Let’s Start with Safal Niveshak
Just in case you missed any of this on Safal Niveshak over the last few days and weeks…
- I had an interesting email exchange with Prof. Sanjay Bakshi on the subject of valuations.
- Warren Buffett teaches us not only how to invest well, but also to live well. In a recent post, I shared Buffett’s advice on how to succeed in life.
- Holding cash in portfolio is one of the most painful decisions an investor makes, because we always want to remain in the thick of action – playing around with our cash. Read here how you should handle this painful situation of holding cash.
- Buffett (again) on what an investor must look at while researching a business.
Book Worm
Howard Marks’s memos are a treat to read. In fact, this is one resource apart from Buffett’s letters and Munger’s speeches that I would recommend you to read – in case you had to read just three things in your life to learn how to invest sensibly. Here’s an extract from Marks’s latest memo on the subject of liquidity, which dispels a lot of myths people have on when an asset is liquid and when it is illiquid….
It’s often a mistake to say a particular asset is either liquid or illiquid. Usually an asset isn’t “liquid” or “illiquid” by its nature. Liquidity is ephemeral: it can come and go. An asset’s liquidity can increase or decrease with what’s going on in the market. One day it can be easy to sell, and the next day hard. Or one day it can be easy to sell but hard to buy, and the next day easy to buy but hard to sell.
In other words, the liquidity of an asset often depends on which way you want to go…and which way everyone else wants to go. If you want to sell when everyone else wants to buy, you’re likely to find your position is highly liquid: you can sell it quickly, and at a price equal to or above the last transaction. But if you want to sell when everyone else wants to sell, you may find your position is totally illiquid: selling may take a long time, or require accepting a big discount, or both. If that’s the case – and I’m sure it is – then the asset can’t be described as being either liquid or illiquid. It’s entirely situational.
There’s usually plenty of liquidity for those who want to sell things that are rising in price or buy things that are falling. That’s great news, since much of the time those are the right actions to take. But why is the liquidity plentiful? For the simple reason that most investors want to do just the opposite.
The crowd takes great pleasure from buying things whose prices are rising, and they often become highly motivated to sell things that are falling…notwithstanding that those may be exactly the wrong things to do. Further, the liquidity of an asset is very much a function of the quantity involved. At a given time, a stock may be liquid if you want to sell a thousand shares but highly illiquid if you want to sell a million.
Stimulate Your Mind
Here’s some amazing content I read in recent times…
- Farnam Street captures Ray Dalio’s thoughts on the open-mindedness and the power of not knowing.
- Here are some wonderful thoughts on value investing from Joel Greenblatt.
- Prof. Sanjay Bakshi writes on why you shouldn’t invest in a business that even a fool can run.
- Read the complete memo of Howard Marks on liquidity.
- PPFAS’s Rajeev Thakkar shares a framework to understand the e-commerce exuberance.
Hubris is basically an overestimation of one’s own competence or capabilities. This is particularly when that person is in a position of influence or power. Now, I know what you’re thinking…you’re thinking this would never happen to you. And it might not to any great degree. Let’s hope it doesn’t.
But the thing about hubris is that you rarely think you have it until it’s already run an unhealthy portion of its course.
Consider the example of Enron, and the e-mail that Kenneth Lay, then the CEO, sent to his employees in 2001. He declared, “Our performance has never been stronger, our business model has never been more robust. We have the finest organization in American business today.” That was less than four months before Enron filed for bankruptcy.
You may also remember the story of the American hedge fund Long-Term Capital Management, which was founded in 1994, and was backed by a dream team including Nobel Prize winners and investment banking experts. It succeeded enormously at first, only to eventually succumb to the folly of its managers’ overweening pride as its most sophisticated computer models failed to anticipate commonsense economic problems. The fund failed spectacularly by 2000.
You see, the thing is that if you are repeatedly successful, there’s a temptation to believe that you’re no longer subject to human fallibility. But the honest (and harsh) truth is that in a world that is continually changing, every right idea or strategy eventually becomes the wrong one.
But, with an arrogant attitude (“This would not happen to me!”), you cease paying attention to differing viewpoints. Confirmation bias takes its roots in your brain, and you screen out all the sounds that tell you how you’re wrong, and amplify those that tell you how you are right.
But then, it’s important to remember that you are not God who will never be destroyed! As surely as night follows days, destruction follows arrogance.
This also holds true when you are investing in the stock market. Open Benjamin Graham’s Security Analysis and the first thing you read is a quote from Horace – “Many shall be restored that now are fallen, and many shall fall that now are in honor.”
What could be a better reminder than this to investors who get intoxicated by their own success? And I am finding a lot of such breed these days.
So, whether it is chasing hot stocks (ascribing their rise to their “moats”), or using leverage, or blindly copying/cloning other investors who have seen short-term success, I see a return of arrogance to the stock market.
Now, for instance, when you take on leverage and show me the math that a 25% annual return over 10 years minus 12% interest cost can still earn you 20%+ return, please remember Nassim Taleb who says that we should judge people by the costs of the alternative, that is if history played out in another way.
As he wrote in his brilliant book Fooled by Randomness – Clearly, the quality of a decision cannot be solely judged based on its outcome, but such a point seems to be voiced only by people who fail (those who succeed attribute their success to the quality of their decision).
In the same way, be very careful when you judge your stock market success by the outcome you achieve, and not by the decision you made.
I am an eternal optimist as far as stock market investing is concerned, but please be very careful of what you are doing with your money and why you are doing it. There are great dangers of hubris while dealing with your money.
And the only way you can avoid those dangers is by avoiding hubris.
Keep poking.
Avoid hubris. You are not God.
Be cool, even as the weather’s getting hot.
Be kind to others, and to yourself.
Stay happy, stay blessed.
With respect,
Vishal Khandelwal
Chief Poker – Poke the Box