Missed Opportunities...

To make money in stock market, you need to do two things. One identify opportunities and two, play long term. Despite my professed knowledge of Stock Markets and investments, I sucked at both.

Consider the facts.

In 2004, I was working for India's largest IT consulting company. And we were implementing the project for India's leading Watches and Jewellery manufacturing company.

In the year 2005, my company came out with its IPO (Initial Public Offering). The shares were priced at 850 rupees and there was a discount of 5% for employees. In addition, the company was giving very good financing options to the employees to purchase its shares in the IPO.

Since I was the 'expert' on share market, my team members asked my opinion.

Book Review #38: How to be a billionaire: Author: Martin S Fridson

Just finished reading the book 'How to be a billionaire, proven strategies from the titans of wealth', written by Martin S Fridson,

Fascinating book.

Author sums up the layout of the book in the first chapter. This is the first book that I have read that does that. So let us dive right in.

Traditional wisdom on building wealth stress on the individual. Have a new idea and single minded focus, keep hope and optimism and keep dreaming and visualizing success, so they say, and you will eventually become a billionaire. The focus is on thoughts and attitudes as a means of attaining wealth. This thought is exemplified by the book 'Think and Grow Rich', written by Napoleon Hill.

 

The above approach is simplistic as per Mr.Fridson. The traditional wisdom miss two important qualities of a billionaire, their ability to negotiate great deals and their  understanding of financial concepts including taxation.

Why market timing do not work?

Let me tell you about my experience in stock market in India in one sentence.

'I have tried everything there is and lost money every time'.

Still I am in the stock market.

Recently my friend Niranjan and I were having a debate on Facebook. I have updated saying that Indian market is at a historically high PE ratio and that one should be careful about investing in the market now. The Nifty PE is above 28 as I write and this has happened only twice in history. Once in 2003 and the other in 2008 and both times markets crashed. 

Niranjan had an idea. 'Why don't you sell your portfolio lock stock and barrel now and buy it back after the inevitable crash?', he asked me.

I have been there. It never worked. Here is what happened.

You think that market has topped out and sell your shares an immediately it goes up by 20%. I used to own the shares of Bombay Dyeing earlier. I purchased it at about 300 and it was vacillating (they call it 'consolidating') around 550. I felt that it was bound to fall and sold it. In the next two days, the stock touched 730 !

After selling the shares at top, you wait for it to bottom. You assume that it has bottomed out and buy it and immediately afterwards, it falls another 40%. I purchased Vakrangee recently at 65 and it fell to 45 in just three sessions !

Another reason it works is this. You identify a great stock and want to play this 'Sell and buy' game. You time the top perfectly and sell it. Now you wait for the price to fall to a particular level so that you can buy it again. The problem is that the stock starts consolidating on the down, with a downward bias, all the while you are sitting with cash in hand and other shares are going up. You keep observing a few shares that are going up and after some time, you lose patience and use the cash to buy the novenu shares that have already run up. Once your cash dries up, the original target share falls to your target level and you do not have cash !. 

Another problem is that after selling a share, you forget about it and later on you see that the share price reached its target level, reversed course and now trading at a price that was higher than when you sold originally !. I remember buying Subros at 50 and selling it at 70 and waiting for the price to reach 50 again so  that I can buy it. Then I used the cash to buy some other shares and then I forgot all about Subros. Later when I checked the price it was trading at 300 !

The main reason that the strategy of 'Sell high and buyback low' doesn't work is that you can neither predict the high or the low of individual shares, nor can you do that for the market.

For example, currently the Nifty PE is 28 as I mentioned earlier. However, there are some people who say that the current situation is not comparable with 2008 because only five stocks are driving Nifty Up. These are TCS, Reliance, Infosys and two more. Other stocks are still trading much lower than their peak valuations. As per this view, when the corporate earnings of the other stocks revert to mean, the Nifty PE will fall and market will become less risky.

Do you see what is common among all these strategies? All these are looking only at the share price, none of them are looking at the underlying business. And that is what you should work on.

It is all very complicated. So, in times of peak PE, the only strategy is to sit tight and do nothing. Buy some solid companies and let them deliver returns for you compounded over long time.

There are many great companies out there. 

The futility of knowledge....

'All the knowledge and wisdom that one accumulates is futile if one do not act on that knowledge'

Take it from me, I should know.

Readers of this blog know that I am running a blog series on reading and reviewing 50 Books in Finance, currently I am in Book Number 37, Think Like a Billionaire, become a Billionaire

The incident that I am about to narrate happened in the end of 2015. I was in the middle of reading and reviewing the book 'New Buffetology'. This amazing book gave countless examples of stocks trading at significant discount to intrinsic value. The basic premise was than a value investor should buy great businesses trading at low valuation.

Such stocks are not generally available.

Book Review #37: Think like a billionaire, become a billionaire: Author: Scot Anderson

Your path to becoming a billionaire starts with your mind, what you feed into it and what you take out of it.  Before you become a billionaire, you have to think like a billionaire. 

The book 'Think like a billionaire, become a billionaire by Scot Anderson extensively covers the thought processes followed by billionaires. They (billionaires) think differently about seven things in particular. These are Money, Investing, Jobs, Risks, Wisdom, Time and Problems.

While we think Money is for expenses,

Book: 100 Baggers: Notes and References

These are the detailed notes from the book 100 Baggers written by Christopher Mayer. You can read the review by clicking here.

Chapter 1: Introducing 100 Baggers

You will learn the key characteristics of 100-baggers. There are only so many ways up the mountain, and we’ll map out these paths
Note: Objectives of the book. One, lear the key characteistics of 100 baggers. Two, explain some techniques by which an ordinary investor can identIfy and profit t from 100 baggers

you will learn why anybody can do

share with you a number of “crutches” or techniques that can help you get more out of your stocks and investing.

this book was called 100 to 1 in the Stock Market by Thomas Phelps.

“Every human problem is an investment opportunity if you can anticipate the solution,”

This was the main thrust of our conversation: the key is not only finding them, but keeping them.

Investors crave activity,

But investors need to distinguish between activity and results.

‘A lot of shavings don’t make a good workman.’”

Phelps advises looking for new methods, new materials and new products—things that improve life, that solve problems and allow us to do things better, faster and cheaper.
Note: This is what Jim Slater recommended in he Zuu Principe

“There is a Wall Street saying that a situation is better than a statistic,”

Phelps is quick to add he is not advocating blindly holding onto stocks. “My advice to buy right and hold on is intended to counter unproductive activity,”

Sometimes stocks take a long time to get going.

“One of the basic rules of investing is never, if you can help it, take an investment action for a noninvestment reason,”

You should sell rarely, and only when it is clear you made an error. One can argue every sale is a confession of error,

The main idea is to know how such returns have happened and what investors need to do to get them.

Book Review #36: 100 Baggers: Author: Christopher Mayer

Over 15 chapters,  '100 Baggers - Stocks that return 100 to 1 and how to find them' written by Christopher Mayer makes a fascinating reading. The book starts off by analyzing the 100 Baggers from the 70s to the early 2000s and try to find common lessons for the investors. The list of 100 Baggers is diverse in terms of age, industry and size. There are 50 year old companies, there are new ones, there are small, medium and large caps and these belong to diverse industries. 

To earn 100 bagger returns, you have to save yourself from yourself. Your bias to action when things are going nowhere, your itch to sell when the share price falls by whooping 40% in a day, your fear when the stock you own falls from high triple digits to single digits, as it happened in case of Amazon.

Buy the Kindle Edition of this book @Amazon at 135 rupees.

To get returns of the magnitude of 100 baggers, traditional mindset nor traditional investment style

Lessons from Tulipomania

This is a story from the book Zulu Principle written by Jim Slater.

Buy 'Zulu Principle' @Amazon

In the early seventeenth century, many people in Holland were collecting tulips to such an extent that it was proof of bad taste for a man of fortune to be without a rare tulip bulb collection. The desire to possess tulip bulbs spread to the Dutch middle classes. By the year 1636, the demand for rare tulip bulbs increased so much that regular marts for their sale were established on the Stock Exchange in many of the principal cities. 

Book Review #35: The Zulu Principle: Jim Slater

This is the review of the book 'The Zulu Principle - Making Extraordinary Profits from Ordinary Shares'. This book is written by Jim Slater. 

There are two ways by which an investor can make money in the market. Invest either in stocks or in bonds. Zulu principle is all about focus. So at the outset, the author informs us that this book will focus on the former (investing in stocks) and will ignore the latter. 

The first edition of this book was published in 1992, the author outlines the objectives of this book which is to explain five methods by which an investor can make money by investing in stock market. 

The five methods are to invest in:

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. 

You can watch the presentation here.

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 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.

Buy the book Tao Jones Averages @Amazon

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.

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'.

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'.

(You can watch the presentation here.)

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'.

Buy the book 'The Most Important Thing' @Amazon

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....

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. 

Here is the link to the speech (audio)

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

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.

(You can watch the presentation here)

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.

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?

What works on Wall Street: Jim O'Shaughnessy

Gyan on Treadmill dated 26-Mar-2018

Jim O'Shaughnessy

James ('Jim') O'Shaughnessy is the author of the book 'What works on wall street'. The book is in my review list. In this delightful google talk laced with wit and wisdom, Jim makes some awesome points which are valuable for any investor.

(You can watch the presentation here)

He starts off by talking about the mistakes made by both passive investors (who invest in Index Funds) and active investors (who research and pick stocks). The only mistakes that passive investors make is to sell off in panic at market bottoms. On the other hand, active investors make two kinds of mistakes. One, sell off in panic in market bottom and two, is to compare their returns against the benchmark (?). Active investors compare the portfolio performance over a period of three years. Market returns are cyclical over three years and mean reversion happens in that time frame. So if you have a comparison period of three years, you might be comparing apples and oranges.

Let us pause here for a moment and look at what we do here in India. Assume that we have an investible surplus, first thing you do is to go to Moneycontrol's mutual fund section and look for fund with the five stars. Then we invest and see that the fund performance has fallen immediately after we invest and next year it becomes a four star and then a three star. I have had countless experiences with this failed strategy. For instance I invested in TIGER fund when it was five star and exited at a loss two years later when it became three star. I invested in HDFC top 200 fund when it was 5 star, stuck with it when it was three star and in the last two years, it has outperformed.

Let us go back and listen to Jim...

Investors are subject to Recency Bias. We pay greatest attention to what has happened recently and we extrapolate the recent event into the future. (two mistakes, the same point made by Tobias Carlisle in his speech of 'Reigno' motif). As per some swedish study on the investment habits of identical twins, 45% of investment decisions we make are genetic. Availability bias is how easily we remember something. 

If you can have a long-term investment outlook and manage to live by it, that is as close to investment super power as possible. 

From discussing the biases, he moves on to discussing process. A good investor values process over outcome. He quotes Deming, 'if you cannot explain what you are doing as a process, you do not know what you are doing'. The same point (about the importance of process) was made by Tobias Carlisle in his presentation also where he mentioned that 'simple models outperform expert's discretion'. In this case 'Simple Model' equates 'Process'. As a part of process, try to analyse as much data as possible.

Jim stresses the need for investors to understand market history. In the market, the trends tend to repeat themselves. What looks attractive from a 4-5 year data (recency bias) may be a disastrous investment strategy for the long-term. There are many people who recommend buying high PE stocks because they are 'growth stocks'. But in reality, all the potential growth is already factored in and if you buy such a stock, you will end up with hardly any returns (in fact -6% compared to SP500 as per the study by Jim and his team)

Due to the three year cycle that was discussed earlier, in every 10 years, there is a chance of your portfolio under-performing at least in three of the ten years.

Successful investors ignores forecasts and predictions. But as retail investors we crave forecasts because we crave stories and narratives. 

Another bias is the 'Halo Effect'. You attribute a lot of qualities because you are impressed with an individual. You like a stock because, everyone is talking about it, and some experts are recommending it etc. Jim gives example of the '10 stocks of the next decade', prediction by Fortune magazine. Of these 10 stocks, 2 went bankrupt and the remaining 8 gave a return of -27% when S&P 500 gave a return of about 125%. That is Halo Effect in action.

Since this talk was focused on active investors, Jim says that two qualities required are patience and persistence. Pay zero attention to the view of others. Stick to your process, stick to your model and think long-term.

Successful investors think in terms of 'Probabilities' rather than 'Possibilities'. There are lot of things that are possible. However, only few things are probable. People who think in terms of possibilities freak out. 

He analyses as to what companies outperform in the long run. As per him, the companies with the highest shareholder yield (dividend + buyback) tend to outperform. Dilution, debt, acquisitions, expansion - all tend to reduce the shareholder return. 

Finally discipline is very important. You must be able to stick to your process and approach when things are going difficult. Resist the temptation to invest based on tips, expert opinion or any of the biases (recency, availability, halo effect) discussed earlier. You may face situations where you are not in control, people are rejecting your ideas or you may lose self-esteem. But the smart active investor will win in the end if he or she is disciplined. 

Lot of amazing lessons here...Thank you Jim...

Deep Value Investing: Tobias Carlisle

Gyan on Treadmill dated 04-Apr-2018

Tobias Carlisle has written the book Acquirer's multiple, another approach to value investing. I have this book in Kindle and will review it sometime later.

The Google Talk is about 'Deep Value Investing', how to find value stocks that can give you surprising outperformance in the long run.

This is a matter of fact presentation, full of surprising insights. The ideas made in this speech upends many of your conventional investing ideas. !!!

This is a number driven presentation, I will try to cull out the key points in this post.

You can watch the presentation here

The key idea in this presentation is an unusual one. It is that investing in a portfolio losing stocks with pathetic financials and high losses can sometimes lead to phenomenal portfolio returns. At the outset, Carlisle gives a disclaimer that this approach is very risky. There is 6% chance that the stocks will become zero. However, a portfolio will ensure that what remains gives huge returns.

Should you pick and choose from the basket of pathetic stocks? The answer is no. The reco is to invest as per the model. 

What explains the portfolio out-performance. Simple answer. Mean Reversion. In the long run, the performance of all the stocks will tend to revert to mean. Since these pathetic stocks are beaten down so much, they are so far away from the mean that any mean reversion will ensure tremendous out-performance.

The next question is when will mean reversion happen and what causes it. 

Regarding first question, no one knows when it will happen. However, if there is a significant difference between price and intrinsic value of the company, the price will gradually move towards the intrinsic value. Some of the causes of mean reversion, according to Graham, are:

1. Creation of an earnings power commensurate with company's assets, in other words improving Return on Assets. This can happen due to general improvement in Industry or due to favorable changes in company's operating policies, with or without a change in management. 

2. A sale or merger (aka. special situations)

3. Complete or partial liquidation

Read the next two paragraphs carefully. This will blow your mind.

Carlisle explains that he and his team divided the universe of stocks into three groups. Large Cap, Midcap and Small Cap. They further divided each of the above to three subgroups, high growth, moderate growth and low growth. Then they did a historical trend analysis (so called 'Back Test') of portfolio returns. Over 5 year and 10 year, the stocks in the low market cap, low growth portfolio, consistently outperformed all the rest.

Wait there is further. Among the low cap, low growth stocks, portfolio of stocks that was in loss gave better returns that the portfolio of stocks that made profit. Among the latter (Portfolio of Low Market Cap, Low Growth Profit making stocks), the stocks that gave dividends did poorer than those that did not give dividend !!

Amazing !!

Does it mean that the growth rate of low growth undervalued portfolio spurted and overtook that of the high growth undervalued portfolio? No. What happened is that mean reversion lifted the market value of the undervalued portfolio to normal valuation. I saw this phenomenon play out in Indian markets about 4-5 years ago when HPCL was available at a price of 190 and a PE of 1 !!. Stupid me, did not buy it then. From then it has become a 10 bagger.

I was reminded of parallels in India market. In 2007, if you had invested Rs.10 Lakhs (a million) equally in a portfolio of 25 such stocks, one of them would have been Avanti Feeds (you would have got about 6000 shares). It has given stratospheric returns since. Indo count in 2009, Mayur Uniquoters in 2011 all are testaments of this approach.

So that is lesson 1: Portfolio of Low Growth, Low Market Cap stocks will outperform the high growth,  high market value companies.

The author also talks about the 'Net net approach' popularized by Ben Graham in his book Intelligent Investor.  I have mentioned about my experience with this approach in this blogpost.

Net-net companies are those where the weighted net current assets (different weights for different current assets based on their liquidity risks) is greater than the market capitalization of the company. Even deeper value is if the weighted net current assets minus Cash and Cash Equivalents is greater than the market cap of the company. Effectively you are getting a company with fixed assets and cash free of cost.

One key point made is about the need for a model. Studies after studies in different areas including medicine and psychology show the need for and importance of a model. Surprising finding is that a model, even a simple model, will outperform the arbitrary decisions taken by experts even!!! Your model could be just the PE screen. But even that will tend to outperform the complex models chosen after deep analysis by experts. The reason that simple model outperforms is that people tend to make mistake while trying to outperforming a model.

Golden rule? Simple models outperform experts, even when experts have access to the results of the simple model.

If that is not a call to arms by the retail investors, I don't know what is.

Lesson 2: Models are required. And simple models outperform complex models and expert discretions.

As mentioned above, Carlisle has written a book called Acquirer's Multiple. What is that? 

This is one of the simple valuation models propounded by the presenter. He looked at various models including 'Net current assets', 'franchise model (See's Candy)', 'great companies going thru temporary stress (American Express)', 'Magic Formula of Greenblat' etc.

Before we move to Acquirer's multiple, let us look at the Magic Formula propounded by Joel Greenblat. In his book 'Little book that beats the market' and its cousin 'Little book that still beats the market', he uses a combination of ROIC and Earnings Yield to identify companies that are worth investing. (Earnings Yield is calculated on EBIT basis, not on net profit basis to remove the impact of the capital structure on returns). This formula comprehensively beat the S&P 500 when back tested over 20 years.

In their research, Carlisle and team goes one step further. They break up the magic formula into its components, ROIC and Earnings Yield and then check the performance. Surprisingly, they find that while earnings yield alone outperforms even the magic formula, the ROIC pulls down the magic formula returns. 

The reason is the mean reversion of ROIC. 

Carlisle do not explain if he tested a portfolio of high earnings yield and low ROIC. May be that IS the magic formula...

In summary, since earnings yield is the inverse of PE, all we need to do is to buy a company with low PE. May be also low ROIC. Mean reversion will do the rest for us.

Acquirer's multiple, also known as 'Enterprise Multiple' is calculated by the formula:

(Market Capitalization + Debt + Preferred Stock - Cash) / (EBITDA or EBIT)

This is the matric used by acquirer's, PE funds, hedge fund etc to value the business. The numerator is the cost of acquisition and the denominator is the Earnings from that investment. Note that this is a more complex calculation of Earnings Yield than the inverse of PE. PE just look at the market capitalization, while this formula also considers Debt, Preferred Stock and Cash In Hand, which could be a more accurate value of the business to an investor.

Lesson 3: Acquirer's multiple is a simple model that outperforms all the other models.

That is it. That is a lot of wisdom for a day....

20 Lessons from 'Rich Dad, Poor Dad'

The book Rich Dad, Poor Dad, written by Robert Kiyosaki (Review Here) is an iconic book in the personal finance space. In simple terms this book explains very complex financial concepts.

This was the second book that I reviewed in my book review series on 50 Books in Finance.

Here are 20 lessons that one can learn from this book. This is a whatsapp post. I am putting up this because of the relevance.

1. For most people, their profession is their income and they live through their work to survive. For rich people, assets they maintain, invest is their income.
2. If I want to buy something, I must first generate enough cash flow from my assets to cover these expenses. Buy luxuries last, not first.
3. Excess cash flow generated by my assets should be invested again into other assets.
4. Do not simply aim for more income, aim for more valuable assets, repeat the circle.
5. Reduce your expenses low and reduce your liabilities.
6. Create a corporation to protect your assets and reduce tax expenses. An employee earns, gets taxed, and then spends what is left.
7. Know a little about a lot. Learn something about accounting, investing, markets, the law, sales, marketing, leadership, writing, speaking, and communication. Now little about everything you can. Also See Bill Gates talking about the same point.
8. Work to learn, don’t work to earn. Find a job where you can learn one or more of the above mentioned skills. Alibaba’s Jack Ma also empahsized on this particular point here.
9. Do not simply buy investments. first learn how to invest as no one else can do it better than you.
10. You become what you study, so choose your study materials carefully and do read a lot.
11. Every rich person has lost money at some point, but many poor people have never lost a dime. Playing not to lose money means you will never make money. “Winning means being unafraid to lose.
12. “Failure inspires winners and defeats losers. Do not be afraid of losing and be bold enough to admit and learn from the failure. No one is born perfect.
13. Be in control over your emotions. Do not let fear or opinions of the general public dictate your actions.
14. Most sellers ask too much. It is rare that the asking price is lower than something is worth.
15. Surround yourself with winners. Sit with people who are smarter than you and you can learn from them,
16. Saying “I can’t afford it” shuts down your brain. Asking “How can I afford it?” opens up your brain.
17. Pay yourself first. Each month, first invest a certain amount of money into income generating assets before you pay your bills. Short of money, use this pressure to keep yourself on your toes.
18. Dream big, have a clear game plan in your mind. Always seek answers to important questions such as Why do you want to earn more passive income? For me, because I do not want to work all my life. I want to have control over how I decide to spend my time. Also, I want to support my parents financially because they helped me all my life.
19. Develop a skill to listen. Listening is more important than talking. Do not constantly argue and think with your mouth. Ask questions, grab as much knowledge as you can from others.
20. On the market: do not follow the crowd, and do not try to time the market. Profits are made when you buy, not when you sell.