Investing Behaviour

Reasonable Expectations

“You’ve got to be careful if you don’t know where you’re going, ’cause you might not get there.” ~ Yogi Berra

At the heart of Ben Graham’s teachings lies his advice that the intelligent investor must never forecast the future exclusively by extrapolating the past.

Unfortunately, that’s exactly the mistake that stock market experts and investors have made innumerable times in the past. Some go even further. Since stocks had “always” beaten bonds over any period of at least 30 years, stocks must be less risky than bonds or even cash in the bank. And if you can eliminate all the risk of owning stocks simply by hanging on to them long enough, then why quibble over how much you pay for them in the first place?

In India, it’s easy to find a forecaster who argues that stocks have returned an annual average of around 18% over the past 30 years and thus that’s what investors can easily expect in the future. But what if I tell you that the average annual return for the BSE-Sensex has been just around 10% over the past 25 years (since the peak of Harshad Mehta bull run)?

Of course, this is just one number and you may accuse me of being selective in my choice to prove a point. But that’s what I am up to – prove a point, that when you do not pay heed to the price you are paying for stocks because you have unreasonable expectations for the future, you are bound to get disappointed.

The Curse of a Bull Market

“Vishal, since the market is up so much over the past 3-4 years, and especially after the surge over the last few months, I’m looking for cheap stocks and sectors that have been left behind, even if they are average businesses,” a value investor friend Ravi told me this as we met for lunch last weekend.

“Why?” I asked.

“Because it’s almost impossible to find value among good quality companies…your so-called moat businesses. And I am a true blue ‘value’ investor you see.”

“Oh no,” I told Ravi. “That is a dangerous thing to do.”

I understood what Ravi was hoping to do. It also sounded logical i.e., to identify and buy stocks that remain cheap in a market where most businesses are quoting at high valuations.

But sensible investing doesn’t work that way.

“There is a big difference between ‘cheapness’ and ‘value’, Ravi.”

“Why do you say that, Vishal?”

Oh, My Impatient Generation!

Impatience I met a guy yesterday who spent the past ten years of his life – and he’s just 32 years of age – destroying his body with alcohol, excessive food, and a sedentary lifestyle.

“I have resolved to be fit, lean and healthy in the next six months,” he told me with great confidence.

Well, not surprisingly, he got irritated when I told him that it might take a little longer than six months to achieve what he wanted.

His reaction wasn’t much different from a cousin of mine, who recently told me how she wanted to become a life coach and was ready to do whatever it took to get there in one year.

When I asked her, “What if it takes you ten years to get there, instead of one?” she had no answer.

Clearly, she hadn’t considered the possibility that years of learning, experience and skill development could be one of the necessary success ingredients in becoming a good life guru. But she wanted the results without all this work…or by investing the necessary time.

Notes from Howard Marks’ Lecture: 48 Most Important Things I Learned on Investing

“If you were to read just five books in your life to become a sensible investor,” I often suggest people seeking my view, “…they have to be Warren Buffett’s letters, Poor Charlie’s Almanack, Peter Lynch’s One Up on Wall Street, Ben Graham’s The Intelligent Investor, and Howard Marks’ memos.”

Well, if you don’t know who Howard Marks is, let me tell you he is the CEO of Oaktree Capital and is one of the most famous investors who manages to keep a low profile, despite managing almost US$ 100 billion. Marks is also the author of an amazing book – The Most Important Thing: Uncommon Sense for the Thoughtful Investor. In its ultimate praise, Warren Buffett writes, “This is that rarity, a useful book”.

I have been reading and re-reading Marks’ memos for a few years now, so was very fortunate to attend a lecture he gave in Mumbai yesterday titled – The Truth About Investing.

It was an enlightening session, just to be in the presence of this legend and hear him out live.

I made some notes from Marks’ lecture, which I present below (most of these are direct quotes from Marks). He calls these lessons as the “brutal truths” of investing. As you would realize while reading the notes, these indeed are brutal truths – stuff that is easier said than done.

Investing is Simple, but Not Easy

“Life is really simple, but we insist on making it complicated.” ~ Confucius

“Simplicity is a great virtue but it requires hard work to achieve it and education to appreciate it. And to make matters worse: complexity sells better.” ~ Edsger W. Dijkstra

It’s a sad fact of life that great people rarely divulge deep insights into how they achieved their greatness. And the sadder fact of life is that when a few of the greats do divulge the secrets of their greatness, we ignore them because the secrets often are too simple, too pedestrian, for us to appreciate.

“Huh! That’s it? It can’t be so simple!” we would say when we hear a great shelling out simple advice to achieve greatness.

Like, if you are learning martial arts and you hear Bruce Lee speak out the secret to his greatness – “Absorb what is useful, discard what is not, add what is uniquely your own” – you say, “Great thought, but is that it? It cannot be so simple!”

Consider investing. When we read Warren Buffett revealing that the only two rules of successful investing are – Rule No. 1: Never Lose Money. Rule No. 2: Never Forget Rule No. 1 – our brain protests, “Great thought, but is that it? It cannot be so simple!”

Investing is simple, like Buffett also says, but not easy. Take a simple idea, Charlie Munger suggests, but take it seriously.

One Idea That Could Change Your Life (and How You Invest)

“Good morning, Sir,” I called out to a man walking just ahead of me during my morning walk yesterday. Like me, he was a regular at the walking track and we often crossed each other exchanging smiles and wishes. I had heard good things about him from others, and so I thought of engaging him in an interaction.

“How are you doing today?” I asked him.

“Great, as always!” he replied with a smile of a ten-year old. He, by the way, looked ninety years of age but healthy enough to be walking at quick pace.

“I have been observing you for the past many days,” I said, “And you always wear a nice smile on your face and look so healthy. It seems you are living a great life.”

“Yeah, it’s always been wonderful,” he replied, “No regrets at all.”

“That’s wonderful!” I said, “But you’ve been lucky,” I murmured, which he could hear, “Else life is so full of adversities and regrets.”

“Yeah, that’s true,” he replied. “It’s adversity all the way, but that’s what life is supposed to be, isn’t it?”

“Maybe, but then that’s not a life you seem to have lived, right?” I asked. “I can see that you are happy and healthy at ninety years of age, and I know that you are financially free. In other words, you seem to have everything that is missing for most of us going through mid-life.”

My Notes on a Brilliant Investment Letter I Just Read

One contemporary value investor I’ve learned a lot from, and look forward to read, is John Huber. John is the portfolio manager of Saber Capital Management, LLC, an investment firm that employs value investing strategy with the primary goal of patiently compounding capital for the long-term. He also writes about investing at Base Hit Investing.

I had interviewed John for the May 2016 issue of our Value Investing Almanack newsletter, and he was very generous in sharing his insights from his long experience as a value investor. Last week, I came across his 2016 letter to clients of Saber Capital, and was hooked instantly.

In this letter, John has shared some of the simplest yet profound thoughts on the practice of successful value investing. Despite their profundity, these thoughts have been forgotten and often ignored by investors who have seen their attention spans and investment horizons getting shorter and shorter.

Investing and the Paradox of Perfection

A lot of people I meet in the startup world and in investing are aiming for that perfect start when all their stars will align to take them off to the moon.

So, some keep waiting for their “best product” or “best design” before starting up their businesses, and others wait for the “perfect business to invest in” or “perfect price to invest at” before starting to invest their money.

The reason? They don’t want to be criticized for any mistake – like not getting business, or temporarily losing money in the stock market – they may make due to not being perfect at the start.

If you think about why we feel the need to be perfect in the first place, it all goes back to how we think about ourselves and our self-worth. If we have a strong desire to be perfect, then we may use the idea of perfection as a way to validate ourselves as worthy and valuable human beings.

Investing and Fear of Missing Out

We conducted our Value Investing Workshop in Ahmedabad yesterday, and here are the tribe members…

Let’s get to today’s post…

“You know I saved 50 rupees today,” declares the husband to his wife as he enters the house in the evening.

“And how did you do that?” the surprised wife asks.

“I missed the bus and ran behind it all the way from office to home.” The air of pride was palpable in the husband’s voice.

“Well, then you should have chased a taxi and saved 200 bucks!” the wife said. And her logic was spot on, wasn’t it?

Here is question for you – how much do you think the poor husband saved? Rs 50 or Rs 200? Extending the wife’s argument, the guy could have chased a Limousine and saved Rs 2,000. Do you see the absurdity of the logic?

Investing Lessons I Learned from Tic-Tac-Toe

If you have sat in a classroom dragging your feet through an uninteresting lecture, you must be familiar with the game of tic-tac-toe, also known as noughts and crosses or Xs and Os.

The game’s simplicity lies in fact that it takes not more than a minute to learn it and it can be played anywhere. All you need is a piece of paper, a pen/pencil and some time to kill. Like chess, it needs two players, but some people don’t mind it playing alone by taking turns and becoming their own opponent.

When I was a kid I even had a water bottle which had the grid of tic-tac-toe built on one of its side and plastic pieces (crosses and circles) to play.

In case, you’ve forgotten how the game is played, here’s a crash course to refresh your memory. A 3X3 grid is drawn on the paper and each player chooses their mark i.e. X or 0. The player who succeeds in placing three of their marks in a horizontal, vertical, or diagonal row wins the game.