Archives for April 2017

Why Not to Speculate During Bull Markets: Lessons from Newton and Druckenmiller

April 27, 2017 | 13 Comments

It was sometime during late 1999 through early 2000, near the peak of the dot-com bubble, the legendary George Soros and his hedge-fund team were working on how to prepare for the inevitable sell-off in technology stocks.

The man in charge of Soros’ high profile technology funds was Stanley Druckenmiller – one of the best-performing hedge fund managers of all time, till date – and he was busy warning his team that the sell-off could be near and could be brutal.

As the markets soared further in March 2000, Druckenmiller was quoted as saying, “I don’t like this market. I think we should probably lighten up.” Soros himself would regularly warn his team that tech stocks were a bubble set to burst.

Despite this, when the sell-off finally did begin in mid-March 2000, Soros Fund Management wasn’t ready for it. His funds were still loaded with high-tech and biotech stocks. Just in five days, starting 15th March, Soros’s flagship Quantum Fund saw what had been a 2% year-to-date gain turn into an 11% loss. By the end of April, the Quantum Fund was down 22% since the start of the year, and the smaller Quota Fund was down 32%.

Post that, in April 2000, Soros said at a conference, “Maybe I don’t understand the market. Maybe the music has stopped, but people are still dancing.”

Latticework of Mental Models: Physics Envy

April 24, 2017 | 2 Comments

A group of tourists was visiting a dinosaur museum. A guide was entertaining them with interesting trivia about various dinosaur species. Just when they were passing by a huge skeleton of an ancient carnivore, an inquisitive member of the tourist group asked the guide, “How old is this skeleton?”

“Oh, that big T-rex skeleton? It’s about 100 million and 5 years old.” quipped the guide.

“That’s quite an odd figure. I understand the 100 million part but how are you so sure about the last 5 years?”

With all earnestness, the guide replied, “Well, that’s the most accurate part of the figure because exactly 5 years ago a world famous expert on dinosaurs told me that the skeleton is 100 million years old.”

The guide was honest in his attempt to provide an accurate information but he confused accuracy with precision. His answer was precise but was it really accurate? In fact, a better question to ask would be – did the guide make expert’s answer anymore useful by making it more precise? I think no.

Sir John Maynard Keynes said, “Better roughly right than precisely wrong.”

How to Analyze a Business, the Sherlock Holmes Way

April 21, 2017 | 10 Comments

Peter Bevelin has written a few amazing books, like Seeking Wisdom: From Darwin to Munger, A Few Lessons for Investors and Managers, and the latest All I Want To Know Is Where I’m Going To Die So I’ll Never Go There.

But one of his lesser-known books that I have on my all time favourites lists is A Few Lessons from Sherlock Holmes. Through this book, Bevelin has distilled Arthur Conan Doyle’s Sherlock Holmes into bite-sized principles and key quotes. In fact, this book is much more than a collection of quotes. It is a way to learn the powers of observation, understand the limits of our mind, and counter the narrative fallacy.

Bevelin writes in the book…

What distinguishes Holmes from most mortals is that he knows where to look and what questions to ask. He pays attention to the important things and he knows where to find them.

Oh, My Impatient Generation!

April 11, 2017 | 6 Comments

Impatience I met a guy yesterday who spent the past ten years of his life – and he’s just 32 years of age – destroying his body with alcohol, excessive food, and a sedentary lifestyle.

“I have resolved to be fit, lean and healthy in the next six months,” he told me with great confidence.

Well, not surprisingly, he got irritated when I told him that it might take a little longer than six months to achieve what he wanted.

His reaction wasn’t much different from a cousin of mine, who recently told me how she wanted to become a life coach and was ready to do whatever it took to get there in one year.

When I asked her, “What if it takes you ten years to get there, instead of one?” she had no answer.

Clearly, she hadn’t considered the possibility that years of learning, experience and skill development could be one of the necessary success ingredients in becoming a good life guru. But she wanted the results without all this work…or by investing the necessary time.

Why I Don’t Invest in Banking Stocks

April 10, 2017 | 18 Comments

In October 2016, I had written a post about how I let an opportunity to buy HDFC Bank in the middle of 2006 pass by, and why I have never come to regret that decision (the stock has turned into a 10-bagger since then!).

My reasons to miss that stock was my inability to understand the complexities of the banking and finance business, and more importantly that I have never trusted banks to uphold high levels of honesty and integrity in their business operations.

I received a lot of brickbats for that post for castigating an entire sector (and the bank) that has created so much wealth for shareholders in the past, and that constitutes such a big part of India’s stock market capitalization.

Well, I stand by my thoughts which, by the way, are my personal thoughts and are not binding on you to also avoid stocks from the banking and financial services space.

Investing is a personal affair, and what makes me uncomfortable can be comfortable for you, and vice versa.

Anyways, now the question is – Why am I writing a second post on my unwillingness to invest in banking stocks?