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Archives for October 2015

Latticework of Mental Models: Status Quo Bias

Do you own a smartphone? Chances are that you’re reading this on a smartphone or a tablet.

One of the most interesting thing about these smartphones is that they allows you to customize everything – data usage, app synchronisation, phone encryption, even how loud you want the camera shutter to sound.

How many of these customization settings have you used? In my case – almost none!

Although I’m not technically challenged, but do suffer from, just like most of the other human beings, a cognitive bias.

Earlier in the latticework series, I wrote about Do Something Bias. It’s a cognitive bias where people get an urge to take action or make unnecessary decisions when ‘not doing anything’ is required.

Now let’s turn the table, and talk about a bias which is exactly opposite of Do Something Bias. It’s called Status Quo Bias. The tendency of people where they don’t do anything and continue to maintain the current state of affairs.

If we could boil down this cognitive bias to a more fundamental body of knowledge, it would be Physics. I am sure you must have heard of Newton’s laws of motion. The first law of motion states –

An object either remains at rest or continues to move at a constant velocity, unless acted upon by an external force.

This characteristic, called inertia, is exhibited by all physical bodies. And when it comes to human behaviour, this tendency manifests in the form of Status Quo Bias.

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I Might Be Wrong

On the morning of the Battle of Waterloo in 1815, Napoleon Bonaparte smugly assured his generals – “I tell you Wellington is a bad general, the English are bad soldiers; we will settle this matter by lunchtime.”

Just before the Titanic was about to embark on its maiden journey in 1912, one passenger asked a ship’s agent for extra insurance on some valuables in her luggage. The agent replied, “Ridiculous. This boat’s unsinkable.”

Captain Smith himself was asked about the safety of the Titanic. He answered – “I cannot imagine any condition which would cause a ship to founder. I cannot conceive of any vital disaster happening to this vessel. Modern shipbuilding has gone beyond that.”

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What to Read in Investing? Lesson from A 2,000-Year-Old Stoic Philosopher

I have lost count of how many investors have told me over the years that they never read anything apart from newspapers. They’re too busy to read books or even long articles, they say.

In fact, most people I’ve encountered read very little (despite the fact that, as per a study, an average Indian reads the most in the world, at around 90 minutes per day, as compared to 68 minutes of an average Chinese and 48 minutes of an average American).

Anyways, when people ask me what they should read to improve their investment thinking and/or to stay informed on the stock market, businesses, etc. and/or to just become better thinkers and decision makers, the first thing I ask them to do is to avoid reading newspapers (the law of inversion, you see, of what not do).

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Latticework of Mental Models: The Power Law

Do you know how much property damage and loss of lives is caused by earthquakes every year?

No idea? Consider this – An earthquake in Japan in 2011 caused an estimated property loss of US$ 235 billion. The deadliest earthquake in recorded history (in terms of loss of lives) occurred in Shaanxi (China) killing more than 800,000 people.

According to one study, annual average losses from earthquakes range from US$ 1.3 to 5.7 billion. That’s loss per year because of all the earthquakes. This is quite huge, considering that it’s caused by an event which we have no control over.

These statistics show that when mother nature’s fury is unleashed, even the modern society with all its technology and resources, finds itself helpless.

Now another question. What do you think is the average loss caused by an earthquake, in terms of dollars per earthquake? Let’s do a quick back of the envelope calculation. So yearly loss of US$ 5.7 billion divided by number of earthquakes per year. How much would that be? Take a guess.

Probably that number would be couple of million dollars per earthquake. Right?

It’s actually little over US$ 10,000. That’s it! How come?

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Maximizing Shareholder Value: A Dumb Idea?

Sometime in 2007, I called the Investor Relations head of a leading Indian power company. “I request for a meeting with your CFO,” I said.

“Where are you calling from?” she asked back.

“I work for an independent research company working for retail investors, and we are looking to initiate coverage on your stock,” I replied. “I had some questions before writing the report and thus wanted to meet your CFO.”

“Are you writing a Buy or Sell report on our stock?” she asked.

“How can I tell you that now?” I said “I need to finish my research and only then will I make a judgement on whether the stock is a buy or a sell.”

“Wait, you are from a retail research organization, right? She asked. “Sorry, we do not have a policy to meet companies focused on retail investors. We only meet the institutional guys because they can help up increase our market cap, not the retail guys. We want to maximize shareholders’ wealth, you see.”

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Safal Niveshak Value Investing Contest 2015

Here’s your chance to showcase your analysis skills to the Safal Niveshak tribe, and in the process win a prize if your entry gets chosen amongst the best.

Contest Rules

  1. Write a 3,000 word (max.) report on one listed Indian company of your choice.
  2. You may submit more than one report, but will be eligible for only one prize.
  3. Deadline for report submission is 25th October 2015
  4. Email your report in a Word file to vishal[at]safalniveshak[dot]com with the subject line as – “Value Investing Contest 2015 – Company Name”
  5. The stock must have a market capitalization of more than Rs 100 crore
  6. The idea must be well researched (by you). Your analysis must cover these areas:
    • Company history and business
    • Moat analysis (if moat exists)
    • Competition
    • Financial strength (provide data/charts to support your analysis)
    • Management quality (have they been good or bad allocators of capital)
    • Risks (what can go wrong)
    • Valuation (no price targets required; challenge the market’s current valuation instead of calculating your own)
  7. The report would be exclusive to Safal Niveshak. But you can post an abstract at other places and link to the full report on Safal Niveshak.

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5 Big Questions on IPOs…Answered

The IPO season is back with a bang. First, the company behind the Cafe Coffee Day chain Coffee Day Enterprises will hit the markets today with its IPO to raise around Rs 1,150 crore or US$ 176 million. Then, later this month, India’s only profitable airline, Indigo, will open subscriptions to its Rs 2,500 crore or US$ 400 million IPO.

These are not anywhere close to the biggest of big IPOs India has seen, so rest assured that we are not at the peak of a bull market. 🙂

But like all IPOs in the past, it’s very important for you as an investor to be careful and not give in to the hype and excitement that surrounds public issues. Towards this, here are my responses to the five key questions you may have about investing in IPOs. I also share below a template for analyzing an IPO document.

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The Journey of Safal Niveshak

Taking a break from writing on investing, behaviour, and business, today I share with you the journey of Safal Niveshak over the past 4+ years.

This is a short presentation I gave at a recent meetup of value investors, and I thought I must share it with you too…for you have been my partner in this journey.

So if you want to know anything and everything about what Safal Niveshak is and what it stands for, you will find in this presentation (click here or read in the panel below).

It’s a long journey, but it’s worth it. And I thank you for being my fellow traveller.

Now, as we move ahead, I would love to have your thoughts on how this journey has been for you. Please click here to share your thoughts.