performances, what was more enlightening was the list of mistakes readers shared associated with their losses, which follows below.

I suggest you take a print of the following text, paste it in front of you, and read it every time you are about to make an investment decision. It may save you a lot of grief in the future.

Small Investor’s Wall of Shame
Here is a list of 40 investing mistakes most investors make, which I have collated from the confessions I received in the recent post. I am sure you will associate with a lot of these…

I, the small investor, buy stocks even when I don’t understand the underlying businesses.
I get carried away seeing just glimpses of greatness – like low valuation and good corporate governance – and don’t look at the overall business. I act like the man with a hammer for whom everything in the world looks like a nail.
I invest in businesses that are growing fast, but ignore that they are also burning capital consistently to achieve that growth.
Ensuring management integrity sounds difficult, so I often avoid it. I forgot what Buffett said about energy, intelligence, and integrity (that if you don’t have the last, the first two would kill you).
I spend a lot of time reading newspapers and watching business channels, and thus I easily get carried away by stories – especially when too many people are repeating them.
I don’t believe brokers but I believe independent research houses that serve me readymade stock recommendations week after week. So that solves my problems of doing any independent study.
Okay, I sometimes put blind trust on tips from broker, especially when they are for multi-bagger stocks.
I hold on to a stock – whether it’s in profit or loss – even after I realize that buying it was a mistake. Hope has always been my great friend.
I love the ups and downs of cyclical industries (cement, steel, etc.) despite not being an insider and despite not having deep knowledge in the same. So what if I was crushed by such cycles in the past. The future will surely be different.
I love to throw good money after bad because I want to be consistent with my original decision. I work hard to find companies and then invest a lot of money in then. Every fall just gives me an opportunity to average down my costs. If I can average when a stock falls from 100 to 25, I will always average when it falls to 10 or even 5.
I have read that high debt can kill a company, but I have also seen a few companies recover from their debt burden in the past…and so I don’t avoid companies with high debt to equity. I don’t understand the base rate of success of companies that have high debt.
When I love a company’s product or service, I don’t think twice before buying its stock. I believe if a company’s product or service is good, so will be its financial performance.
Warren Buffett is too humble to have a “too hard” basket for businesses that are complex to understand. I don’t find anything too hard for me!
I believe a good company will always turn into a good investment. So I don’t mind paying any price if the business is good.
I hold on to stocks that are down 80-90%. How worse can it get?
I find it difficult to convince myself that I have made an investment mistake. After all, I rarely make mistakes!
I often don’t remember why I bought a stock.
I often buy a stock because a smarter investor bought it. How could he be wrong?
IPOs? Oh I love them, and especially for their listing gains. Again, I don’t bother about the base rate of success as an IPO investor (which, in reality, sucks!).
I only show patience when it comes to holding on to my losers…rarely otherwise.
I love cheap stocks. Even if the business goes bankrupt, I will still get some money back.
I believe in high conviction and high concentration. So sometimes, my best idea would form 70-80% of my portfolio.
I have great faith that businesses that are going downhill can turn around. I know Peter Lynch said that “turnarounds rarely turn around”, but I am always hopeful.
When I make some money in the stock market, I feel like a great stock picker. I see this as a great way to keep myself motivated.
Some stocks that are down 80-90% are lying in my portfolio for the last 10 years. You see, I am a long term investor.
I know that businesses that have been “reliable” for years will be reliable in the future as well, and so I can always “rely” on them.
I have a great memory and don’t believe in having a written process. I am after all a human and will continue to make many mistakes. But I will learn from them, and that’s important.
The beautiful anchors on business channels often lead me to buy bad stocks. But that’s a cost you must pay to watch them throughout the day.
I often buy stocks due to peer pressure. How can people I know make quick money while I am left out?
If a company’s promoter is doing fine today, I avoid looking into his past. People change, after all.
I understand P&L accounts but find balance sheets confusing. By the way, who has the time to read balance sheets these days?
So what if the stock has risen 50% from the time I sold it? I will buy it again! I don’t want to miss out on the gains like others have made in recent times.
If a company is earning good profits, it must be earning good cash. After all, doesn’t profit equal cash?
I am often attracted to shiny stuff that has great future potential – things like green energy, new drug, and latest technology.
I am young and thus have too many years to cover my mistakes. So what if I lose some money now. I have enough time on my side to try out many stocks before finding the best ones.
I am sure putting out my mistakes in the open will help me avoid making them in the future, so I felt great after confessing on Safal Niveshak.
I read Safal Niveshak like it is a holy grail that will make me a smarter investor. I am sure of Vishal’s capabilities and thus sure that I will find my multi-baggers some day.
I stopped doing my homework ever since I left school.
I don’t believe in miracles, except when it is about my stock portfolio.
I know that a fool and his money are soon parted, but I am not that fool.

Hate the Sin, Not the Sinner
You see, there’s no point splitting your hairs on what has happened in the past. But surely there’s an urgent need to throw floodlights on what you are doing as an investor, as of NOW.

It’s a time to do a reality check – whether you really want to take up stock market investing on your own, or delegate the responsibility to a fund manager and then keep your fingers crossed for the next 10 years.

Of course, there’s no point quitting the stock market at all taking this to be a casino or a place where just the big investor wins.

If you have time in your hand – and that’s your biggest edge as a small investor – there’s no better place than the stock market to create your retirement nest egg.

But there’s no point being overconfident – and that’s a big sin – on your capabilities as a stock market investor…thinking that you are much better at it than you actually are.

Please don’t treat stocks as coins in a coin-flipping contest. “If not this one, then that one!” is a dangerous mentality in the stock market.

Your odds of success will only grow if you can take time out to understand businesses, then buy only those that are good and are available at discounted prices, and behave sensibly all through this process.

Online trading has given you great powers to instantly invest whenever and wherever you want. But before you choose to use this power the next time, always remember what Spiderman said – “With great power comes great responsibility.”

You have been a bad investor. Now I hope you will become a responsible one.

All the best!

How to Stop Worrying about Falling Stock Prices

My friend Rohan visited me on the weekend, and here is how our discussion went. Rohan’s comments are in red.

“Hey Vishal, did you notice the crash last week? I am pained to see my portfolio again and again!”

“Crash? Where?”

“Stop fooling dude! You know I am talking about the stock market and the crash in the Sensex!”

“Oh that! No, I was busy somewhere else, so didn’t notice that!”

“How could you miss a 1,200 points crash in the last 8 days? And you seem to be writing an investment blog, huh!”

Poke the Box: Have Fun Today, and Please Avoid Death

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

In life and investing, “It will never happen to me!” is a widely held but dangerous notion. You must avoid it at all costs!
There’s this one great investment you can ever make for yourself and your loved ones. I’m already making it. What about you?
Here’s your chance to get into the mind of one of the best Indian investment thinkers. Prof. Sanjay Bakshi agrees for a second interview for Safal Niveshak. Ask him your question here.

Mental Model of the Week: Second-Level Thinking

Here is what Ben Graham wrote in The Intelligent Investor…

“The art of investment has one characteristic that is not generally appreciated. A creditable, if unspectacular, result can be achieved by the lay investor with a minimum of effort and capability; but to improve this easily attainable standard requires much application and more than a trace of wisdom.”

The ironical truth about investing is that, despite hundreds of rules that guide the practice of being an investor, there is no rule that works all the time, and in the same manner.

Investing is, after all, not like a game of football where the ground and the ball remain the same throughout the ninety minutes of play. It’s more like cricket where the pitch changes its behaviour with every new ball, and the ball changes is shape every time it’s bowled.

So, when you are an investor, the environment in which you play isn’t controllable, and circumstances rarely repeat exactly. What’s most important then is how you behave when others are behaving oddly.

One of the best tools to think and behave better in investing is what Howard Marks calls the “second level thinking”. Here is how Marks explains it in his book The Most Important Thing…

First-level thinking says, “It’s a good company; let’s buy the stock.” Second-level thinking says, “It’s a good company, but everyone thinks it’s a great company, and it’s not. So the stock’s overrated and overpriced; let’s sell.”
First-level thinking says, “The outlook calls for low growth and rising inflation. Let’s dump our stocks.” Second-level thinking says, “The outlook stinks, but everyone else is selling in panic. Buy!”
First-level thinking says, “I think the company’s earnings will fall; sell.” Second-level thinking says, “I think the company’s earnings will fall less than people expect, and the pleasant surprise will lift the stock; buy.”

In other words, first-level thinking, as the name suggests, is what comes to our mind first. And given that our mind is searching for simplicity, in most cases, this kind of thinking is simplistic and superficial, and just about everyone can do it (a bad sign for anything involving an attempt at superiority, like in investing).

In essence, if you wish to perform better than the rest – or in other words, perform better than average – your thoughts actions, expectations, and portfolio have to diverge from the norm.

Most importantly, you don’t have to be just different, you also must get it right…not 100% of the times, but it’s good to aim for a distinction…that is 75%. And for that, you need to practice second-level thinking.

Book Worm
Here is what Howard Marks writes on investing defensively in his amazing book The Most Important Thing…

When friends ask me for personal investment advice, my first step is to try to understand their attitude toward risk and return. Asking for investment advice without specifying that is like asking a doctor for a good medicine without telling him or her what ails you.

So I ask, “Which do you care about more, making money or avoiding losses?” The answer is invariably the same: both. The problem is that you can’t simultaneously go all out for both profit making and loss avoidance. Each investor has to take a position regarding these two goals, and usually that requires striking a reasonable balance. The decision should be made consciously and rationally.

Stimulate Your Mind
Here’s some amazing content I read during the week gone by…

Handy list of some great books on the psychology behind human decision making and irrationality
Great, practical way to avoid death!
Bihar orders head-teachers to taste all school lunches before they are served to children. Now that’s a simple solution to a complex situation.
Anyone can learn from their own experience. The competitive advantage comes from being able to learn from the experience of others. Now, what about learning from history’s most hated?

Poke of the Week – Make it Fun

“Those who approach life like a child playing a game, moving and pushing pieces, possess the power of kings.” ~ Heraclitus

Sure, children are stubborn, noisy, and often hard to deal with. But they also possess some of the most fearless and creative minds in the world, a trait that should be made second nature to anyone grown up.

My daughter, for instance, won’t take “I don’t know” for her “Why?” questions. She is fearless in the face of things I consider as daunting – like trying something new.

She will look at everything in a new, fresh way. For her, there isn’t “one right way” do a thing.

To a child the world is a playground and everything therein is a toy. If, as grown-ups, we can look at life, work, and our problems in the same way and then try to find solutions, we would indeed possess power of kings.

You see, there is always enjoyment hiding in what you do, you just have to find it. Start taking a look at your world with a renewed sense of vigour, like a child does.

You will be much happier with the results of your hard work.

The renowned chair designer Bill Stumpf was once asked what criteria he used to select new projects.

He responded – “There are three things I look for in my work: I hope to learn something, I want to make some money, and I’d like to have some fun. If the project doesn’t have the promise of satisfying at least two of these, then I don’t sign on.”

That’s the way to go!

If you haven’t done it already, sign up here to receive Poke the Box in your email…and get ready for stimulating Saturday mornings.

Keep poking.

Play like a child.

Have fun.

Please avoid death.

Till next weekend…

Vishal Khandelwal
Chief Poker – Poke the Box

I’m Making This Investment. Are You?

“Man surprised me most about humanity. Because he sacrifices his health in order to make money. Then he sacrifices money to recuperate his health. And then he is so anxious about the future that he does not enjoy the present; the result being that he does not live in the present or the future; he lives as if he is never going to die, and then dies having never really lived.” ~ Dalai Lama

In my previous post, I wrote about the need to avoid the “it-will-never-happen-to-me” mentality when it comes to health and investing.

Before I get to writing again on money and stock markets, here’s one more thought (more important than money and stock markets) I wanted to share with you.

I’m sure you must have never heard of Dr. Lester Breslow, like I didn’t till last week while attending to my ailing father and reading up stuff on keeping good health.

[Read more…]

It Will Never Happen to Me!

Sitting in a Kolkata hospital lobby while getting my father treated for a heart ailment, I see this wall hanging that says – “It will never happen to me!”

The pictures below this headline show how a person hurts his heart through stuff like…

Alcohol consumption
Cigarette smoking
Poor eating habits
Sedentary lifestyle
Stress

…yet continues to think that a heart ailment will never happen to him.

It will happen to everyone around him, but not to him!

Such thinking is widely prevalent when it comes to deadly diseases, death, or even investing doom.

We all consider everyone else as vulnerable but ourselves as invincible. And this is the reason we continue to play with fire, whether it comes to our life, habits and investing.

Charlie Munger says…

A lot of success in life and business comes from knowing what you want to avoid : early death, a bad marriage, etc.

Ironically, most of us while knowing what we must avoid for a healthy heart, long life, better relationships, and comfortable financial life, are mostly travelling on the path assuming others are going to die there, but we will survive.

This is sad, and dangerous! Why?

Because…

It happens, and often!
My father is as healthy a person as anyone can be – no alcohol consumption, no smoking, and he certainly does not have a sedentary lifestyle.

But he has still suffered a serious heart ailment, for which he is being treated now.

He was not “supposed” to have such a disease, but he still has it.

The situation seems under control as of now (keeping fingers crossed!), but his heart has surely taken a serious hit!

Anyways, over the past three days, I have seen several cases of people with heart problems who would have believed at some points in their lives that “it will never happen to me.”

Sadly, many people I see suffering here are in their 40s and 50s. Even sadly, most would have surely fallen to these ailments on account of the poor habits like the ones mentioned above.

But people don’t understand the base rates of living a dangerous lifestyle and then falling into a deadly health issue. It’s high, and increasing!

I am not in a situation to write further at this point of time but, dear tribesman, stuff happens!

Especially in life and also in investing, “It will never happen to me!” is a widely held but dangerous notion.

Surely take risks in life, but only ones that will not cause you a permanent loss.

I am not old enough to dole out advice on healthy living, but I know it surely helps.

I have reiterated it several times in the past, and would do it again today. Remember what Charlie Munger says…

All I want to know is where I’m going to die so I’ll never go there.

You know where you are going to die – in life and investing – so please avoid going there.

Please!

Safal Niveshak StockTalk: Godrej Consumer Products Ltd.

Statutory Warning: This report may cause a reaction, and acting on it can be injurious to your wealth.

Note: This StockTalk analysis has been written by Abhishek Jain.

About GCPL
Godrej Consumer Products Limited (GCPL) promoted by Godrej group is a household and personal care products company. Godrej group owns around 64% of equity and the company is professionally managed. Through international acquisitions, the company has built a sizeable international presence in Africa, Latin America, Indonesia and the UK. Its overseas businesses now account for 40% of revenues.

Over the past decade, GCPL has evolved from a domestic market soap manufacturer to a diversified emerging market MNC. The proportion of soaps in GCPL’s consolidated revenues has reduced to ~20% in FY13 from 63% in FY05.