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Archives for November 2016

Of Falling Stock Markets and Shutting Brains

In one of the old interviews of Mohnish Pabrai of Pabrai Funds, he described the root cause of a common, but difficult to overcome, inefficiency in share prices –

Our brains are in sync with the speed at which the market is moving and totally out of sync with the speed at which a business is moving. You have to learn to dramatically slow your brain, which is very hard for most people. The reality is that you should make decisions based on how the business is changing, and that’s a very slow process.

You wouldn’t know that businesses change slowly from the share price activity in the stock market. Such volatility, of course, can be a boon for the disciplined investor waiting for what Warren Buffett refers to as a “fat pitch.” Most maintain a watch-list of what they consider to be superior companies that they would be happy to buy, but only at the right price. But the problem for most of us lies in deciding what that right price is because most of us find it difficult to understand what that underlying value of the business is, to which we must relate the price. And thus, most of us would rather make our decisions just looking at stock prices – especially when they are moving fast, up or down – than underlying intrinsic values.

[Read more…]

Book Review: Investing Between The Lines

Note: This book review was originally published in the May 2016 edition of our premium newsletter Value Investing Almanack. To know more and subscribe, please click here.

When an investor starts investigating a business, the first thing he wants to know is if the business is strong and profitable? And he can usually find the answer from the company’s annual report by reading the numbers like net earnings, debt, cash flow, profitability ratios etc.

The next question is, how accurate or authentic those numbers are? Of course, they are verified by auditors. But even Enron and Satyam numbers were also certified by auditors. And both of them ended up as biggest accounting scandals.

As an investor, how do you know that the management is telling you the truth? And how does an honest CEO communicate with the shareholders in a manner which establishes trust?

Laura Rittenhouse, in her book Investing Between The Lines, attempts to answer the above questions. She offers clues to separate the facts from the fluff in annual reports and quarterly earnings calls. Rittenhouse had raised a red flag on Enron, much before it collapsed, noticing a discrepancy between the net income cited in its CEO letter and its audited financial statement, among other things.

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Safal Niveshak Stream – November 26, 2016

Note to Readers: In Stream, we suggest worthwhile reading material on a variety of topics, not all of which are directly related to investing. Some of the articles require you to be paid subscriber of those sites. However, it is often possible to read such articles by going to Google News and searching for the article’s title.

Some nice stuff we are reading, watching, and observing at the start of this weekend…

Investing/Stock Market

  • (3 minutes watch) Recently, government of India took a drastic step to invalidate the Rs. 1000 and Rs. 500 currency notes. We don’t have any opinion on how effective or ineffective this demonetization step would be in addressing the problem of black money and fake currency. However, it would be very interesting to see the unintended (positive and negative) consequences of this policy. One immediate effect was that people started hoarding Rs. 100 notes. Valid currency notes (1000s and 500s) suddenly turned into bad money and it drove out the good money (lower denomination notes i.e. 50s and 100s), perhaps temporarily, from the circulation. This is known as Gresham’s law. It is a monetary principle stating that “bad money drives out good.” Watch the latest episode of Latticework of Mental Models video series on Gresham’s Law.

    Click Here if you can’t see the video above. [Read more…]

Latticework of Mental Models: Lucifer Effect

Let me ask you a disturbing question.

“Would you electrocute a stranger?”

Most of you would respond with an emphatic no. But perhaps you are underestimating yourself.

I am neither doubting your character nor your sense of morality but empirical evidence suggests that human beings underestimate their own vulnerabilities that can turn them into evil. To support my claim let me take you through a fascinating experiment.

In 1971, Philip Zimbardo, a young psychologist from Stanford University, wanted to study the psychology of imprisonment i.e., study the roles people play in prison situations. So he invited students to participate in an experiment and randomly assigned them the roles of ‘prisoners’ and ‘guards’. Tests showed that all students were normal people and physically and mentally healthy. A simulated prison environment was created to mimic real-life prison conditions, where they lived for several days. As part of the role playing the ‘guards’ behaved aggressively and ‘prisoners’ behaved helplessly. [Read more…]

Investing and the Art of Metaphorical Thinking

My momma always said, “Life is like a box of chocolates. You never know what you’re gonna get.” Mama always had a way of explaining things so I could understand them. ~ Forrest Gump

About a century ago, when the first automobile was introduced on the roads, most people referred to it as “horseless carriages”. Not only that, when the first set of cars came out, people called them “iron horses.”

Amusing, right? How limited people’s imagination was!

But today when the first lot of autonomous vehicles are getting ready for the roads, most people like to call them driverless cars. I am sure our future generation will be amused at our choice of words.

“Driverless? What driverless?” They would probably chuckle at the unimaginative terminology of their previous generation.

But that’s how a human mind works. The seeds of most revolutionary ideas are sown in those moments of unimaginative thoughts, like horseless carriages and driverless cars.

Driverless cars are as complicated and unbelievable to us as horseless carriages were to our great grandparents. And for a human mind, the best way to learn a complex idea is to find it living inside something else it already understands.

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Safal Niveshak Stream – November 19, 2016

Note to Readers: In Stream, we suggest worthwhile reading material on a variety of topics, not all of which are directly related to investing. Some of the articles require you to be paid subscriber of those sites. However, it is often possible to read such articles by going to Google News and searching for the article’s title.

Some nice stuff we are reading, watching, and observing at the start of this weekend…


  • (970 words / 4 minutes read) Nilanjana Roy discusses the concept of being a “time-millionaire”, a measure of how much person has control over his or her time. It’s not so straightforward to draw an analogy between time and money in the bank. However, the importance of having control of one’s time cannot be emphasized enough when it comes to understanding human happiness…

    The American writer and blogger Mason Currey tracked the daily routines of 161 highly creative people, from Twyla Tharp and Agatha Christie to Matisse and Benjamin Franklin, in Daily Rituals: How Artists Work. Despite wide variations in working styles and habits, some patterns emerge. The brightest humans find work satisfying in itself, continuing to be productive long after they’ve achieved financial stability; they tend to work for a few hours every day, with the odd marathon session.

    The most happily successful people you might imagine — Warren Buffett, for example — have the knack of enjoying what they do for work, and take time off to play bridge, learn the ukulele, or whatever. Although Currey didn’t explicitly say this, it also becomes clear that highly creative people exercise iron control over their time — and enjoy spending time, perhaps as much as we’re conditioned to think of enjoying spending wealth.

    [Read more…]

Latticework of Mental Models: Porter’s Five Forces Analysis

Peter Lynch, who successfully ran Fidelity’s Magellan mutual fund for more than a decade, has often mentioned that investors are well advised to buy a business that’s so good that an idiot can run it because sooner or later an idiot will run it. That’s Lynch’s trademark style of saying that some businesses have structural advantages.

The easiest example that comes to mind is when Vijay Mallya ran two different kinds of businesses i.e the liquor business and the airline business. The alcohol business has great economics and aviation industry is known for its horrible economics. It didn’t matter how skillful Mallya was (or wasn’t). The outcome of the events in these two cases proves Lynch’s point.

So how do you find businesses which have a structural advantage? The search should begin by evaluating the industry. If one can answer following questions then he or she can get deeper insights about the industry.

  • Is this a good industry to look for quality businesses?
  • Is this is a mediocre industry, but are there companies which are exceptionally good performers?
  • What are the growth drivers for the industry?
  • What are the challenges?
  • What factors might influence how the industry might do in the future?
  • Who are the dominant players? Why are they dominant?

Of course, one needs to read a lot about the industry and the companies operating in it to answer above questions. But there’s is smarter approach to get quick insights on the competitive nature of any industry. And that brings us to a very important mental model – Porter’s Five Forces Analysis. [Read more…]

How to Deal With the Harsh Reality of a Stock Market Crash

Short practical advice (may skip) – If you cannot withstand losing a bit of your money in a stock market crash (where things easily go from bad to worse to brutal), please stay away from stocks. But if you are fine with the risk of losing some money in the short run in return of wealth creation in the long run, keep owing your good stocks and/or good mutual funds. Buy more (and keep buying) if you believe the quoted (now lower after the crash) prices offer great value in the long run. Then, once you are with your chosen good investments, just get going with other more important things in life like family, work, and self-development…and let go of the outcome of your investments. Accept that whatever happens, happens.

How to Deal With the Harsh Reality of a Stock Market Crash

Slightly long theoretical advice (must read) – I read a wonderful article earlier today on dealing with life’s harsh realities – sharp fall in stock prices is one such reality for most investors – and here is an excerpt from the same…

…the only intelligent thing to do when such turbulent change occurs is for us to sit back and realize that we are only to be witnesses to change, and to respond to it rather than to react to it—much like we would watch a movie unfold on the screen and laugh at the funny bits and cry at the sad bits, while always knowing that what is happening before our eyes is unreal.

Modern quantum physics after Einstein also points us this way—it says that what occurs depends upon the observer, and not on what is observed. So, in effect, as a witness, I am free to choose my response, and therefore the reality I actually experience.

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