Tuesday, April 17, 2018

The evolution of a value investor: Tom Gayner

Gyan on Treadmill dated 12-Apr-2018

Thomas Gayner graduated from the University of Virginia in 1983 and started his career in accounting and began working at Price Waterhouse Coopers (PWC) as a Certified Public Accountant. Soon he moved out and after multiple transitions, has been working with Merkal Corporation since late eighties. Currently he holds the post of Chief Investment Officer in the company. 

In this presentation Mr.Gayner discusses his evolution as a value investor. 


Gayner started off as a quantitative analysts, looking a the numbers. However, as he gained experiences, he has added other qualitative aspects to his approach of identifying value. 

The basic premise behind value investing is that if you buy a security at a price significantly below its intrinsic value, sooner or later, the price will catch up with the value. Gayner says that this premise is only the first step of 'spotting' value. Many a time, the price did not catch up with the value. So he moved to the next step of 'value creation'. In this way, he looks at progressive creation of value rather than a static picture of value. 

Based on the above, he came up with a four point approach at identifying companies for investment. 

The first thing he looks for is a 'Profitable business with a good return on capital and that do not use a lot of leverage to do it'. What does it mean?

He looks for companies with demonstrated capability to create profitability. According to him, continuous profitability is a sign that the company is doing something that its customer's value. There are two reasons why the company many not be making profits. One, the company may not be interested in making profits or two, it may not be good at making profits. Regarding the use of leverage, he has two interesting views, one financial and other ethical. Financially, the need to regularly pay 'Financial Charges' hangs like a Damocles sword over the business. In addition, the businessmen who use a lot of leverage may not have a lot of integrity, in other words, business men with integrity do not use a lot of leverage. (I am reminded of the character Coco Jacobsen in the book 'The Shipping Man', where he asks, 'Why should I use my own money to pay back my loan?' )

The second lens that he looks through is the management. He looks for character (integrity) and ability. One without the other is useless. 

The third thing that he looks for is the 'reinvestment dynamics' of the business. He looks to see if the business model can be replicated successfully many times. As an example of a business that cannot be replicated, he talks about 'Gourmet' restaurant. Typically the food quality is dependent on the people staffing the restaurant. This model cannot be replicated. He looks for scalability and replicability in a business. A perfect business is one that earns very good returns on capital and reinvests it again and again thus compounding the investor's wealth. 

The fourth criteria is price (valuation). This is where many people start and end their analysis. He looks for reasonable PE, PB ratios. When people look at price, they usually make two mistakes. One is that you pay too much for what the company is worth. Second, and the more costlier mistake, is that you 'think' that the stock is overvalued and wait for the price to come to reasonable level all the time the stock is compounding at a rapid rate and you are not able to invest. 

The above approach of looking at price as the final criterion is in line with the thinking of Warren Buffett as discussed in this book

Out of these four points, is there one that he thinks about more often? Yes, it is the third one, the 'Reinvestment Dynamics'. What is the growth potential of this company? Will it be able to sustain its growth? Will it be able to sustain its high ROIC? If you find some company with that characteristic, do not be a penny pincher.

Someone told Gayner that "The secret to success in investing is to last the first thirty years". This means that everything that happens in market will repeat all over. The bull market, the bubble, the correction, the depression, the recession... everything will repeat again and again. You will become successful only if you last thirty years and learn the right lessons from what is happening in the markets. 

At the start of his career, as a value investor, Gayner used to look at stocks trading at 52 Week Lows to identify value opportunities. However, over a period of time, he has changed his approach and now looks at stocks trading at 52 Week Highs, to see what the market knows that he doesn't know and to identify potential compounders. If a stock intrigues him, he will invest a small amount in the stock just to have a position and learn more about the stock. 

That is it. Pretty interesting talk.

Friday, April 13, 2018

The investors alphabet: Advices from Tao Jones Averages

In his book 'Tao Jones Average', the author Bennett W Goodspeed gives a set of 26 advices to a a budding investor. It is structured as one advice per letter of the English alphabet. Here is a summary of the advices.
  1. Be a light sleeper: Be aware of the changing conditions so that you can act on them quickly.
  2. Be your own judge of value: Bargains are rarely announced, so learn to assess bargains.
  3. Do not be too sure: The time to be careful is when you are sure. You may be right now, but could be wrong the next time.
  4. Stay diversified: The world is changing rapidly that it do not make sense to put all your eggs in one basket. What happens in one area may have significant impact on a totally unrelated area.
  5. Avoid the recommendations of experts: These are so widely disseminated that you won't get any value by following them.
  6. Value the art of selling: Key to investment success is knowing when to sell. Give as much care to end as to the beginning. 
  7. Be comfortable with risk taking: 
  8. Stick to what you know
  9. Use value guidelines: Develop matrices to assess value. You could use commonly available matrices like PE ratio. They help to curb the enthusiasm of the right brain.
  10. Take your losses: Admit your mistakes and book losses
  11. Don't procrastinate in decision making: Analyse your portfolio. If you will not buy more of a stock, you should sell it, after considering tax implications, of course
  12. Don't churn your account: Avoid trading
  13. Don't fight the tape: Timing is important in investing. Sometimes it is better to wait on sidelines than fight the tape. 
  14. Don't just hope: Hope is a false god and investor's worst enemy. Do not continue a loss making position 'hoping' that things will improve.
  15. Avoid insider information: Always invest based on the fundamentals. Stick to a process
  16. When you feel out of sync don't play: When you don't feel 'in step' with the market, better to walk away for the time being.
  17. Avoid formula investing: Formula investing based on historical facts will not work in a fast changing world. Try not to confuse chance with cause and effect.
  18. Trust your vision: Be on the lookout for contrarian opportunities
  19. Mistakes are OK: Don't be afraid to make them. 
  20. Be comfortable holding cash: Understand the 'option value' of cash. Cash is what helps you take advantage of buying opportunity. Don't fall for the temptation to invest your cash.
  21. Use both brains: Sleep on investment ideas. Especially if it is a 'can't miss' idea. That is a flash of warning, right there.
  22. Bounce your ideas: 
  23. View yourself as a typical consumer: Each of us is a 'Universal Consumer'. This means that our actions and that of our family will provide many investment clues. Also point 18 above.
  24. Coincidence is more than a chance: The concept of synchronicity - idea that coincidence is more than just chance - can greatly heighten investor's awareness. By looking at 'coincidence' as an event that contains a message, you can become sensitive to opportunities and dangers that otherwise you would likely ignore.
  25. Avoid the pied piper: The fact that a person is right 7 times in a row, may not mean that he will be right the eighth time. 
  26. Be patient, but move decisively: Use both your yin and yang qualities. Sense opportunities with yin qualities and then seize them with yanglike decisiveness. Good investing is a matter of waiting to see the opening and then moving with strength.

Thursday, April 12, 2018

Book Review #34: The Tao Jones Averages: Author: Bennett W Goodspeed

The book 'The Tao Jones Averages: A Guide to Whole-Brained Investing', written by Bennett W Goodspeed promised to give me a different perspective on investing. It did not much.

Human brain consists of two hemispheres, the left hemisphere that is analytical, deductive and logical and the right hemisphere that is artistic, creative and intuitive. The author's point was that while the markets always behaved non-rationally (right brained), the traditional analysts approached the market with a rational approach,  focusing mostly on the analytical part of their brain. By focusing on hard numbers - the trend, growth projection, DCF, financials etc - they were missing the potential of half of the brain. And they (the analysts) were wiser post-facto. They were good at explaining 'why an event happened as it did' and 'why they couldn't have anticipated it'.

As per the author, by using the potential of both the hemispheres while making the investing decision, you can make better investment decisions. The right brain will help one 'sense' changes to market conditions, before they actually happened. Sounded logical

In this Book Review series, I have been reviewing (this is the 34th book) books on investing, mostly about the approaches followed by the masters of investing. All of them tended to focus on the left hemisphere of the brain. All of them explained how you can do fundamental analysis, how to use numbers to identify value etc.

I was nearing the saturation point and was beginning to feel that I have got all the knowledge I needed for investment analysis and any new book that I read will only cement the existing knowledge that I possessed.

That is when this book arrived on the horizon. Dealing with a different approach, this sounded interesting.

I am a right brained person. I use a lot of intuition in my decision making and have found that intuitive decisions 'worked out in the end', as Tao says. So it was with a lot of anticipation that I opened this book.

In the first few pages, the book referred to another book named 'Tao of Pooh', by Benjamin Hoff. I understood that to make a sense out of this book, I needed to first read that book. So I downloaded and read that book first. You can read the review of that book HERE

The first half of this book (TJA) meanders along, covering two key areas, one, why wall street analysts are wrong and two, the principles of Tao. I am not clear why entire pages on a book on investing are spend on explaining the difference between Taoism, Confucianism and Buddhism.

By applying male (yang) logic to to the market's female (yin) behaviour, professional investors are often guilty of 'trying to understand running water by catching it in a bucket'. One challenge of the fundamental analysis is that it is based on the available data as provided by company management. They are ineffective in dealing with 'soft data', which is non-quantifiable and based on perceptions.

The right brain deals with 'sensing'. This is the process of seeing unrelated information and making an assessment related to a different area. The author gives a couple of examples. One of them relates to 'Saudi Box'. An analyst found that Saudi Arabia had reduced the sized of the containers that arrives in its ports and started checking every container. Only explanation was that the country was fearing an arms insurrection. The analyst sensed that in this situation, the key people will start accumulating gold. He purchased gold at about 300 an ounce and in a couple of months, sold it off at about 600 per ounce. 

The author spends time on decision making analysis. There are five stages to decision making. These are intelligence, information transference, design, approval and implementation. Intelligence is the process of collection and synthesis of information. Information transference occurs when take the derived information for further analysis. While intelligence develops questions, design activity is an analytic search to find answers and map out possible strategies. Alternatives are identified and send to management for approval. Once approved, the decision is implemented.

Among the above stages, intelligence and information transference are mostly related to the right brain the remaining are left brain activities. 

Author talks about Tao Investors, who 'sense' the changes taking place in the environment very early in the cycle and take advantage of the outcome. He gives multiple examples. Jim Rogers observed that in the 6 Day War, Egyptian forces were getting significant victories due to superior technology of Soviet equipment. He sensed that US will put in a lot of money to augment its technology. Based on this he invested heavily in low-priced technology companies in US and his investments returned 20 times in a span of about two years !!

Seeing Egypt winning in the war with Israel and linking it to US technology investments is right brain activity. It is a synthesis of information from one area to be used in another area, which is again the work of right brain.

The most important part of this book is the discussion on Hermann indicator.

Hermann indicator is a test to identify your hemispherical dominance. Each hemisphere has a lower (limbic) and upper (cerebral) aspect. The dominance of a cerebral left and a limbic right (facts / feelings or logical / emotional) or a limbic left and a cerebral right (experimental / control) is the most difficult profile for successful investing. The individuals with such profiles tend to be inconsistent in which mode they use. Their brain halves tend to compete rather than compromise. 

Since experimental  and control functions cannot occur at the same time, investors with such profiles will oscillate between modes. For example, if the experimental part dominates a decision that proves wrong, the control part will have a higher say the next time. On the other hand, if the risks taken by experimental mode pays off, the chances are that the investor will take even more risk. 

The way to handle this is to use more facts and feelings which opposes the experimental / control impulses.

Investing is a two part function. Feelings tend to precede logic, so that the intuitive right brain develops the questions and the left supplies the answers. Knowing one's dominant hemisphere should serve as a confidence builder for investing. If you are left brained, logically dominated, you should have the confidence that you can develop investment skills by learning more about the logical elements of investment game. Conversely  and intuitive right-brainer should learn to trust his or her instincts and judgement. 

When making investment decisions, it is advisable to stop and ask which side of your brain is running with the ball. Is it logical? Does it feel right? Is there a clash between the two? In case of a clash, it is better to defer a decision and bring about a balance between the two hemispheres. Logical investors need to observe the law of reverse effort. When a decision is logically very compelling, it is better to sleep on it for a day or two for the right brain to come up with its opinion. 

The four enemies a person must overcome to become a 'man of knowledge' (wise investor). The first enemy is fear. If a man gets scared and runs away, he will not invest and will not learn. You never learn unless you are a player. 

Fear is overcome by clarity, which becomes the second enemy. Clarity of mind dispels fear, but it also blinds. It gives you the false confidence. You must use your clarity only to see, and wait patiently and measure carefully before you take the next step. In investment, clarity is almost always an illusion.

One who overcomes clarity possesses the third enemy, power. One who is defeated by this enemy will not know how to handle it. To conquer power, you have to defy it deliberately. You must understand the way of the universe, that power can come and go. Like trained martial artists, you should use your power very rarely. 

The fourth enemy to overcome to become a wise investor is old age, where you must resist the unyielding desire to rest. In investing old age refers to the day you stop learning and questioning. It refers to taking ridiculous investment decisions, for example, selling a good investment to avoid paying LTCG.

The Chinese word for 'crisis' means both danger and opportunity. Those who sense change very early stages will tend to have the most bountiful harvest. This sensitivity is a key part of investment game. 

The book decks up the key ideas with stories and a few jokes. It ends with the investment alphabet, a set of 26 advises for an investor, corresponding to 26 letters of the alphabet. A few of them are, be a light sleeper - believe in the wisdom of insecurity, do not be too sure - be questioning, value the art of selling etc. A complete list is the subject of another post.

I cannot say that I am a wiser investor after reading this book. There are only a few concepts or ideas that I learned from it. I will give it a rating of  3 / 5. 

Wednesday, April 11, 2018

The most important thing:- origins and inspirations Howard Marks

Gyan on Treadmill dated 11-Apr-2018

In the world of Investing, Howard Marks stands up there with Buffett. He heads Oaktree and his funds have given phenomenal returns over the years. In the talk that he gave at Google, he talks about his book 'The most important thing'

The title of this presentation is 'The most important thing: origins and inspirations'.


Marks started off by explaining why he named his book 'The most important thing'. As he sat in his client's office, he used to hear himself say 'the most important thing is controlling risk', then in another client's office it will be 'the most important thing is buy at a low price' and at another occasion it is 'the most important thing is being contrarian' etc.

Over a period of time, he found that he had identified almost 19 different 'things' at different times as 'the most important thing'. So when he wrote the book, he titled it that.

Why did he write the book in 2011? Originally he was planning to write a book after retirement, but Warrren Buffett promised him that if he ever wrote a book, he will give a quote for the jacket. That was a motive enough to work on his book sooner. As per Mr.Marks, the book is not designed to tell the reader how to make money or how to do investing. 

Mr.Marks did not plan to end up as an investor. After graduation he applied for 6 jobs and ended up joining an investment firm. He developed his investment and life philosophy over more than 2 decades and which is embodied in his memos to the customers. 

He titled this speech 'Origins and Inspirations'. These are the sources from which he got his ideas and inspirations to write this book. In this presentation, he explains some of these. 

The first reference to the book 'Fooled by randomness' by Nassim Nicholas Taleb. The key point is that in investing, there is a lot of randomness. You can't tell from an outcome whether the decision was good or bad. This is due to randomness. In the world of randomness, good decisions may not work out and bad decision may work out quite well. The book is about the role of luck. Even if you know what is most likely outcome, many other outcomes are possible. You should not act as if the things that 'should' happen are the things that 'will' happen. Even when what should happen actually happens, it may not happen within the given timeframe. 'Never forget the 6 foot tall man who drowned while crossing the 5 foot deep pool on an average'.

Second reference to a quote by John Kenneth Galbraith. The quote is 'we have two classes of forecasters. Those who don't know and those who don't know that they don't know.' Here Mr.Marks talks about the quality of forecasts. Most of the forecasters are just extrapolaters. The problem is that such forecasters do not make money, since that forecast is already factored in the price. The forecasts that make money are the ones that predict radical change. The problem with that approach is that if you look at the previous forecasts of the same forecaster, they are not right consistently. Which means that this correct forecast is just a fluke.

The third reference is to a quote from a book called 'Winning the Loser's Game', written by Charles Ellis. This book refers to another book called 'Extraordinary tennis for the ordinary player'. In this book, the author Simon Remo talks about two different strategies for winning in Tennis. The professional tennis players win by 'winning' more points. They his harder, constantly find the angles and win aggressively. On the other hand, amateur players win by 'not losing', by making lesser mistakes than the opponent. Their objective is to simply return the ball on to the opponents court. 

Charles Ellis, says that investing in stock market is like the 'loser's game'. In stock market, you win by making 'fewer mistakes'. Paradoxically, you lose in stock market by 'playing to win'. That is the reason why defensive investing is so important. 

The fourth reference is to the meeting Mr.Marks had with Michael ('Mike') Milken the famous junk bonds specialist. Milken single-handedly created a market for junk bonds (bonds rated AA- and below). Mr.Marks met Milken in November 78. As per Mr.Milken, there is only one way to go for AAA bonds. They are already valued high, and they can go only down. Whereas, a B rated bond, and if they survive, they can only go up. 

Making money in stock market is not by buying fairly priced stocks of good companies. The way to make money is by paying for an asset at a price lower than its intrinsic value. This reminded me of my purchase of Amara Raja Batteries, a fairly priced stock as any. I purchased it about two years ago at about 800 rupees, and the stock is still trading at the same price today. It is not that the stock is bad, it is just that it is a good stock but fairly priced and captures all the potential upsides. 

The key here is 'if they survive'. If they survive, the junk bonds tend to get re-rated upwards and you make money. So the only task for the analyst at Mr.Mark's firm is to analyse the 'survivability' of the bonds. If they survive, the bonds will make money. Bond trading is a 'Negative Art'. The performance of bond portfolio comes not from what you buy, but from what you exclude.

Based on the above inputs and many more, Oaktree Capital  came up with their philosophy. These are as follows.
  • Primacy of risk control
  • Emphasis on consistency
  • Importance of market efficiency
  • Benefits of specialization
  • Macro-forecasting not critical to investing
  • Disavowal of market timing.
The idea is not to become best at all times, The idea is to be consistently above the middle. 

Marks ends his presentation with three investment adages. 

One, what wise man does in the beginning, the fool does in the end. First the innovator, then the imitator and then the idiot. 

Two, never forget the 6 foot tall man who drowned while crossing a stream that is 5 foot deep on the average.

Three, being too far ahead of your time is being indistinguishable from being wrong. 

The session was followed by a QA session. Some great questions were asked. one of them being on the efficacy of index investing. Marks says that while index investing is good, still you run a risk that your portfolio value will fall along with the index. On the other hand, if you choose a portfolio focused on risk mitigation, you get the upside of the index without the risk of downside.

Another question was that how and when the price reach the value since the value investor is betting on the difference between the two. While he do not have the exact answer to this question (remember that the same question was asked to Mr.Benjamin Graham during the Senate Committee hearing), there are one or two catalysts that push the move towards value. One of them is that the bond is close to maturity. As the bond matures, it moves towards its face value. Another catalyst is the activist investors who force the company to change its processes so that the price will match with value. 

Great stuff guys....

Tuesday, April 10, 2018

22 biases leading to human misjudgements: Charlie Munger

Gyan on Treadmill dated 06-Apr-2018

In his speech given at Harvard Law School in Jun 1995, Charlie Munger laid out 22 standard causes of human misjudgement. While we have discussed behavioral biases in the Google Talks by Prof.Sanjay Bakshi, in the speech by Prof.Sanjay Bakshi at IFA Galaxy Global Summit 2015 and the in the book 'Value Investing and Behavioral Finance' by Parag Parikh, this is the motherhood list. Almost all identifiable biases have been identified and discussed by Mr.Munger.
Charlie Munger

Why is understanding of this very important? Two reasons, one, it will help you understand the root cause of the problem and design optimum solutions and two, it reduces one's ability to help others. 


The 22 Causes are:

1. Under-recognition of the power of incentives: Incentives have power to alter behaviour. When you look at a behaviour, we need to understand the incentives for their behaviour. For example, in India, insurance salesmen gets higher commission if they sell endowment plans at the expense of term plans, even though latter one is cheaper for the customer. If the customer do not understand the power of this incentive, they will end up buying expensive plans. 

2. Psychological denial: Sometime we tend to deny reality even though it is right in front of us. For example, the company we work for may be against our values, but we deny these concerns. 

3. Incentive - caused bias: People with a vested interest in something will tend to guide you in the direction of their interest. Real estate agents always try to sell you the house, even when they know that rental is cheaper for the customer. This is why insurance sales person tend to sell endowment plans at the expense of term plans, eventhough the latter is cheaper and better for the customer

4. Consistency and commitment tendency: There are multiple aspects to this bias. We tend to resolve issues even when they work against us, because looking for a solution means that we have to accept that we were wrong. Another aspect of this bias is the self-confirmation bias, where we commit to a position that is verbalized or when it is hard won. For example, many investors lost money during the 2008 bear market, because they kept on believing it as a 'bull market correction'.

5. Pavlovian association, misconstruing past correlation as a basis for future decision making: In the famous Pavlovian experiment on classical conditioning, Pavlov rang a bell and gave a reward to the dog. At the sight of the reward, the dog started salivating. Over a period of time, the association between the bell and the reward became so close that the dog started salivating at the sound of the bell itself !!. By associating their products with positive memories, advertisers are working on the principles of classical conditioning above.
Another type of conditioning is called operant conditioning. In this case the animal is given a reward once it performs some activities. Initially the animal do not realize the cause and effect linkage. However over a period of time, it catches on, and a clear linkage is established between the behavior and the reward. We see this happen in many situations. 

6. Reciprocation tendency: This is also called 'ask-for-a-lot-and-backoff'. If you ask someone to do something difficult and then modify the request by reducing a bit of difficulty, you can increase the compliance rate significantly, even when doing any part of the task is against their best interests. Part of the reciprocation tendency is the role theory, where people behave the way society expects them to do. In one experiment, people were made to role play 'Cops and Robbers'. Over a few days, the people who played Cops started acting the part and inflicting tortures on the people who were playing robbers. You see this play out regularly in India where girls are expected to 'play their part'.

7. Bias from over-influence by social proof: You tend to do what others are doing because it gives your behaviour a social acceptance. In one real life scenario, one lady was brutally murdered in the public square with so many people watching. Silence of others gave others the social acceptance not to do anything. You see this playing out very regularly in stock market where mutual fund managers do not take any risks and only buy stocks that other managers are buying.

8. Bias of numbers: This is simple. Anything expressed in numbers or statistics is accepted without much of analysis. 

9. Contrast-caused distortions of sensation, perception and cognition: This is the progressive acceptance of a bad situation. Examples abound in real life, like ignoring progressively worsening health signs, staying in a progressively worsening relationship etc. The positive aspects of this are also equally striking. Writing one page a day may not be a big deal, but over a year you have written a book !!

10. Over-influence of authority figures: This is the famous Milgram's experiment. It reflect almost everyday when we take investment decisions based on expert's comments on the TV

11. Deprival super-reaction syndrome: This is the famous loss avoidance. We tend to value a loss of something we own significantly higher than the gain from something we own. As per research, the sadness we feel from a loss in our equity investment is three times higher than the happiness we feel from a gain of the same amount. You see this every day in flights when someone occupies a seat next to you which you thought was empty. 

12. Envy / jealousy: No need of any explanation. These two animals often cloud our judgement. 

13. Bias from Chemical dependency (drugs)

14. Bias from Mis-gambling compulsion: This is the idea that you control the odds if you are a part of the decision making process in any step of gambling. For example, those who picked their own numbers felt that their odds of winning are higher in a lottery. This is the illusion of control. By varying the reinforcement rate, you can strengthen the behaviour. Casinos use this very effectively when they give you occasional win which will motivate you to continue playing. The so called 'beginner's luck' is nothing but mis-gambling compulsion in action.

15. Liking distortion and its opposite disliking distortion: Tending to accept suggestions from someone we like (including ourselves) and rejecting suggestions from people we don't like.

16. Tendency to over-weigh conveniently available information: This is the so called availability bias. This is also related to recency bias and vividness bias. We tend act based on easily available information that is recent and which is vivid. Examples abound. We buy or sell stocks based on their most recently available results, especially if they are significantly different from estimates (vividness), people tend to buy earthquake insurance 'after' an earthquake etc. 

17. Over-influence of vivid information (Vividness bias). This is explained in the point 16 above. 

18. Not having clarity on 'Why': This is the bias of taking decisions based on sketchily available information without asking the 'Why' question till we get the real problem that we are trying to solve. As an ERP consultant, I see this bias play out everyday. We tend to provide solutions to non-existent problems. We tend to buy stocks on tips without going deeper into understanding about the business etc.  

19. Other normal limitations of sensation, memory, cognition and knowledge

20. Stress-induced mental changes: Stress can cause one to behave differently in any situation than one normally would. 

21. Tendency to lose ability through disuse: You tend to lose capabilities by not using them regularly. You do not realize that and tend to misjudge your capability. For example a man who used to do competitive racing in the past, would misjudge that he will be able to do it after 30 years, even though he has not had any practice in between. Identifying and continuously honing your skillset is very, very important for any person.

22. Say-something syndrome: This idea that you are contributing something in a meeting just because you made some point. We all want to contribute in decision making, but some time, the best contribution is to remain silent. 

After reading this list, it is difficult not to come to the conclusions that we are 'NOT' in control of ourselves, and that we are living with an 'Illusion of Control'. Our judgements are subject to so many biases that it is a surprise that we make good decisions on a regular basis at all !!!

Update: Jana Vembunarayan has created a mindmap of these biases in his wordpress blog. You can check it out HERE. It is very good

Monday, April 9, 2018

Lessons from great minds of investing: William Green

Gyan on Treadmill dated 07-Apr-2018

One of the benefits of reading and learning about investing and investors is that you can learn a lot about life. You get more life wisdom rather than investment wisdom, I would even go as far to say that the latter is a bonus. Most of the great investors have tasted great success, experienced great failure, resisted temptations, handled bare borne emotions like greed and fear, shown exemplary courage and exemplary humility, separated what is important from what is urgent and unimportant and finally, helped a large number of people to become successful and lead their life with calm and peace. 
William Green
For his book 'Great minds of investing', William Green and team interviewed 22 of the greatest minds of investing and culled the essence of their life experience. The book provides deep insight into the minds of these investors, identifying the qualities and principles that have enabled them to achieve huge success. It has taken the wisdom of the great investors without restricting it to investing and extending it to life.

The book is currently available only in hard cover and is very expensive at about 86 Dollars. I am waiting for the Kindle Edition to appear to even consider buying.

As an aside, if anyone wants to gift me this book, you are welcome to do so.

As a part of the 'Author Talks' series at Google, William Green spoke of the lessons that he learned after interviewing these great minds in investing. Here is the essence of his presentation.


While analyzing these experts to understand the 'How' questions, like how do they make decisions, how do they handle failures, how do they avoid obvious mistakes and how do they manage work life balance and 'what' questions like what are their principles, what are their life approach etc, Green came up with a list of four life lessons.

They are: 
  1. Willingness to be lonely: This deals with the ability to diverge from the crowd and take tough decisions (take uncomfortable idiosyncratic positions). 
  2. The power of humility: While you have to have the self-confidence to go your way, you also should have the humility to accept the possibility of making mistakes. This helps you build safeguards in case you are wrong.
  3. The ability to take pain: As a long-term investor, there are bound to be times when you are making huge losses and the society will be after you with a pitchfork. You should have the emotional resilience to handle the downside. 
  4. The key to happiness: What they do with their money? How do they use it for societal benefits?
John Templeton was one of the great investors of his time. He was the first leading investor to venture beyond American Borders and venture into the area of global investing. Many a time he took
John Templeton
extraordinary tough decisions which no one would have taken. As an example of his ability to take tough decisions, Green talks about Templeton's investment in small companies in the US markets in 1939. It was the beginning of WW2. Germany was moving into Paris and everyone was expecting the world to come to an end. Templeton bought a basket of 104 companies in the NYSE trading at less than a dollar. 37 of those companies were bankrupt. Five years later, when he sold off his position, 100 out of the above were profitable and he made 5 times his initial investment. 

Mohnish Pabrai is another investor who stood out against the crowd. When he started off in 1994, he
Mohnish Pabrai
found that no serious investor was following the strategy of Warren Buffett, like buying companies trading at very low price in relation to its intrinsic value. He understood the value of 'Extreme Patience' and followed the value investing principles to the core. 

One example of extreme patience is to wait for the perfect opportunity to invest. You may have to wait for very long period of time, but great investors always eschewed the tendency to invest because they 'had to invest'.

Another example of loneliness is Bill Miller's purchase of Amazon. After he purchased it, the stock crashed from 90 Dollars to about 5 Dollars. Miller invested almost all his money in this one company and as per the latest price, the stock has grown 200 fold from those lows. This is the ability to accept that you will be lonely a lot of time.

You also have to be humble to understand that you do not have all the answers. You have to accept the possibility of either extrinsic (war, earthquake etc) and intrinsic (hubris, assuming that you can predict the future) events and take steps to handle the aftermath. You have to accept that you are just a cog in the giant wheel of the universe and remove all illusions of control. Humility also means accepting the role that luck played in your life and career and not to attribute all the successes internally and all failures to external causes. 

As an example of role of luck, Green explains the case of Howard Marks. Early in his career, Marks
Howard Marks
had applied for a job at Lehman brothers and the guy who was supposed to make the final offer got drunk and forgot about it. Had that offer come, and had Marks accepted (which he most certainly would have), his career would have taken a different turn.

(Non-sequitur) At certain point in life you realize that the scarce resource is time, not money.

You need to be humble enough to accept that you could be wrong. And take possible corrective action. 

It is not easy to balance the trait of humility with the arrogance that comes with loneliness. You have to be arrogant about your intellect, your process and your approach to take a position vastly different from that of the majority, It is very easy to be carried away by your arrogance and miss the changing trends that could impact your decision. It takes humility to always ask the question, what if I am wrong? Humility ensures that ego is kept out of decision analysis.

Ability to take pain is another important trait. At one point, Bill Miller of Legg Mason was managing
Bill Miller
an asset base of 77 Billion which crashed to 800 Million (almost 1/10th) during the financial crisis. At that time, he had to lay off about 100 people. He looked around and found investors who had lost their wealth, people who had lost their jobs, all due to mistakes he made. That realization is very painful.

There are two ways to handle pain. One is to prepare for the inevitable crash when things are going good. For example, Bill Miller's wife put all her alimony into bond funds and did well when Markets Crashed. Another is to look around how others have handled pain, what was their source of strength, and identify our own source of  emotional strength. It could be from your family, your faith, your life philosophy...anything. 

What is the key to happiness? Does money make people happy? Many of the investors whom Green interviewed were not very happy. On the other hand, some of them had an inner glow which can come only from having a higher purpose. One way to remain happy is continuous learning. Author
Irving Kahn
gives the example of Irving Kahn, the oldest American investor. At 108 years of age (He had four brothers and all of them lived to above 100. Kahn died at the age of 109), he was a perfect embodiment of the message of this book. When asked what made him happy, he sited three points. One, a happy and healthy family, two, that he was able to start a company and provide employment to many and three, the ability to interact with very smart minds who could provide answers to many of his questions. He was a life long learner, the only thing he craved for were books. 

Happy people focus on 'Return on Life', while others focus on ROI, ROC etc.

Happiness comes from a higher purpose in life. Mohnish Pabrai has created the 'Dakshana Foundation', whose objective is poverty alleviation through education. The foundation identifies talented but impoverished students and help them prepare for competitive examinations. The foundation is very succssful

Ashok, one of the Alum from the foundation, cleared IIT JEE with a AIR of 66, joined CS at IIT Mumbai and is currently working at Google.

He was also sitting in the audience, listening to the presentation by Mr.Green.

Sunday, April 8, 2018

The education of a value investor: Guy Spier

Gyan on Treadmill dated 05-Apr-2018

I had heard about Guy Spier while reviewing the book 'Dhandho Investor' written by him and Mohnish Pabrai. You can read my review of the book here

This is a part of the 'Author Talks' series of Google Talks. Guy Spier is a Value Investor and has written the book 'The education of a value investor'

This is a unique talk. If I expected full on maths, analytics, number crunching and investing strategies and PE Ratios, I was in for a surprise.

A pleasant surprise, if I may. 

This presentation is more about author's evolution as a human being and a successful value investor. Being laced with life lessons, this book is right in my territory. I am not even sure if blog post will fall into a label of 'Investment Wisdom' and be a part of this blog on Finance and Investing, or it should be a part of my blog 'Grow Together' which deals with personal growth and life lessons...

Guess, I will post in both.

This is a short presentation, with some high quality wisdom.

(You can watch the presentation here. )

So off we go.

Guy graduated from Harvard Business School. After graduation, he worked as an Investment Banker in a Wall Street firm, working on deals. As a young graduate, he wanted to make a lot of money. Gordon Gekko was his hero. He quickly found that in order to make lots of money,  he was asked to play on the borderline between legal and illegal. He found that he has to compromise morality to make money in wall street.

After 18 months of working in that firm, disgusted with what was happening in the financial industry, he left the company. Later he discovered Anthony Robbins which changed his life. He talks about 'Technology of success in life' and until you find that, you will not be successful in life. He comes back again and again to this theme in different times in this presentation.

There are three ideas that this presentation focus on. They are:

1. Compounding of goodwill
2. Power of authenticity
3. The idea of resonance

Some time in his life, he decided to write 'Thank You' notes to people whom he came across who helped him in any way. This was his way of compounding goodwill over time. Inspired by 'Hare Krishna' people handing out flowers at airports, Guy started giving gifts to random people and as mentioned before sending Thank You notes. He started with sending 3 notes a day for five days a week, and has so far done more than 30000 thank you notes. This helped him meet some very good people who helped him. One of them was Mohnish Pabrai, with whom Guy eventually partnered.

He talks about the concept of resonant frequency. Every successful people he knows, according to Guy, has found a way to match his frequency with the frequency of the universe. You cannot achieve lasting success without this frequency matching. Once that frequency matches, crazy, awesome things begin to happen.

Authenticity refers to integrity. You are inside, what you are outside. Once you achieve authenticity as well as resonant frequency, there is no force in the universe that can stop you. He quotes Mahatma Gandhi who said, 'be the change you want to be'.

Authenticity also means accepting yourself for what you are. A person who do not have all the answers, a person who may (will) commit mistakes etc. Once you accept that you are not a rational individual, you can factor that in your decision making by creating tools like checklists, to do lists etc. 

Sometime early in his career, Guy identified what Antony Robbins calls 'Matching and Mirroring'. He had just discovered Warren Buffett. Guy wanted to become like Buffett. He thought as to what Buffett would do in the situation Guy was in, working in a stifling environment. He decided that Buffett would quit the job. It took him almost 10 more months before he quit his job. 

His rule for self improvement is to identify a person whom you respect and ask what would that person have done under the given circumstances and do at least a fraction of that, still you can be very successful.

Guy always wanted to meet Warren Buffett, which he did at the time of launching his book. The upside of meeting Buffett was that he finally realized that he cannot be like Buffett and that freed him to become what he really was.

Traditional models and ideas of success follow a set of steps. First is to identify a goal and then strive to achieve it. Guy has a counter-intuitive approach. Instead of trying to achieve a goal, he is always trying to 'tilt the playing field in his direction'. Sending a thank you note, delivering more than what you are asked for are all ways of 'tilting the playing field'. It makes people want to help him.

He also has some suggestions for finding a better investment process. As everything with (this) Guy, some of these are counter-intuitive. Some of them are:
  1. Stop checking the stock price
  2. If someone tries to sell you something, do not buy it
  3. Don't talk to management
  4. Gather investment research in the right order
  5. Discuss investment ideas only with people who have no axe to grind
  6. Never buy or sell stocks when market is open
  7. If a stock tumbles after you buy it, do not sell it for two years.
  8. Don't talk about your current investments.

Finally, here is his secrets of success.
  1. Give first, then evaluate
  2. Show Empathy
  3. Be vulnerable
  4. Learn how to write thank you notes. 
  5. Get around people better than you, and then you can only improve.

Identify people into three groups, takers, matchers and givers. Takers take whatever you give. Matchers do stuff that match what you did and givers give more than they take. Always spend time with Givers.

Towards the end, he makes a very powerful statement. 'Whenever I have looked for answers outside of myself, I have not found it. I have always found answers inside me'. 

Let us close with a tinge of humour. He poses a hypothetical question. What would you like to be? A person whom world thinks is great in bed, but whose wife knows that you are terrible, or a guy world thinks is terrible in bed, but whose wife knows you are good in bed. 

Who life would you like to live?