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5 Ways to Create Luck in Investing and Life

A wise man once said, “I am a great believer in luck. The harder I work, luckier I get.”

Believers in this saying usually belong to the meritocratic school of thought. They claim, “If you’re good, you don’t need luck.”

If you’re successful it’s a natural human tendency to assume the credit for your success. After all, you must have worked hard for it and you surely deserve it. But when I think of my life, I have seen and met many individuals for whom, in spite of working extremely hard, success remained elusive.

Goes with saying that I have also met those who achieved great heights with relatively much lesser effort. These are the people who manage to attract much more than their fair share of luck. Usually, we look down on such people with some envy and disdain. It’s assumed that any success founded on an element of luck is inherently undeserving.

Do you know someone who always manages to find himself in the right place at the right time? Before you label him as lucky, ask yourself – do you think his luck is out of pure randomness? Perhaps he has a knack for arriving at the right place and at the right time.

Common sense tells us that luck can’t be controlled and it’s all about chance and probability. But what if someone told you that there was a way to control luck? Not in an esoteric way but in a rational way? If you feel like scoffing at such an idea, I would urge you to have an open mind. Just for the sake of curiosity.

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Safal Niveshak Stream – October 22, 2016

Some nice stuff we are reading, watching, and observing at the start of this weekend…

Investing/Stock Market

  • Jason Zweig, The Wall Street Journal’s investing columnist, in an interview with Philip Tetlock, the co-author of “Superforecasting: The Art and Science of Prediction,” explore why amateurs can actually be better than experts at predicting the future, and what the experts can learn from it…

    One reason is that experts sometimes know too much. I was talking once to John McLaughlin, former director of the CIA, about the end of the Cold War period, and he was remarking that the analysts who were slowest to recognize that East Germany was disintegrating were the people who had been on the case for 20 years.

    It was the newbies coming in who got it pretty quickly. And there’s a lot of psychological evidence that attests to the power of preconceptions to grip us and make it hard for us to be timely belief updaters. So sometimes knowledge is actually an impediment. Another big factor is that there is a large amount of uncertainty in the world. So no matter how smart you are, it isn’t going to give you a lot of traction.

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Video Series: Investing Lessons From Occam’s Razor

It’s a human tendency to address a complex problem with a complex solution. And when it doesn’t work, man starts looking for an even more complex solution.

In an uncertain world, seeking complexity is a big error. Complex problems do not always require complex solutions. Overly complicated systems like financial markets are not only difficult to comprehend but easy to exploit and possibly dangerous.

In investing, less is more.

Warren Buffett, in his 2004 letter to shareholders, wrote…

Last year MidAmerican wrote off a major investment in a zinc recovery project that was initiated in 1998 and became operational in 2002. Large quantities of zinc are present in the brine produced by our California geothermal operations, and we believed we could profitably extract the metal. For many months, it appeared that commercially-viable recoveries were imminent. But in mining, just as in oil exploration, prospects have a way of “teasing” their developers, and every time one problem was solved, another popped up. In September, we threw in the towel.

Our failure here illustrates the importance of a guideline – stay with simple propositions – that we usually apply in investments as well as operations. If only one variable is key to a decision, and the variable has a 90% chance of going your way, the chance for a successful outcome is obviously 90%. But if ten independent variables need to break favorably for a successful result, and each has a 90% probability of success, the likelihood of having a winner is only 35%. In our zinc venture, we solved most of the problems. But one proved intractable, and that was one too many. Since a chain is no stronger than its weakest link, it makes sense to look for—if you’ll excuse an oxymoron—mono-linked chains.

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What Buses Taught Me About Stocks

When I was studying in College in Mumbai, I heard a saying from my friends about BEST buses.

“You should never run behind a bus because if you miss one, there’s always the next one coming in few minutes.”

And it was quite true because I don’t remember waiting at any bus stop for more than 15-20 minutes ever in Mumbai for whatever period I stayed there.

It’s funny that later I found the same analogy being used in the context of stock market. Occasionally, I visit few online stock discussion forums, not for fishing new ideas but just to see what’s keeping people busy these days.

In one such forum an investor argued, “If my stock seems overpriced, I sell it even if it’s a good business to own. I’ll buy it again when it comes down.”

“What if it doesn’t come down?” someone countered.

“Well, then I’ll buy something else,” the first guy reasoned. “There’s always the next stock to buy in the share market. Isn’t it?”

Now, that reminded me of Mumbai’s BEST buses. I thought of naming it the “Mumbai BEST Effect”. Don’t worry, it’s not really an official psychological bias. But just for the fun of it, I coined the term.
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10 Demons of Investing

I wish all tribe members of Safal Niveshak a very happy Vijayadasami or Dussehra. Today marks the victory of Goddess Durga over the demon Mahishasura. Today also marks the victory of Lord Rama over demon Ravana.

Ravana is depicted and described as having ten heads and as a follower of Shiva, a great scholar, a capable ruler and a maestro of the veena, but someone who wished to overpower the devas. His ten heads represent his knowledge of the six shastras and the four Vedas.

A negative interpretation of Ravana’s ten heads are the ten emotions or senses in humans –

  1. Kama (Lust)
  2. Krodha (Anger)
  3. Moha (Delusion),
  4. Lobha (Greed),
  5. Mada (Pride),
  6. Matsar (Envy),
  7. Manas (The mind),
  8. Buddhi (Intellect),
  9. Chitta (Will)
  10. Ahamkara (The Ego)

When it comes to investing, some of these emotions stand in between the investor and his long term success.

In the illustration that follows, I have tried to depict the ten emotions, or the ten demons, of investing. Print it, paste it on your work desk, and look at it every time you are making an investment decision.

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How I Missed a 10-Bagger, and Why I’m Proud of That

It was sometime in the middle of 2006 when I met the management of a banking company for the first time. It was HDFC Bank, and I met one of their top executives along with my banking analyst colleague.

The bull market in banking and financial stocks was just beginning to pick up pace and, in hindsight, there we were at the right place and at the right time. We ended up recommending a ‘Buy’ on the stock, which turned out to be a big wealth creator for our clients. Trusting the analysis skills of my colleague, I wanted to buy the stock a month after she recommended it to clients, but stopped at the last moment.

Why? I did not understand the head or tail of HDFC Bank’s balance sheet (I still don’t). Of course, I understood how it made money – by earning interest on its loans, advances and investments – but my competence ended there.

I had no clue on how the bank priced its loans, how it tested credit abilities of borrowers (do they really test that?), and how it accounted for its investments and liabilities on the balance sheet. I knew that if India were to do well, banks would be a direct beneficiary. But it was a tough nut to crack for me, and I gave up there and then.

So, unlike our clients, some of whom would have made a 10-bagger in the stock, I missed this bus. Only that, unlike Warren Buffett who talks about sucking his thumb while missing such obvious opportunities, I had all my fingers tied behind my back, and it was my own choice.

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Investing and the Art of Suffering

Pain is a complex experience involving sensory and emotional components: it is not just about how it feels, but also how it makes you feel. And it is these unpleasant feelings that cause the suffering we humans associate with pain.

Photo credit: Christopher Macsurak (Creative Commons)

When it comes to investing, there is a third angle to this thought – What you do when you feel the pain? How do you react to it?

Like what you do when the share market is going through a bad phase, and when your portfolio is giving you sleepless nights for reasons outside your control. I believe most people reading this associate the 2008 crisis with one such painful period that’s fresh in their memories.

I attended a lecture yesterday from a famous Indian investor, who has grown his wealth from Rs 0 to Rs 1,000 crore over a span of around 30 years. And what I understood from what he said about his journey was that he has been through several painful periods in his long experience in the markets. And apart from the fact that luck has played a very important role in this wealth creation process – being at the right place at the right time with the right people – it was also his capacity to suffer during the painful times that has helped him reach where he is now.

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My Lecture on Mental Models

I recently delivered a lecture on Mental Models and how financial advisors and other business owners can use them to grow their businesses. It was to a group of 200+ advisors at a session organized by my friend Sadique Neelgund of NetworkFP.

Talking to advisors always makes me nervous (as you can see in the picture above), largely because my work at Safal Niveshak is all about helping people learn to manage money on their own, thus avoiding the need of advisors. 😉

By the way, in case you haven’t checked out our latest ebook – Mental Models, Investing, and You (2,000+ people have already got their hands to it) please click here to get it now.