Archives for May 2015

Book Review: A Short History of Financial Euphoria

May 29, 2015 | Reading Time: 10 minutes | 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.

Life 2.0: Journaling

May 28, 2015 | Reading Time: 12 minutes | Leave a Comment |

Today I am going to share an insight that shook my life pretty hard, for the good of course.

How many times it has happened with you that after reading a book you thought that you understood the idea until you were asked to explain it. The idea seemed pretty clear in your head but the moment you had to verbalise it you discovered that either you didn’t have a proper grasp on the idea at the first place or you were unable to explain it in a logical coherent way to a third person.

This is the kind of silent reaction I got from people “You’re telling me that you just finished reading a compelling book but can’t explain the central idea in few sentences?”

This problem haunted me for a long time. Then one fine day I discovered the Feynman Technique, which says that the mere action of writing something down allows for a more effective integration of the learning. This further led me to the idea of Journaling. It was a Eureka moment!

Let me first share my definition of journaling. Journaling is simply an activity of writing in plain language about what’s going on around you and what your thoughts are about them. It can include things like your future goals, plans, dreams, reminders to yourself, comments on ideas/people or any unrelated thing that crosses your mind. It’s a conversation that you have with yourself.

So what’s so special about journaling? Stick with me through the rest of the post and you might find some surprising insights.

Journaling allows you to take fuzzy thinking and distil it into precise line of thought. If you want to think better you have to start writing your thoughts. It’s not a common knowledge that writing, apart from being a communication tool, is a thinking tool too. Famous author, Dan Pink, further validated my belief in this commencement speech.
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Latticework of Mental Models: Variable Reinforcement

May 27, 2015 | Reading Time: 15 minutes | 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 | Reading Time: 15 minutes | 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.

Corporate Governance: Charlie Munger on Governance

May 20, 2015 | Reading Time: 10 minutes | Leave a Comment |

Charlie Munger is widely quoted in value investing community for his multidisciplinary ideas. However, he has some unconventional advice on the subject of corporate governance also which deserves a discussion. Let’s look at some of the insights from Munger on the issue of governance.

Munger believes more in the spirit of corporate governance rather than enforcement of compliance rules and regulations. If the intention is not right, people can always bend the rules and find workarounds for carrying out unethical practices without breaking the law. But when you know that the intentions are right then even an occasional instance of non-compliance doesn’t bother you because you trust the person and know that things will eventually get sorted out.

Munger is of the opinion that different companies have different cultures and you cannot come up with a one-size-fits-all solution in form generic compliance rules. An organization is made up of diverse set of people with different interests and values. Such collection of people behaves as a complex adaptive system. The moment complex rules are infused to command more control it invariably results in unintended consequence. So the solution is not to device more rules but to make the system simpler.

In the annual meeting for Wesco Financials in 2007, Munger pointed out –

A lot of people think if you just had more process and more compliance—checks and double checks and so forth—you could create a better result in the world. Well, Berkshire has had practically no process. We had hardly any internal auditing until they forced it on us. We just try to operate in a seamless web of deserved trust and be careful whom we trust.

This brings us to the Munger’s first idea for simplifying the corporate governance puzzle.

Seamless Web of Deserved Trust

A system in which the individuals making decisions do not bear the consequences of those decisions seems incompatible with a seamless web of deserved trust. Munger explains –

Good character is very efficient. If you can trust people, your system can be way simpler. There’s enormous efficiency in good character and dis-efficiency in bad character.

Moreover, unethical behavior is contagious. Gresham’s law says that bad values (or currency or people) drive out the good values from a system. If you find that it’s easy to cheat and steal in an organization, it’s just a matter of time before majority of the people in that system start exhibiting dishonest and unethical behaviour. Even if everybody was absolutely honest to begin with. Such is the human behaviour.
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