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Archives for November 2015

The Mother of All Investing Mistakes

What would you do if you had something coming at you at 110 km an hour and less than half a second to react?

Soccer goalkeepers saving penalty kicks face this situation often. While watching penalty kicks looks like a lot of fun for the audience, it’s often a tricky situation for the person facing the penalty i.e., the goalkeeper. He has to make a decision in less than a second and that too a decision on which the balance of his team’s fortunes hangs.

Penalty kicks are a great way to understand one of the biggest mistakes investors make. More on that later, but first let’s talk about the options in front of the goalkeeper saving the kick.

Lesson in Investing from Penalty Shoots

He has three choices available – He can dive left, dive right, or stays put.

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Poke the Box: Embrace your constraints

Let’s Start with Safal Niveshak
Just in case you missed any of this on Safal Niveshak over the last few weeks…

Book Worm
If you are familiar with the terms ‘value investing’ and ‘behavioural biases’ then chances are that you have heard about ‘checklists’ too. The idea of checklist has been made popular in recent times by Dr. Atul Gawande through his book The Checklist Manifesto.
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Latticework of Mental Models: Gambler’s Fallacy

Let’s start with a small riddle.

A man, probably a statistician, believes that his next child will be a girl since his wife has already borne him three sons.

Do you find his argument convincing?

The argument intuitively doesn’t feel right. Isn’t it? But why?

We’ll circle back to this puzzle but before that let me indulge you in another interesting thought experiment.

Imagine yourself as a spectator in a coin flipping tournament. You notice that in one of the plays, the coin has landed on heads for 5 consecutive flips. If you were given an opportunity to bet on the next flip, would you bet on heads or tails?

I know you’re a value investor and don’t believe in speculating or gambling away your hard earned money on frivolous coin flipping tournaments, but this being a thought experiment I would request you to play along.

So what’s your answer?

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Big Idea from a Super Investor: Howard Marks on Contrarianism

Note: This article formed part of the May 2015 Special Report sent to subscribers of our premium newsletter Value Investing Almanack.

What do you do if Warren Buffett calls you personally and offers to write the foreword for your book? First, you write the book as soon as possible and second, you make it worthy and useful enough to deserve an endorsement from Buffett. (source: Google talk)

That’s precisely what Howard Marks did with his book –The Most Important Thing: Uncommon Sense for the Thoughtful Investor. He runs Oaktree Capital, a $90 billion hedge fund, and has more than four decades of investing experience. Just like Buffett he has been writing memos to his investors for last twenty five years.

These client memos contain insightful commentary and a time-tested philosophy about sensible investing. Howard Marks is not only a super investor but a thoughtful author too. His writings are not to be missed and that’s what Buffett seems to say in this statement –

When I see memos from Howard Marks in my mail, they’re the first thing I open and read. I always learn something, and that goes double for his book.

In this post, I try to draw one big lesson from his writings and offer them to you for reflection. The big idea for today is contrarian investing. Let’s dive in right away.

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Poke the Box: Combine Ideas

Let’s Start with Safal Niveshak
Just in case you missed any of this on Safal Niveshak over the last few weeks…

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Latticework of Mental Models: Reciprocation Tendency

Few months back I was watching a bollywood action crime drama movie called ‘Badlapur’. The movie portrays the human emotion of ‘revenge’ and how far someone can go to seek it. The protagonist in the movie patiently waits 15 years to avenge his wife’s and son’s murder.

The urge to take revenge can manifest in smallest of things. Someone cuts you off in the traffic and the first thought that comes to mind is to get back at him and settle the account. In fact people getting shot dead in road rage incidents isn’t uncommon these days.

So what could be the reason for this strong force, a need to reciprocate the wrongdoing, in human behaviour?

Is it just the anger? Or is it the resentment for receiving an unfair treatment?

Let’s use the inversion mental model and turn the question around. If humans can have such a strong need to reciprocate to an injustice, can they also have a similar need to reciprocate a favour?

To answer that question in a truly multidisciplinary way, let’s explore the field of Psychology.

Robert Cialdini, a professor of Psychology and author of wildly popular book Influence: The Psychology of Persuasion, has done extensive research on human behaviour. One of the human biases that he talks about in his book is Reciprocity Bias. According to Cialdini – the rule for reciprocation is one of the most potent weapons of influence around us.

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Results: Value Investing Contest 2015

We recently concluded the second edition of Safal Niveshak’s Value Investing Contest. Today, I feel happy to announce the winners of the same.

We received 24 entries in total and found it extremely tough to rank them in terms of quality and simplicity of analysis. Thus, we have chosen four winners for the first three positions.

While our choice of winners does not devalue the quality of analyses sent by others, it’s just that we had to pick the best very few, and here they are –

1st Prize

  • Ankit Kanodia – Mahindra Holidays

2nd Prize

  • Vikas Kasturi – NESCO
  • Depesh Kashyap – MT Educare

3rd Prize

  • Samar Srivastava – Poddar Developers

Here are the prizes winners have won –

  • 1st Prize – Books of choice, worth Rs 5,000/-
  • 2nd Prize – Books of choice, worth Rs 2,500/- each
  • 3rd Prize – Books of choice, worth Rs 2,000/-

Congratulations to all the winners, and thanks to all who participated!

Click here to view/download all the submitted entries.

Before Your Song Is Over

Warren Buffett wrote this in his 2000 letter to shareholders…

The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities—that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future—will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands.

Buffett was talking about the irrationality he was seeing around during the heydays of the dotcom boom. What followed next i.e., the bust, is deeply etched in most investors’ memories who participated in that irrationality.

As I was reading this text from Buffett last night – thanks to my habit of reading and re-reading a small super-text each night before I sleep – I could relate this to the irrationality with which most of us live our lives, ignoring the beautiful things that happen around us while we race towards achieving name, fame, and of course, lot of money…

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