Archives for June 2017

Small Circles: The Theory of Mastery in the Art of Learning and Investing

One of the best books on the art of learning I’ve read is, well, The Art of Learning by Josh Waitzkin.

Josh is a champion in two distinct sports – chess and martial arts. He is an eight-time US national chess champion, thirteen-time Tai Chi Chuan push hands national champion, and two-time Tai Chi Chuan push hands world champion.

In his book, Josh recounts his experiences and shares his insights and approaches on how you can learn and excel in your own life’s passion, using examples from his personal life. Through stories of martial arts wars and tense chess face-offs, Josh reveals the inner workings of his everyday methods, cultivating the most powerful techniques in any field, and mastering the psychology of peak performance.

One of my favourite chapters from Josh’s book is titled – Making Smaller Circles – which stresses on the fact that it’s rarely a mysterious technique that drives us to the top, but rather a profound mastery of what may well be a basic skillset.

StockTalk (June 2017)

Announcing Camp Millionaire – Money Workshop for Children

Given how important financial skills are to navigating life, it’s surprising that our schools don’t teach children about money.

How many of us look back at our childhood and wish we would’ve been taught more about money? A lot of people graduate from college without any idea how to manage their money or balance their bank account. Maybe you were one of them.

Now that you’ve learned more about managing your money right, I am sure you want to help your kids not make the same mistakes. But then, even when many parents know it’s important to teach their children about money matters at a young age, most don’t know where to start or how to go about it.

I have been through this situation wherein, despite knowing what to teach my kids about money, I lacked the structure and skills to teach them in the way they would learn best i.e., through games and fun-filled activities.

This was till I met Rachana Thamankar of Thrifty Gene. More on her and her initiative later, but let me take the pleasure to introduce you to a structured, games and activity-based workshop for kids to teach them about money and investing.

InvestorInsights: Shalabh Agarwal

Shalabh Agarwal is the founder of Snowball Capital Investment Advisors LLP. After spending a decade in the equities industry, Shalabh quit his steady and lucrative job in one of the best mutual fund houses in India to follow his passion of value investing. With a strong desire to unravel the stock market mystery, he read varied literature on investing – it was all quite confusing till he came in contact with Warren Buffett through his annual letters and books written on him. Since then Shalabh has been an avid follower of the Value Investing philosophy.

Shalabh has a professional experience of more than ten years including seven years as a ‘buy-side’ analyst in the Indian mutual fund industry. He graduated as a Mechanical Engineer from IIT Delhi and went on to acquire an MBA from IIM Bangalore.

Safal Niveshak (SN): Could you tell us a little about your background, and how you got interested in value investing?

Shalabh Agarwal (SA): I graduated from IIT Delhi in Mechanical Engineering in the year 2000. Generally, the fourth year is less intensive and so most of my time was spent on my B.Tech Project (final year major project), billiards and on surfing. Internet was still new to the campus and I remember Moneycontrol launching virtual stock market games. This was a period when markets were going berserk – shares hitting circuits on almost daily basis.

With absolutely no knowledge of stocks, this euphoria was intriguing enough for me to start participating in virtual stock market games. As luck would have it, I won some weekly / monthly portfolio contests and started receiving Rs 200 / Rs 500 bank cheques as prize money. Now this was something big as the dosa (a South Indian delicacy) at IIT Delhi’s subsidized restaurant used to cost ~Rs 5 then – suddenly, the cash starved me had enough to treat his friends!

Why I Don’t Talk About My Stocks Publicly, And Why You Shouldn’t Either

It was sometime in the middle of 2008 when the realization of a global financial crisis had finally settled on the Indian stock market. I was working on my job as an analyst.

One stock – an Indian engineering major – I had recommended to our clients at the start of the year had fallen around 30% since my recommendation. Not just the stock price, the business had started to wobble. But I closed my eyes to that because my recommendation was now public and many clients would have bought it in their portfolios. To change my view after a 30% cut in stock’s price, however honest I would have been to accept my mistake, would have been a disaster.

Now, this wasn’t just one example that I can think of from that time. There were a few similar such recommendations I and my team had made then.

Some stocks had fallen just because the markets were down. But a few had fallen because their underlying businesses were also bouncing around on a rough wicket.

“What would our clients think of us,” I asked my colleague, “If we change our view now after the stock has already declined? It would hit the trust our clients have on us!” He agreed.

Safal Niveshak Stream – The Powerful Effect of Compounding Goodwill

Some nice stuff I am reading, watching, and observing at the start of this weekend…

Of Greater Fools and Bubbles

How many greater fools does it take to make a bubble? An old but highly relevant post from Jason Zweig…

Economists have struggled and failed to explain why markets turn into manias. Some have denied bubbles exist; others have argued bubbles must somehow be “rational.” Often, the argument is that bubbles are caused by “uninformed” traders, or “dumb money,” while the “smart money” sits on the sidelines.

The latest findings suggest, however, that bubbles might be caused not by traders who lack information but by those who have too much.

BookWorm: On Writing Well

If you trace the life of greatest thinkers you’d find a common thread among them. Almost all of them were great writers too. William Zinsser gives useful and blunt advice about writing better non-fiction.

What differentiates a mediocre investor from a good investor? Knowledge? Knowledge is necessary but not sufficient. The key is having the ability to apply the knowledge wisely. And that ability is a product of how one thinks. If you trace the life of greatest thinkers you’d find a common thread among them. Almost all of them were great writers too.

Writing isn’t merely a tool for expressing one’s thoughts. It’s also a tool to discover new thoughts, structure them, and refine them. All the great thinkers, inventors, scientists, philosophers, communicators I know have vouched that writing and thinking are connected to each other like Siamese twins. Isaac Asimov, the most prolific sci-fi writer of 20th century, wrote more than 400 books. He used to say, “Writing, to me, is simply thinking through my fingers.”

Latticework of Mental Models: Risk Aversion Vs Loss Aversion

On April 10, 2003, Pepsi announced a contest called “The Pepsi Billion Dollar Sweepstakes”. It was scheduled to run for 5 months starting from May in the same year.

For the contest, Pepsi printed one billion special codes which could be redeemed either on their website or via postal mail. According to Pepsi’s estimate, about 200-300 million of these codes were redeemed. Out of these, 100 codes were chosen in a random draw to appear in a two-hour live gameshow-style television special. Each of these 100 people were assigned a random 6-digit number, and a chimpanzee (to ensure a truly random number and of course to rule out any monkey business) backstage rolled dice to determine the grand prize number. This number was kept secret and the 10 players whose numbers were closest to it were chosen for the final elimination. On the evening of September 14, the final day of the contest, the event, titled Play for a Billion, was aired live. If a player’s number matched the grand prize number, he would win US$ 1 billion.
(Source: Wikipedia)

Given the scenario, it was highly unlikely that anyone would win a billion dollar. The chances were literally 1 in a billion. In spite of that, Pepsi was unwilling to bear the risk of the possible billion-dollar prize. So they arranged for an insurance company to insure the event. They paid US$ 10 million to Berkshire Hathaway to assume the risk. Yes, Warren Buffett’s Berkshire Hathaway. The same guy who is famous for his two iron rules –

1. Never lose money
2. Don’t forget rule number 1.

Then why would Buffett expose his company to such a big risk for a relatively paltry premium of US$ 10 million? Isn’t this akin to playing Russian roulette?

Behaviouronomics: The Texas Sharpshooter Fallacy

If hindsight bias and confirmation bias had a baby, it would be the Texas sharpshooter fallacy.

Like any other teenager, I was fascinated by the idea of time travel. I watched a lot of sci-fi movies that sparked my imagination about how cool it would be to teleport to the future. More than the idea of going to the future, what excited me was the possibility of seeing the future. Then in 9th standard, I stumbled upon a book called “The Prophecies of Nostradamus”. Nostradamus was a 16th-century French physician who, perhaps as a hobby, published prophecies about future. What’s remarkable about Nostradamus’ is that his first book, which was published in 1955, has rarely been out of print since his death. It’s said that Nostradamus predictions about significant events including the world wars, assassinations of US presidents, many earthquakes, and other natural calamities have come true. Nostradamus has attracted a following that, along with much of the popular press, credits him with predicting many major world events.

The book that I had in my hands was of course not the original text. It was an interpretation of Nostradamus’ French quatrains (stanza of four lines). The translator claimed that Nostradamus intentionally obfuscated his writings to avoid getting persecuted by the 16th-century French government since many of his predictions were about the royal family. But that didn’t stop me from devouring the book and marvelling at this French dude’s clairvoyance.

Could Nostradamus really see the future? While you puzzle over that thought, let me share two interesting stories. Stories about coincidence.

What are the Odds?

The first story is about two US presidents.

How to Generate Stock Ideas: An Unusual Lesson from a 1939 Book

One of the best books I read before starting on my journey of building Safal Niveshak was James Webb Young’s A Technique for Producing Ideas, originally published in 1939. After all, I was trying to build my idea bank for things I wanted to do in life then.

In this book, Young lays out with brilliant simplicity the five essential steps for a productive creative process. Explaining how the production of ideas is largely a result of process than talent, he writes –

The production of ideas is just as definite a process as the production of Fords; that the production of ideas, too, runs on an assembly line; that in this production the mind follows an operative technique which can be learned and controlled; and that its effective use is just as much a matter of practice in the technique as is the effective use of any tool.

My limited experience in investing suggests that what is most valuable to know about idea generation is not just where to look for a particular idea, but how to train the brain in the method by which all ideas are produced and how to grasp the principles which are at the source of all ideas.