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 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....

Story of 1000 rupees discount

Gyan on Treadmill dated 25-Mar-2018

In his Presentation made at IFA Galaxy Global Summit 2015, Prof.Sanjay Bakshi talks about the subconscious biases that each of us have when it comes to personal decisions. While the the decision parameters and the data are the same, we take totally different decisions depending on circumstances.

He gives the following example.

During a lecture, he gives the following scenario. Assume that you had always wanted to buy a beautiful lamp with a certain specifications.  The lamp costs 10000 rupees. After accumulating the money, you go to the shop to pick up the lamp. As you are picking up, the shopkeeper comes and tells you that a lamp with the exact same specifications is available at a nearby shop, 10 minutes walk from here, at a discount of 1000 rupees, at 9000 rupees.

What would you do?

Almost the entire class says that they will be ready to walk the extra 10 minutes to avail of the discount of 1000 rupees.

Now he gives a different scenario.

You are in a Car agency wanting to buy a car costing 10 Lakhs (On Million) Rupees. Just as you propose to pay, the shopkeeper says that a car with exact same specifications, is available at a nearby shop, 10 minute walk from here,  at a discount of 1000 rupees, at 999000 rupees. Would you walk the extra  10 minutes distance to avail of the discount?

Entire class says no.

Here is the problem. Every parameter and the amount are the same. Product specifications are same, the walk distance is the same and the discount amount is the same, what you can buy with the discount amount (the purchasing power) is the same...

But your decisions are different in these cases. Why?

Professor talks about the 'bias for percentages' in one's mind. 1000 in 10000 is 10%, huge in your mind, 1000 in 10 Lakhs is 0.1%, hardly worth the extra effort. The bias for percentage make you take different (probably wrong) decisions under the same decision parameters and amount.

Fascinating, ain't it?

Story of Stock market Newsletter Scam

Gyan on Treadmill dated 25-Mar-2018

In his Google talk on Prejudices of Mr.Market, Prof.Sanjay Bakshi talks about a stock market scam. Let us drill it down.

A scammer started off with a list of 364500 email addresses. He divided them into three groups, A, B and C. He identified a volatile small cap stock.

To group A, he send an email stating that the stock price would go up in the coming week

To group B, he send an email stating that the stock price would remain the same in the coming week

To group C, he send an email stating that the stock price would fall in the coming week.

At the end of the week 1, depending on the movement of the stock, one of the group (121500) people got the email with the correct prediction. Let us say it was group A.

A member of group A received this email saw the prediction and checked with the outcome and ignored it as a fluke.

In the next week, he focused on the group A. Again he divided the population of 121500 into three groups, let us call them group D, E and F. He did the same thing as he did initially. That is:

To group D, he send an email stating that the stock price would go up in the coming week

To group E, he send an email stating that the stock price would remain the same in the coming week

To group F, he send an email stating that the stock price would fall in the coming week.

At the end of week two, one of the groups would have got the correct prediction, Let us say it was group E.

A member of group E would have now received predictions of two weeks that turned out to be correct. His curiosity is piqued. 

Now he ignored groups D and F and focused on group E. He again did the same thing. Divided them into three groups and followed the same process for this new group with a population of 40500

Like this he continues for 6 weeks. At the end of the sixth week, there is a population of 500 people who have got correct predictions on all the 6 weeks...

On the seventh week, he sends these 500 people a mail stating that if they wanted to continue with his services, they can subscribe to his newsletter by paying a subscription fee of Rs.100000 per year.

How many of those will fall for this? Even if one third falls for it, he would have earned Rs.17000000, (17 Million), for an overall effort of sending six emails....

Moral of the story: Do not fall for Stock Market Newsletter Scams

The Value of Stories in Business: Aswath Damodaran

Gyan on Treadmill dated 30-Mar-2018

In his book Tao Jones Averages, author Bennett W Goodspeed complains that the traditional financial analysis is too left brain oriented and it doesn't consider those information that are not available in numbers. The book encourages investors to use 'whole brain investment' strategy.

It is almost like Prof.Aswath Damodaran, professor of Business Valuation, and a global expert in Business Valuation, read the book and decided to act on it. The talk on 'The value of stories in business', by professor, may be the closest that one may have come to 'whole brain' valuation. Professor encourages us to build our valuation case as a story and attach numbers to each key aspect of the story.

Professor Damodaran is very liberal with sharing his knowledge. You can read his ideas and opinions in his blog 'Musings on Markets'

Also puts up his entire course on Youtube.

Professor Damodaran has elaborated his ideas on the stories that are related to numbers in his book 'Narratives and Numbers-The value of stories in business'. The current talk by Professor is based on this book.

Professor is very articulate and very humorous. You will find the PRESENTATION very enjoyable.

He starts off by dividing his class into two groups, one, the 'number crunchers', who thrive on numbers and are left brained and two, the 'story tellers', who are more imaginative than analytical. Each group maintain some delusions. The former has delusion of precision - the idea that data is precise and more precise the data, more precisely it describes reality, delusion of objectivity - that the data has no bias and delusion of control - that you control information since you have the numbers. The delusions of the latter group include, 'You cannot quantify creativity', 'If the story is good, the investment will be - I have told you a great story, it should be worth 3 Billion, right?' and 'Experience is the best teacher'.

In addition, the tools used by these groups are different. While number crunchers use tools like accounting statements, spreadsheets, statistical methods and pricing data, the story tellers use tools like anecdotes, experience (own or others) and behavioural evidence.

The objective of this presentation is to create 'disciplined story tellers' or 'imaginative number crunchers'. The approach is first to right the story (he calls it narrative) and then attach numbers to it to come up with valuation. There are five steps in converting the story to numbers. These are:

1. Develop a narrative for the business you are valuing: In this narrative, you tell the story of how you see business evolving over time
2. Test the narrative to see if it is Possible, Plausible or Probable: There are a lot of possible narrative, a subset of these are the plausible and a subset of plausible are probable narratives.
3. Convert the narratives into value drivers: Take the narrative apart and see how you will bring it into valuation with potential market size down to cash flows and risk. Each part of your narrative should have a corresponding number attached to it and each number should have a story attached to it. 
4. Connect the value drivers to valuation: Create a valuation model that connects the inputs to a final business value
5. Keep the feedback loop open: Listen to people who knows business better than you and use their suggestions to fine tune your narrative and perhaps even alter it. Work out the effects on value of alternative narratives for the company. 

While developing the narrative you make assessment of the company (its products, management and history), the markets that you see it growing in, the competition and the macro-environment.

The narrative should answer questions like why the business will be scalable (Network effect in case of Uber, more the drivers affiliated with Uber, more will be motivated to join the Uber network), why should customer buy the product, Why the revenue will grow in future, why the margin will grow / shrink in future, what are the risks etc.

As an example, Professor discusses the valuation of Uber and Ferrari. He had valued Uber in 2014 at about 6 Billion, when PE firms had priced it at 17 Billion.

For Uber, the initial narrative in 2014 was as follows.

1. It would be an urban car rental business with focus only on car services
2. It would expand business gradually (40% over 10 years) through new customer acquisition
3. It has local networking business, which means that if it establishes in one city, it will quickly become larger. But the size in one city is irrelevant as it moves into a new city
4. Will maintain its current revenue sharing model due to competition.
5. Continue its current business model, with drivers as contractors and very little investment in infrastructure.

Once the narrative is established it can be put in a visual framework as shown below

Figure 1:The Narrative Framework for Uber

Once this framework is completed, it is easy to fill in numbers and find the valuation of the company.

This blog is not going into the details of valuation. Kindly watch the full video for details.

The Prejudices of Mr. Market: Prof.Sanjay Bakshi

Gyan on Treadmill dated 25-Mar-2018

This is an excerpt from the talk given by Prof.Sanjay Bakshi as a part of Google Talks. Summary of other presentations by Sanjay Bakshi can be read HERE.

You can watch the presentation here

In this presentation, Prof. Bakshi talks about various prejudices of Mr.Market. He starts off by identifying four stakeholders. These are Customer (what is the pain of the customer is company alleviating), competitor (why a competitor won't enter the market, could be due to a moat - competitive advantages or could be due to statutory / patent entry barrier), Entrepreneur (has he got it in him to stick to it) and Mr.Market.

The current talk focus on Mr.Market.

Most of the time Mr.Market is very emotional given to extreme elation or despair. He can be very euphoric or very depressed. When interacting with Mr.Market, you have to understand that Mr.Market is there is serve you, not to guide you. 

The prejudices of Mr.Market stems from Representative Heuristic. We make judgements about similar past experiences to determine the probability of future events. One example is of Insurance companies catogarize the potential customers. 

Stereotyping is the social grouping that we do in our minds. This helps decision making, but can lead to wrong decisions. In the world of investing, hostile stereotyping by Mr.Market can have great consequences for a value investor. For example, Mr.Market says that Airline Industry is a bad industry. Mr.Market is depressed about ALL the players in the Industry. However, there could be very good SPECIFIC value investing opportunities in this industry. Similarly, currently in India, Mr.Market is downgrading pharma industry. A discerning value investor can identify great opportunities when Mr.Market allows his temporary prejudices to significantly undervalue great businesses..

The five prejudices are explained below.

Prejudice 1: Marshmellows

Tendency of investor to catogarize stocks as cheap or expensive based on their reported PE multiples. This approach is wrong because the reported earnings could understate the true earnings, especially in a 'moted business'. This is because the money charged for Moat Expansion is charged to P&L as an expense, whereas it should be charged to Balance Sheet as expenditure with potential future opportunities.

Prejudice 2: Hidden Champions

Great companies that lies hidden from the market. The companies will have dominant market share in their market, some of them 70-80%. Why do these companies lie below the radar? This is because large number of products offered by hidden champions go unnoticed by consumers. These are mainly B2B companies and supply products or services that are not discernible in the final product or service. In India, many of the auto ancilliary companies could fall into this category. How many of us have heard of companies like Subros, Minda or Talbros? Another examples is profitable niches hiding in Industries with commodity characteristics.

Prejudice 3: Learning Machines

These are companies that make mistakes and learn from those mistakes. Mr.Market can easily misprice such opportunities.

Prejudice 4: Serial Acquirers

Most acquisitions do not add value. So markets look at these with scepticism and tend to undervalue these companies. However, as with Learning Machines, there are exceptions to the rule and that makes an exceptional value investing opportunity. The characteristics of good serial acquirers are one, extreme financial discipline, that is, willingness to walk away from a deal if it doesn't make economic sense. Two, providing a permanent home to a promising business, three, preserving the successful culture of the acquired company and four, providing growth capital for inorganic bolton acquisitions.

Prejudice 5: Freaks and Misfits

Markets tend to expect rational behavior from entrepreneurs. And if an entrepreneur do not meet the standards of Mr.Market, he will tend to undervalue the business. Some of the exceptional entrepreneurs are 'slightly crazy'. They will be passionate, fanatics, slightly crazy, many not meet the societal mores, some time even indulging in actions bordering on illegal. A value investor who can identify such an entrepreneur in the early stages of his growth and attach himself to his coattails (become a passive partner) can make huge wealth over long-term, since in the long-term, the performance of the company catches up with the market. Only challenge is that as an investor, YOU should be ready to overlook some of the questionable characteristics and actions of this exceptionally talented entrepreneur.

There are two lessons from this talk. One, Mr.Market corrects his prejudices as more information come in. He is a learning machine. Two, Mr.Market is far less prejudiced than some of us. We need to learn a lot from Mr.Market

6 Behavioral Errors in Investing: Prof:Sanjay Bakshi

Gyan on Treadmill dated 29-Mar-2018

It is a pleasure to listen to the investment wisdom of Prof.Sanjay Bakshi. He is one of the rare breed of preachers who are practitioners too. He is the adjunct Professor of Behavioural Finance and Business Valuation at MDI Gurgaon. He is also an ace value investor in the Indian equity market with a portfolio valuation of about 400 Crores. He is credited with identifying multiple value stocks including Relaxo Footwear, long before they caught the investors fancy.

Today while walking on the treadmill in the gym in my apartment, I was listening to his presentation on 7 Behavioural Errors in Investing that he made the IFA Galaxy Knowledge Summit 2015. (IFA stands for Independent Financial Advisors, a group that originated in Chennai)

Watch the presentation by Prof.Bakshi here

In his presentation Professor spoke about the following errors, also called as 'Heuristics'. These are behavioural traits and belief systems that impede our decision making in life as well as in value investing. The six errors / biases are blunders people make during our day to day decision making.

Error #1: Availability Heuristics (WYSIATI: What you see is all there is)

We tend to make decisions based on information available to us. Even if the information is irrelevant, we tend to try and make meaning of that information. Most of us never tend to analyse the available information and see if they pass the relevance test. Making solution from irrelevant information tend to us solving the wrong problems. Recency and Vividness are subsets of availability heuristic. For example, when you make an investment decision, you tend to give higher weightage to information that is recently available. He gives example of doctors. All the doctors had studied about the negative impact of smoking when they were studying. However, a study found that the proportion of smokers among doctors increased as they went farther away from chest X Rays. Which meant that skin specialists and orthopaedists tend to smoke more than a cardiologist. Another aspect of this heuristic is that people perceive things are more risky, exactly when it is less riskier, for example, more people buy earthquake insurance immediately after the occurrence of an earthquake. This is an example of vividness. All that images on the TV, tend to make the impact of a quake more vivid.

Our risk map is influenced by availability heuristics. While focusing on recency and vividness, the incremental changes go unnoticed. For example, the risk of extreme weather (which is in the news and hence recent and vivid) is over rated but the risk of climate change (which is gradual, and hence not in news) is underrated, even though the risk is far higher. 

He talks about the scam of Stock Market newsletter where prediction is correct 6 consecutive times. On the 7th time, the recipient of the news letter pays money to buy the subscription. This is explained in this post.

Error #2: Perceptual Contrast
He gives example of people buying a lamp and a car. In both cases you have another option which is 1000 rupees cheaper. But you have to walk 10 minutes to walk to the nearby store. All are ready to walk the extra 10 minutes to get a discount of 1000 rupees on a lamp that costs 10000 rupees. Then he gives an offer of 1000 rupee savings on the purchase of a car that costs 10 Lakhs. To avail this discount you have to walk 10 minutes. In this case, even though the amount of discount is the same in both cases (1000 rupees), in the second case no one is willing to walk an extra 10 minutes.

Perceptual contrast is best exemplified by the concept of Industry PE. If a stock is selling at 30 PE (expensive), where Industry PE is 40, we think the stock is undervalued. However, in reality, both may be overvalued.

One aspect of perceptual contrast is the low contrast effect, where incremental changes go unnoticed. This happened to Kodak, the landline phone, the audio tape, Uber and Taxi industry etc..The change may be very gradual, but the trend is important. For instance, it took almost 15 years for Kodak to die. The idea that the company has been there for a long time doesn't mean that it will go on forever.

Bias #3: Deprival super reaction syndrome.
The anger that a dog shows when a bone is taken out of him is higher than the amount of happiness exhibited when a bone is given. Similarly, the pain of loss of 100 rupees is three times higher than the happiness of gain of 100 rupees. Desperation felt after a huge loss induces people to take higher risks.

Bias #4: Commitment and Consistency

We continue to do things even though we know that is wrong because we do not want to look stupid. We tend to rationalize our decisions. He gives the example of how we rationalize smoking. We may say that it doesn't  apply to me, or that smarter people than us are smoking, or we know someone who smoked regularly and lived a long life, or we say that we may live a short life, but it will be enjoyable....Man is a rationalizing animal. One of our biases is confirmation bias, where we overweigh evidence that support our decisions and underweigh those that counters them.

One of the reasons for commitment is the 'justification of effort'. We do not want to reverse a decision, because we have already incurred significant costs in arriving at a decision.

Investing is a probabilistic activity, mistakes are bound to happen. What is not acceptable is perpetuating those mistakes. 

Lesson? You should be ready to change your mind (decisions and perceptions) once facts change.

Bias #5: Social Proof

The need to align our decisions with that of the crowd is a very powerful behavioural bias. We see that every day in mutual fund managers who tend to buy the same stocks. 

"If you want to do better than the crowd, you should be ready to do things differently from the crowd"

Bias #6: Dopamine (temporary high)

You see this in the later stages of bull market when euphoria takes over and we make decisions based on the 'Dopamine rush'. This makes people credulous, they will believe what they want to believe.