Investing

Sounds great, right? Five claims in one minute is quite a number.

“But, five out of how many claims that you receive, sir?” I wanted to ask. When I got back home and checked the claim-settlement number, it was around 70%! Now that’s poor!

“There is nothing more deceptive than an obvious fact,” said Sherlock Holmes.

Then, Bertrand Russell said, “Obviousness is always the enemy to correctness.”

It happens so often in life that we come out with wrong conclusions because they seem the obvious based on a single observed effect.

When someone remarked to the French writer Voltaire, “Life is hard,” he retorted, “Compared to what?”

We tend to ignore alternatives, and therefore we fail to make appropriate comparisons. Often we only consider information or evidence that is presented or available and don’t consider that information may be missing.

In effect, we ignore the base rates, which simply mean that if 1% of the public were “medical professionals”, and 99% of the public were not “medical professionals”, then the base rate of medical professionals is simply 1%.

In the same way, if 2% of penny stocks earn good long-term return, and 98% don’t, then the base rate of success in penny stock investing is just 2%.

What is the base rate of investing in leveraged companies in bull markets?

• Hand gliding – 1 in 560
• Grand Prix racing – 1 in 100
• Motorbike racing – 1 in 1,000
• Mountain climbing – 1 in 1,750
• Bicycling – 1 in 140,000
• Running/Swimming– 1 in 1 Million (1 Million = 10 Lac)
• Car driving – 16 in 100,000 drivers
• Motorcycle riding – 21.5 in 100 million vehicle miles
• Airplane – 1.3 deaths in 100,000 flight hours
• Smokers – 22x more likely to die of lung cancer than non-smokers
• Lifelong smokers – 50% die before age 70
• Dance parties – 1 in 100,000

Finally, regardless of all risks, your probability of dying during a given year doubles every 8 years!

So watch out for base rates before making any decision in life (and investing), and please be careful.

In his recent book titled The Icarus Deception, Seth writes about the story of Icarus, whose father Daedalus fashioned two pairs of wings out of wax and feathers for himself and his son to fly out of a prison they were captivated in.

Daedalus tried his wings first, but before taking off from the island, warned his son not to fly too close to the sun, nor too close to the sea, but to follow his path of flight. However, overcome by the giddiness that flying lent him, Icarus soared through the sky curiously, but in the process he came too close to the sun, which melted the wax.

Icarus kept flapping his wings but soon realized that he had no feathers left and that he was only flapping his bare arms, and so he fell into the sea.

The Icarus myth is often used as an example of when hubris or over-confidence – of flying too high – can go badly wrong.

However Seth, in his book, points out that there is another part of the story – Icarus’s father Daedalus also told his son not to fly too low as the water could also damage his wings.

As per Seth – “Society has altered the myth, encouraging us to forget the part about the sea, and created a culture where we constantly remind one another about the dangers of standing up, standing out, and making a ruckus.”

However, he writes, settling for too little is “a far more common failing”.

You see, we all have the potential to do great work in life. However to do so, we need to leave our comfort zones – to fly closer to the sun, and to fail sometimes.

If you’re not failing every now and again, it’s a sign you’re not doing anything very innovative.

Looking from another angle, if you’re hitting bull’s-eye every time, maybe you’re standing too close to the target.

Like when it comes to investing, I have a long list of great stocks that I did not buy or sold early, for a simple reason that I feared taking some risk.

But since these errors of omission won’t show up in my profit and loss account, I often ignore them.

The reality is that our errors of omission – not flying high and close to the sun – can be more costly than the errors of commission – flying too close to the waters.

Thankfully, what I omitted – taking risks – in my investing life, I committed in my work life, and that led me to quit my job to pursue my passion.

Ask yourself what stops you from taking risks in your life – not risks based on arrogance and blind overconfidence, but well-calculated risks like…

• Building up a saleable skill that people would pay for, and then telling your boss that you won’t need his services soon
• Telling your boss how his excel-based projections could go haywire
• Starting a business that you have been wanting for years
• Researching businesses and then investing in them independently
• Spending time learning a third, or a fourth language
• Learning how to swim or drive…or cook

Arthur Koestler put it so well – “If the Creator had a purpose in equipping us with a neck, he certainly would have meant for us to stick it out.”

Maybe this could be your permission slip.

It’s another matter that I did not realize then that I was getting the passers-by to indulge in what psychologists call as “social proof”.

As per Wikipedia, social proof is – …a psychological phenomenon where people assume the actions of others in an attempt to reflect correct behavior for a given situation. This effect is prominent in ambiguous social situations where people are unable to determine the appropriate mode of behavior, and is driven by the assumption that surrounding people possess more knowledge about the situation.

In simple words, social proof is all about ‘what-you-think-I-think…what-you-do-I-do”.

Social proof is what is at work in canned laughter – what you hear in comedy shows. The reason such laughter exists is because it causes the audience to laugh longer and more often when humorous material is presented and to rate the material as funnier.

In fact, you will hear the laughter even when there’s nothing to laugh about. I propose they add such laughter to business channels as well, so that people stressed hearing the experts can get a few laughs. 🙂

Social proof applies especially to the way we decide what constitutes correct behaviour. We view a behaviour as more correct in a given situation to the degree that we see others performing it.

Whether the question is what to do with an empty popcorn box in a movie theatre, how fast to drive on a certain stretch of highway, or what to put on the plate at a dinner party, the actions of those around us will be important in defining the answer.

Social proof works to both our advantage and disadvantage. When someone shouts “Bomb!” at a packed theatre, it pays to run with others for safety without being analytical.

It also helps us find books we’ll like (Amazon reviews), restaurants to eat at (Zomato, Burrp), and places to travel (TripAdvisor). We don’t make our decisions in a choice vacuum. Our social circles influence our actions and our purchases, and that’s normal.

Anyways, social proof also works in stock market investing.

Why do you think most of us are always on the lookout for others’ opinions on the stocks we own or want to own?

Social proof is the reason you will find most fund managers owing similar stocks in their portfolios. The thinking is – “If I outperform, I will be a star…but if I underperform, I will be like others!”

But then, Somerset Maugham said, “If 40 million people say a foolish thing, it does not become a wise one.”

You will scold your child who misbehaves and then says, “But everybody else is doing it.” Have you ever scolded yourself for investing like everyone else is doing?

Social proof also works at a bigger level…inside companies. That is what drives most CEOs to act like their peers. So they will acquire companies just because a competitor is doing so. And they will conduct accounting frauds just because many others are doing so!

Warren Buffett on Social Proof
Here is what Warren Buffett wrote to his managers in September 2006, when his peers in corporate America were all under the spell of social proof to justify their misdoings…

The five most dangerous words in business may be “Everybody else is doing it.” A lot of banks and insurance companies have suffered earnings disasters after relying on that rationale.

But it couldn’t be more wrong. In fact, every time you hear the phrase “Everybody else is doing it” it should raise a huge red flag. Why would somebody offer such a rationale for an act if there were a good reason available? Clearly the advocate harbors at least a small doubt about the act if he utilizes this verbal crutch.

Avoiding Social Proof
How to get over the social proof tendency? Here is some advice from Peter Bevelin’s Seeking Wisdom…

• The 19th Century American poet Ralph Waldo Emerson said: “It is easy in the world to live after the world’s opinion; it is easy in solitude to live after our own; but the great man is he who in the midst of the crowd keeps with perfect sweetness the independence of solitude.”
• What is popular is not always right. If you don’t like what other people are doing, don’t do it. Warren Buffett says: “We derive no comfort because important people, vocal people, or great numbers of people agree with us. Nor do we derive comfort if they don’t.”
• Disregard what others are doing and think for yourself. Ask: Does this make sense? Remember the advice from Benjamin Graham, the dean of financial analysis – “Have the courage of your knowledge and experience. If you have formed a conclusion from the facts and if you know your judgment is sound, act on it – even though others may hesitate or differ. You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.”

“Why are you saying this?” “I know that dear, because I was a kid myself!” “Why have you grown up, papa? If you were still small, you could have played and enjoyed with me and my toys!”

“Everyone has to grow up, my baby!” “Why papa?”

Why? Why? Why?

If you’re a parent of a small child, you most likely hear this question several times during a day – “Why?”

While all children are inquisitive, there are some who love to prick your brain by asking questions until they find a satisfactory reply from you. My 8-year old daughter falls in this very category of hyper-inquisitives.

I find myself bombarded with her questions every now and then. There are some questions that I have replies for. And then there are many for which I have no replies.

But I enjoy her questions as they most often force me to think beyond the obvious to pull out the answers that satisfied her inquisitiveness.

There is a reason a child asks so many ‘Why?’ questions. And this is something most of us adults don’t understand.

The reason is that when a child asks a question on a subject she is not familiar with, she has no point of reference. She’s coming from nowhere in her inquisitiveness regarding her question.

It’s same as you walking into a space scientists convention. Would you be able to understand the intelligent discussion that’s going on, or even ask a simple question that didn’t give the scientists the hint that that you don’t fit in with the crowd?

I bet most of us couldn’t, because most of us have no point of reference regarding space science. Similarly, a child will continue to ask questions till the time she gets something that she understands and appreciates.

So ask questions. Don’t be afraid to show your ignorance!

Give yourself a license to expose your lack of knowledge about a particular subject, and ask “why is that?”

That’s the fastest way to get a little wiser each day.

By the way, can you please tell me if we call oranges ‘oranges,’ why don’t we call bananas ‘yellows,’ or apples ‘reds’? 🙂

We want to be liked and accepted. We believe, trust and agree with people we know and like. We do things for people we like. We like the people who like us (check your Facebook now! :-)) And if we feel that a person likes us, we tend to like them back.

Now, likability comes in many forms – people might be similar or familiar to us, they might give us compliments, or we may just simply trust them.

Companies that use sales agents from within the community employ this principle with huge success. People are more likely to buy from people like themselves, from friends, and from people they know and respect.

Also, we like those who are physically attractive, popular, or those we have positive associations with. We also like and trust anything familiar.

Aristotle said – “Personal beauty is a greater recommendation than any letter of introduction.”

Studies show that we believe that physically attractive people have a more desirable personality than average-looking or unattractive people. Experiments show that attractive criminals are seen as less aggressive and get a milder punishment than ugly criminals.

But like the 6th Century Greek writer Aesop wrote, “Appearances often are deceiving.”

The best con artists always behave as though they are not acting in their best interest. The 16th Century Italian political philosopher Niccolo Machiavelli said in The Prince – “Princes who have achieved great things have been those who have given their word lightly, who have known how to trick men with their cunning, and who, in the end, have overcome those abiding by honest principles.”

Look at stock market investing. Most often, we like a stock after it has run up sharply (Titan, Asian Paints, Page), while we hate things that have dropped in price.

We are attracted to fast-growing companies and fast-rising CEOs, as we see our own aspirations in them, want to become like them, and want to associate with them. All this without worrying what that fast growth may lead to, which is often a rapid decline!

Now, while the “liking” tendency is deeply ingrained in our minds, to avoid falling deep into it, it’s important to…

• Concentrate on the issue and what you want to achieve, not on appearances.
• Not depend on the encouragement of others.
• Not automatically mistake people’s appearance for reality. It may be a social mask!
• Not automatically mistake fast-growing companies or fast-rising investments with great returns. They may turn out to be WMDs for your portfolio.

Better, seek an enemy or devil’s advocate who may dislike what you are doing and tell you exactly why he/she things so.

As Benjamin Franklin wrote, “Love your enemies, for they tell you your faults.”

Anyways, despite often reading nonsense on Safal Niveshak, I hope you would continue to like me! 🙂

At least, I wish you continue to like me on Facebook! 🙂

Remember that voice you often hear in your head?

The voice that says – “You can’t do it! You’ll never be good enough! You’re going to fail!”

This voice scoffs at you whenever you set out to achieve something. It criticizes you when life gets difficult and you are down in the dumps. It holds you down when you struggle to get up after a fall.

You see, self-doubt not only bothers you when you have it, often it slips past your barriers and gets over you. And when you let it loose, it destroys your confidence, strips logic and reason from your mind, and steals happiness from your heart.

In return, it leaves you with only fear and insecurity.

I have faced such situations several times in the past, and continue to face them day in and day out. The more I fight my self-doubt, the more it fights back.

However, I have also realized that with self-knowledge and understanding, I can use self-doubt for my benefit…and I am learning to do just that.

Most often, in life, what should concern us is not the way things are, but rather the way we think things are.

If I think I can’t do a thing, I will act in such a way that I will never be able to do that thing.

It’s a self-fulfilling prophecy: As I think, so I am.

You must have found yourself in similar situations in the past when you realized that you were not able to achieve some things because you believed from the very start that those things were unachievable.

When it comes to investing, despite the fact that Benjamin Graham and Warren Buffett’s amazing ideas have been with us for decades, the reason most people don’t invest sensibly is because they think they can’t.

So we will remain in the comfort of the crowd, buy what others are buying, look for signals on forums, blindly trust others with their money, and rarely get down to do the independent homework of finding great investments.

Again the reason is that we would believe the world but ourselves, negating what Graham said years ago – “You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.”

The critic in your head or outside of you won’t let you believe yourself…but you have no option but to believe in yourself if you really wish to live a life on your own terms.

Watch this video and you will know that anything is possible if you believe in yourself…