Archives for February 2016

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

As humans, we don’t only imitate good actions, but we also have a tendency to follow wrong actions and inactions of fellow humans. The Bystander Effect.
Switching costs create moat but what creates switching costs?
A combination lock should really be called a permutation lock. Find out why.

Book Worm
The Elements of Investing is a short, straight-talk book about investing and saving. While talking about power of saving and compounding, authors, Burton Malkiel and Charles Ellis, write –

Time is indeed money, but as George Bernard Shaw once said, “Youth is wasted on the young.” If only we could all train ourselves at a young age to know what we know now. When money is left to compound for long periods, the resulting accumulations can be awe inspiring.

Benjamin Franklin provides us with an actual case. When Franklin died in 1790, he left a gift of $5,000 to each of his two favourite cities, Boston and Philadelphia. He stipulated that the money was to be invested and could be paid out at two specific dates, the first 100 years and the second 200 years after the date of the gift. After 100 years, each city was allowed to withdraw $500,000 for public works projects. After 200 years, in 1991, they received the balance—which had compounded to approximately $20 million for each city. Franklin’s example teaches all of us, in a dramatic way, the power of compounding. As Franklin himself liked to describe the benefits of compounding, “Money makes money. And the money that money makes, makes money.

Latticework of Mental Models: Permutation and Combination

Here’s an interesting trivia.

If you wear different tie on the same shirt, most people will think that you’re wearing a different shirt. That’s an interesting way to multiply your options without really buying new cloths (except few new ties).

“That’s not a trivia, that’s a Jugaad.”, you might want to say. Anyways, That brings me to an equally interesting mindbender.

If you have 2 shirts (white, blue), 3 pants (black, gray and brown) and 3 different ties (pink, orange, red), in how many different ways can you get dressed? Assumption here is that getting dressed requires you to wear all three i.e. a shirt, a pant and a tie.

Using the multiplication principle we can say that there are total 2 x 3 x 3 = 18 ways to get dressed. Of course some of the dress combinations will look outright funny but our concern here is to find out all possible ways to get dressed. Moreover, today we are getting into Maths discipline and most mathematicians don’t really have whole lot of fashion sense anyways.

So that’s the simplest example of using the idea of combinations in real life. Now let’s say, for some strange reason, we were also considering the order in which you put on the cloths, i.e. it matters to us if one puts on the shirt first instead of tie.

Imagine wearing a tie first and then squeezing the shirt inside the tie, funny right? I told you mathematicians don’t care much about the dressing etiquettes 🙂

Okay, back to the same question again. In how many ways can you get dressed if the order of dressing matters?

Poke the Box: Dealing with Stock Market’s Moments of Terror

Let’s Start with Safal Niveshak
Revisiting the archives for some old posts on dealing with stock market turbulence…

How to survive a stock market panic…and make it work for you.
How to stop worrying and start investing.
What should investors do when stocks crash?

Book Worm
Yesterday, I was re-reading what Buffett wrote in his 1987 letter to shareholders, which I believe is one of the most important texts ever written on how to become a sensible stock market investor. As a student of value investing, you must have read what follows several times. But then, such super-texts need several readings, and then several more.

InvestorInsights: Gaurav Jalan

Gaurav Jalan, an enterprising and inspiring young value investor shares his invaluable insights and experiences in sensible, long-term investing.

Gaurav has 14 years of experience in management consulting and investment management. He manages investment portfolios for high net worth individuals and companies as Chief Investment Officer at Avant Garde Wealth Management. Previously, he was an Investment Analyst at Fidelity International in Mumbai and also worked as a Senior Associate Consultant at Bain & Co., New York. Gaurav completed his MBA from Columbia Business School, New York in 2006 and his B.A. in Economics and Computer Science from Amherst College, Massachusetts in 2001.

In his interview with Safal Niveshak, Gaurav shares his wide investment experience and how small investors can practice sensible investment decision making.

Safal Niveshak (SN): Could you tell us a little about your background, how you got interested in value investing?
[Read more…] about InvestorInsights: Gaurav Jalan

Latticework of Mental Models: Switching Costs

How many times in last 6 months have you bought something from any of the these websites –

Flipkart
Amazon
Snapdeal

In my case I have used all three, at least once, in last 6 months. With two infants at home, my wife’s favourite online shopping destination is firstcry.com these days. But when it comes to buying diapers, I order from Amazon. Why? Whichever website offers better discount, we go for it. I am not loyal to any particular online store.

Now let me ask you another similar question. How many times have you switched your bank in last 6 months?

In last 1 year? Or in last 5 years?

Well even if another bank comes with an offer of higher savings interest rates, how many people actually take the pains of shifting all their cash and bank deposits to another bank? Very few I guess. My father hasn’t changed his bank in last 30 years.

But why is it that we change our online shopping stores in the blink of an eye but never really change our banks. Even credit cards or demat brokers don’t see too much churning in their customers base. If you talk to bankers, you’ll find that the average turnover rate for deposits is around 15 percent, implying that the average customer keeps his or her account at a bank for six to seven years.

Behaviouronomics: Zeigarnik Effect

Outstanding tasks gnaw at us until we complete them or get rid of them. But there’s another way to relieve the stress of unfinished without finishing it.

What is not started today is never finished tomorrow.~ Johann Wolfgang von Goethe

The most interesting and exciting thing about behavioural economics and psychology is that it’s not very difficult to experimentally test the validity of theories. You don’t need expensive lab instruments. The world is your lab and its inhabitants i.e., people, including yourself, are your test subjects (read guinea pigs).

So here is a simple experiment that you can try on your next visit to any restaurant. It’s not uncommon to find waiters who don’t really write down your order. They seem to have this wonderful ability to recall the order for each table. Even if there are half a dozen orders with every order consisting of many different dishes (including special request like – I want less sugar, don’t add mushrooms in my Pizza etc.) these waiters rarely goof up. Well that’s their part of the job and with years of practice they have exercised their mental muscles so much that they develop a super-sharp memory. But do they really have a great memory?

Try this – After you are done with your meals and have paid the bills (and a good tip), wait for ten minutes after you have left your table and then go back to the waiter who was waiting on you. Ask him to repeat your order. You’d expect him to rattle off your order without any difficulty. But don’t be surprised if he gives you the look – “I am sorry, who are you?” It would seem, not just your order but your whole existence has evaporated from waiter’s memory. What happened to his super memory?
[Read more…] about Behaviouronomics: Zeigarnik Effect

BookWorm: The Hard Thing About Hard Things

Building a business is hard and there are no easy answers to the tough problems business throws at you every day. A high technology entrepreneur and a venture capitalist shares an honest and straight talk based on his experience in starting, running and selling a billion-dollar company.

While many people talk about how great it is to start a business, very few are honest about how difficult it is to run one. In fact, calling it difficult would actually be an understatement.

Building a company inevitably leads to tough time. It’s just hard and the hard thing about it is that there is no formula to deal with those hard things.
[Read more…] about BookWorm: The Hard Thing About Hard Things

Poke the Box: Choose Must

Let’s Start with Safal Niveshak
As Mr. Market behaves like a drunkard trying to get on a horse, here’s time to revisit some old posts dealing with how to behave during a stock market turbulence like we are seeing now –

Simple thoughts on how to deal with stock market turbulence.
Stock prices may be falling, but the stock market is getting an expensive place. Intrigued? Read this post.
Your 10 big questions on the stock market crash answered.
An old, but highly relevant presentation on the return of uncertainty, and how you can deal with it.
Curse of the bull market is back to haunt investors.

Latticework of Mental Models: The Bystander Effect

“Madness is a rare thing in individuals – but in groups, parties, peoples, and ages it is the rule.” ~ Friedrich Nietzsche

Just after 3 a.m., March 13, 1964 in New York City, Catherine Genovese, a 28-year old woman, was stabbed to death in a parking lot in front of her apartment complex. Catherine’s murder story could have drowned in the middle pages of most newspapers like many other crime stories, except that it didn’t.

Catherine’s murder wasn’t a quick, muffled death. It had been a long, loud, tortured, public event. The killer had chased and attacked her in the street three times over a period of thirty-five minutes before his knife finally silenced her cries for help.

Shockingly, thirty-eight people, all in the surrounding apartments, witnessed at least one of her killer’s three attacks from the safety of their apartment windows for 25 minutes without calling the police.

The story has since been thoroughly debunked, a case of sensational reporting, but at the time it was written it led to intense interest in the phenomenon from psychologists. Even if there is a ten percent truth to above story, it’s a baffling account of a crime, not because it was a murder, but because “good people” failed to call the police.

Why didn’t the neighbours help? Were they indifferent? Frightened? Why should they be afraid of calling the police from the safety of their own homes? Has the violence on TV and movies made people so insensitive? Was it the beginning of a new epidemic known as large scale social apathy?

Interview with the witnesses revealed none of these explanations was the real reason behind people’s inaction.

StockTalk (February-2016)

Poke the Box: School Yourself