Archives for May 2015

Book Review: A Short History of Financial Euphoria

May 29, 2015 | 1 Comment

This book review has been submitted by Ankit Kanodia.

If anyone would ask me to summarize A Short History of Financial Euphoria in quick words, I would borrow the following three quotes to make my point…

All I want to know is where I’m going to die so I’ll never go there. ~ Charlie Munger

History does not repeat itself, it rhymes. ~ Mark Twain

There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know. ~ John Kenneth Galbraith

For starters, the book does not give you any tip on how to compound wealth or how to invest to earn great returns on capital. On the contrary, it brings to your notice how you can lose it all and thus how difficult but important it is to avoid that danger.

A small, thin book of only 110 pages, it consists of almost everything one needs to know about the speculative bubbles in economic history.

Latticework of Mental Models: Variable Reinforcement

May 27, 2015 | 22 Comments

It’s not often that you would find me exercising my thumb muscles with a TV remote but it so happened that on a Saturday afternoon while killing time in front of the idiot box, an unsettling thought caught me off guard. I realized that I had been surfing through the TV channels for the past hour without really spending more than a minute on any single channel.

This habit is not uncommon but the unusual thing was once I had looped through all the channels a couple of times and once it was obvious that there was nothing interesting on TV, I still kept going without getting bored. So what was keeping me hooked?

As a flash of insight the answer that my mind constructed was an uncomfortable one.

Latticework of Mental Models: Gresham’s Law

May 21, 2015 | 18 Comments

This article is the fifth of this weekly series called Latticework of Mental Models, which will be authored by my friend and partner in writing the Value Investing Almanack, Anshul Khare. Anshul will write on various mental models – big ideas from various disciplines – which can help you think more rationally while analyzing businesses and making your stock investment decisions.

Few weeks back, we discussed the mental model of Storytelling. I am going to use the same model to start this post. Let me start with a true story, and take you back to medieval India.

Between the years 1324 to 1351, Delhi was ruled by an emperor named Mohammad-bin-Tughluq from the Tughluq dynasty. He had a scholastic background and spoke multiple languages. In spite of good intentions, some of the policies that he enforced during his rule backfired which made him infamous as an eccentric ruler. One such failed idea was about an experiment that he did with the local currency.

Tughluq noticed that India had very few silver coins and a comparatively larger number of bronze and copper coins. He decided to promote bronze or copper coins by passing a royal order that bronze and copper coins are to be accorded the same value (i.e., same purchasing power) as silver coins. In other words, he wanted the markets to mentally consider bronze and copper as silver itself so that 1 gram coin of bronze can buy the same goods as 1 gram of silver. It looked like a neat idea however the emperor failed to consider the law of unintended consequences.

When to Sell a Stock (E-Book & Checklist)

May 19, 2015 | 12 Comments

Most investing discussions revolve around when to buy a stock. “Which stock should I buy?” is the first question that comes to your mind when you think about investments. But equally important is the question – “When should I sell a stock?”

Now, there aren’t any “10 Immutable Laws of Selling.” In fact, the answer to this question is often as difficult and subjective as deciding when to buy a stock.

But, without doubt, a disciplined sell process injects a healthy dose of Darwinism – survival of the fittest – into the portfolio. This process weeds out the weakest stocks – the ones that have deteriorated / deteriorating fundamentals or diminished margins of safety – in favour of stronger ones.

In a special report, and through a diagrammatic checklist (see below), I try to answer some of the questions around when to sell a stock. Not every selling rule under the sun may be included herein, but I’m sure what you read and see below will still be of some help to you.

Latticework of Mental Models: Mean Reversion

May 13, 2015 | 16 Comments

This article is the fourth of this new weekly series called Latticework of Mental Models, which will be authored by my friend and partner in writing the Value Investing Almanack, Anshul Khare. Anshul will write on various mental models – big ideas from various disciplines – which can help you think more rationally while analyzing businesses and making your stock investment decisions.

There are certain days in everybody’s life which in spite of being ordinary remain etched in the memory for a long time. It was 15th of December. I distinctly remember it because I bought my car that day.

The ownership of new car brought with it an excitement to take care of it which included an urge to diligently track the car mileage. You know, boys with toys. At an average of 13 km/litre it was a satisfactory performance. However, after few weeks I started noticing that the mileage numbers would go down occasionally and then come back again to the normal.

There wasn’t any change in my driving style or driving routes. Except the source of fuel there was no other variable that could cause the variation in performance. So my hypothesis was that the quality of fuel was affecting my vehicle’s performance. To empirically validate my theory I decided to keep track of different fuel stations where I got the petrol from.