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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.

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Long Term Investing in An Age of Small Attention Spans

My 5-year-old son Chaitanya, like most kids his age, paid little attention as I showed him how to make a paper boat for what seemed like the hundredth time. I said, “Fold the paper into half, then fold here, and then here.”

As I was talking, he kept looking at everything except at what I was doing. He fidgeted and played with his pencil. I kept pulling his attention back to what we were doing and my constant refrain was, “Pay attention!”

Ultimately, I lost my patience, and moved on to reading a book on my Kindle.

It’s not that Chaitanya is uninterested all the time. He is completely focused when I read his favorite books, or when he is playing with his Lego blocks. But at other times, asking him to focus is an exercise in frustration.

Now if you think kids with their terribly short attention spans are tough to deal with, consider this. In 2000, the average human attention span was 12 seconds i.e., we could focus on any one particular thing just for 12 second before being distracted or allowing our minds to wander. If you think that was terribly low, please note that this number has now fallen to just eight.

When I look back to that time when I lost my patience on Chaitanya and moved onto reading a book on my Kindle, I realize that I was onto a second book in the next five minutes, and to a third book in no time.

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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.”

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My Notes on a Brilliant Investment Letter I Just Read

John HuberOne 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.

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The Most Powerful Mental Model for Identifying Stocks

For starters, we had our Value Investing Workshop in Chennai yesterday, and here are some moments from the same…

Safal Niveshak's Value Investing Workshop in Chennai - Feb. 2017

The next workshops are in Mumbai (19th Feb), Delhi (25th Feb), and Hyderabad (5th March). In case you wish to join any of these, please click here to register.

Anyways, let’s start with today’s post.

“It’s a funny thing about life; if you refuse to accept anything but the best, you very often get it.” ~ W. Somerset Maugham – English dramatist & novelist (1874-1965)

As I’ve seen in the past 14+ years of investing in the stock market, Maugham’s thought holds a great relevance when it comes to picking up businesses for investment.

Pick up a business with good economics and with good margin of safety, and the probability of making money in the long run is high. Pick up a business with poor economics with any margin of safety, and the probability of losing your shirt, and entire wardrobe, in the long run is very high.

Understanding a business also adds significantly to your margin of safety, which is a great tool to protect yourself against losing a lot of money.

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My Interview with Jason Zweig

Note: This interview was originally published in the December 2016 issue of our premium newsletter – Value Investing Almanack (VIA). To read more such interviews and other deep thoughts on value investing, business analysis and behavioral finance, click here to subscribe to VIA.

“I wish I could talk to this guy,” I told my wife when I read Ben Graham’s The Intelligent Investor first time sometime in 2005.

“But he is dead, right?” she said.

“Oh, not Graham,” I exclaimed, “But Jason Zweig who has edited this version of Graham’s book.”

“I am sure you would one day,” she said with an air of confidence. But I junked her thoughts saying, “Why would he even want to talk to me?”

Well, I had this discussion in mind when I wrote to Mr. Zweig in mid-October last year to request him for an interview for our Value Investing Almanack newsletter. I knew it was a shot in the dark, something I had not done for a long-long time after missing a few such shots in the dark on stocks I lost money owning.

But this shot worked, and worked well for me. Not only did Mr. Zweig agree immediately for the interview, he also made me comfortable by asking me to address him as, well, Jason. 🙂

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2 Bitter Truths of Stock Valuation…and How You Can Avoid Them

We conducted our Value Investing Workshop in Bangalore yesterday, and here are some moments from the session…

Safal Niveshak's Value Investing Workshop in Bangalore

Out upcoming workshops are in Chennai, Mumbai, Delhi, and Hyderabad. If you wish to attend any of these, please click here to register.

Anyways, one of the key topics that I cover during these workshops is valuations i.e., importance of valuations and the process of valuing stocks. But before I start this specific section, I warn members about two bitter truths of valuations and how they can avoid them.

I first learned these truths during my reading of Aswath Damodaran, Professor of Finance at the Stern School of Business at New York University, where he teaches corporate finance and equity valuation. He is widely quoted on the subject of valuation, with “a great reputation as a teacher and authority”. In other words, Damodaran is to business valuations what Peter Drucker was to business strategy.

Couple of years back, I read his The Little Book of Valuation, wherein the first chapter reiterates an important fact about “value” – that it’s more than a number, and that understanding it well is a way to stay ahead of the pack.

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The Big Budget Challenge: Are You Up for It?

In Fooled by Randomness, Nassim Taleb wrote that “news makes idiots of us because it gives us confidence, not insight.” Like a PhD in macroeconomic theory. Today is one such day in India, when after the Union Budget is announced, a lot of us will feel like PhDs in macroeconomic theory.

After all, media (television, newspapers, radio) and social media are all already filled with updates and “expert” comments on the Budget.

My wife has already prepared her questions to be asked after the Budget is announced – “What got expensive and what got cheaper? What can I shop more for?”

But I am not answering anything of it this time. Why? Because I am taking up this challenge of avoiding everything related to Budget for the next three days i.e., till the noise dies down.

Though I don’t watch and analyze much of Budget every year, and I don’t read much of news, as a ‘test’ of my ability to avoid all kinds of noise and especially such a loud noise like Budget’s that will surely hit me from all sides, I am going on a three-day diet of consciously seeking news related to what the FM would be announcing today (and the Budget won’t matter after three days anyways).

Are you up for it too?

You see, a Budget anyways won’t make any difference to your life. If you are already a spendthrift, you will continue to spend a lot even if things got cheaper or taxes are lowered. And if you are already frugal, you will continue to spend within your limits even if things get expensive or they don’t touch the taxes a bit. So how would this Budget really impact your life? Why give it such a big shelf space in your brain’s attic? Why waste precious time amidst noise?

By the way, if you are worried that by avoiding all news for the next three days, you may miss an opportunity if one of the stocks you own or are looking to own falls or rises due to Budget’s impact, don’t be. A 5-10% rise or fall in stock prices won’t make a difference to your decisions anyways. And if prices rise or fall even more, I am sure you will somehow come to know about it. 🙂

So are you up for the challenge? Let me know in the Comments section of this post if you are, and also let me know if you aren’t and why.

I’m asking you to take up this challenge as a test, but you have a choice to dump it.