Archives for May 2016
Latticework of Mental Models: Bayes Theorem
A statistics professor who travels a lot was concerned about the possibility of a bomb onboard his plane. He determined the probability of this and found it to be low but not low enough for him. So now he always travels with a bomb in his suitcase. He reasons that the probability of two bombs being onboard would be infinitesimal.
Do you think he has really reduced the risk?
Even those who aren’t well versed with the basic concepts of probability can say that the professor’s logic seems absurd.
Well, the bomb riddle is a famous joke among mathematicians. Nevertheless, it’s a thought provoking joke.
So to help you think about the riddle, let’s explore another related thought experiment.
A man wakes up in the middle of the night with a splitting headache. He remembers that there are few aspirin bottles in the bathroom. He dizzily stumbles into his bathroom to grab one of the four bottles in the dark and pops a pill from that bottle. An hour later, instead of getting relief from headache, he starts feeling a terrible nausea. Suddenly he realizes that only three of the four bottles in the bathroom contained aspirin and the fourth bottle contained poison.
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8 Big Ideas from a Super Investor: Philip Fisher
Note: This article formed part of the April 2015 Special Report sent to subscribers of our premium newsletter Value Investing Almanack.
If you are a Warren Buffett fan, chances are slim that you haven’t heard of Philip Fisher. He belongs to the league of those very few super investors who have shaped Buffett’s investing style.
In his 2013 letter to investors, Buffett ranked Fisher’s book next to Ben Graham’s books –
…Phil Fisher put it wonderfully 54 years ago in Chapter 7 of his Common Stocks and Uncommon Profits, a book that ranks behind only The Intelligent Investor and the 1940 edition of Security Analysis in the all-time-best list for the serious investor.
Despite being considered as a super investor, Philip Fisher was little known to general public and rarely interviewed. He is widely respected and admired in the value investing circles all over the world. He is also known for his ‘scuttlebutt’ 
approach, which simply means seeking information from competitors, customers, and suppliers, all of whom have a vested interest in the company.
He wasn’t among those who made decisions just by reading annual reports. He believed in getting first hand information about the company from various sources.
Now, when it comes to following an advice, it’s more sensible to first take up the recommendation about “what NOT to do” instead of “what to do”. So, in the spirit of inversion, let me explore some of the don’ts in investing recommended by Fisher through his various interviews and writings.
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InvestorInsights: John Huber
A young, super-smart value investor and money manager shares his insights and experiences in sensible, long-term investing and money management.
John Huber is the portfolio manager of Saber Capital Management, LLC,an investment firm that manages separate accounts for clients. Saber employs a value investing strategy with a primary goal of patiently compounding capital for the long-term. John established Saber as a personal investment vehicle that would allow him to manage outside investor capital alongside his own account. John also writes about investing at the blog Base Hit Investing.
John can be reached at john@sabercapitalmgt.com.
Safal Niveshak (SN): Could you tell us a little about your background, how you got interested in investing and also about your wonderful blog Basehitinvesting.com?
John Huber (JH): I’ve always loved investing. My father was an engineer, but he maintained an avid interest in the stock market, and did very well investing his savings. I developed a casual interest in stocks and investing in high school through watching his investments do well, and then I became much more interested a few years later after picking up a book at the library one day about Warren Buffett. The book was the first time I had ever read much about Buffett, and like many other value investors, his approach to investing really resonated with me. His ability to articulate the simple logic of value investing captivated me enough to dive headlong into studying the topic in much greater detail, and although I had just begun a career in real estate, I soon set the goal of eventually setting up an investment firm that would be somewhat similar to Buffett’s original partnership. I spent time in real estate, managing property and operating a few small real estate investment partnerships, which eventually allowed me to save enough capital to seed my investment firm in 2013.
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Latticework of Mental Models: Winner’s Curse
Consider this thought experiment –
A friend of yours is the Chairman of the Acme Oil Company. He occasionally calls with a problem and asks your advice. This time the problem is about bidding in an auction. It seems another oil company has gone into bankruptcy and is forced to sell off some of the land it has acquired for future oil exploration. There is one plot Acme is interested. Until recently, it was expected that only three firms would bid for the plot, and Acme intended to bid $10 million. Now they have learned that seven more firms are bidding, bringing the total to ten. The question is, should Acme increase or decrease its bid? What advice would you give?
Do you advise bidding more or less?
If you’re like me and seeing this case study for the first time you’d probably go with a higher bid. After all, there are additional bidders, and if you don’t bid more you won’t get this land. Isn’t it?
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BookWorm: Investing Between The Lines
Trust is the necessary foundation for long-term business success and candor is the language of leaders who choose to be trusted. This book offers important clues for deciphering the CEO communications to help investors make better decisions.
When an investor starts his investigation about a business the first thing he wants to know is if the business is strong and profitable? The answer to this question can be found out from the company’s annual report by reading the numbers like net earnings, debt, cash flow, profitability ratios etc.
The next question one needs to answer is how accurate or authentic those numbers are? Of course they are verified by auditors, but then Enron and Satyam numbers were also certified by auditors. And both of them ended up as biggest accounting scandals.
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Latticework of Mental Models: Pari-mutuel System
You don’t win by predicting the future; you win by getting the odds right. You can be right about the future and still not make any money. ~ Will Bonner
The way to win in stock market, according to Charlie Munger, is to work, work, work, work and hope to have a few insights.
Now, the question is – how many insights do you need in your investing lifetime?
Not many, as Munger says…
…you don’t need many in a lifetime. If you look at Berkshire Hathaway and all of its accumulated billions, the top ten insights account for most of it. And that’s with a very brilliant man—Warren’s a lot more able than I am and very disciplined—devoting his lifetime to it. I don’t mean to say that he’s only had ten insights. I’m just saying, that most of the money came from ten insights.
So you can get very remarkable investment results if you think more like a winning pari-mutuel player. Just think of it as a heavy odds against game full of craziness with an occasional mispriced something or other. And you’re probably not going to be smart enough to find thousands in a lifetime. And when you get a few, you really load up. It’s just that simple.
Munger uses horse racing’s Pari-mutuel betting system as one of his mental models to make sense of stock market investing. He is asking us to think like a Pari-mutuel player and look for the mispriced bets.
So what’s a Pari-mutuel system and how does one find a mispriced bet in such a system?
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Behaviouronomics: Imperfect Memory
We humans tend to remember the things we want to remember and forget the things we’d rather forget because our minds are drawn to what feels true, not what’s necessarily so. That means a significant part of human memories are mostly fiction.
Yesterday when I logged into my Facebook account, it showed a picture which I had posted three years ago. In the picture I was celebrating my birthday with colleagues in the office. Although I had completely forgotten about the picture, it brought a smile on my face.
I just couldn’t remember being present when that picture was taken. My brain had conveniently erased that incident from my memory. I am sure it happens with others and Facebook knows it. So they introduced this fascinating feature. Bringing back those lost memories creates a pleasant experience which isn’t much different from the one when you find money in your old pant pockets.
How would it be if we never forgot anything? Why does our brain choose to remember something and forget others? Is there an evolutionary reason behind this behavioural quirk? Let’s explore these questions today.
Total Recall
In 2005, Deb Roy and Rupal Patel, a scientist couple from MIT designed a system called “Total Recall”. It was a set up to record (audio and video) everything in their lives starting from the day they brought home their newborn son. The intention was to discover the patterns in how a child learns language. They installed cameras and microphones in every room and stored all the recordings in a hard disk which was to be transcribed and analysed later. The experiment lasted for 2 years and it did reveal interesting insights about various stages in language development of a child but what made this experiment hugely remarkable was an array of serendipitous discoveries about human brain.
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An Investor’s Best Friend
In one of his most dramatic investment outlooks yet, Bill Gross wrote in May 2015 about fears of his looming death –
Having turned the corner on my 70th year, like prize winning author Julian Barnes, I have a sense of an ending. Death frightens me and causes what Barnes calls great unrest, but for me it is not death but the dying that does so . . .
What I fear most is the dying . . . the suffering that . . .will accompany most of us along that downward sloping glide path filled with cancer, stroke, and associated surgeries which make life less bearable than it was a day, a month, a decade before.
He then went on to relate this to the coming death of the investment super-cycle the world over.
Latticework of Mental Models: Loser’s Game
In the hope of executing an impressive smash, I again sent the ball flying away from the table. Losing yet another game of table tennis to Navin, a good friend and a colleague in my previous job. It was probably 50th consecutive loss since I started playing TT with Navin.
“It isn’t that I am an extraordinary player,” explained Navin, “I just focus on returning the ball back on your side. Your unforced errors are just too many so you continue to lose.”
The idea of unforced error didn’t make much sense to me at that time. And the streak of losses continued for another few months until our employer decided to remove the TT facility from the office. They reasoned that some employees were spending more time on TT table than their workstation. I wonder who those employees were. 😉
It took another few years for the idea of ‘unforced errors’ to sink in properly. It happened when I learned about a concept called – Loser’s Game.
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