Archives for October 2017

Investor Insights: Morgan Housel

Note: This interview was originally published in the April 2017 issue of Value Investing Almanack. To read more such interviews and other deep thoughts on value investing, business analysis and behavioral finance, click here to subscribe to VIA.

Morgan Housel - Value Investing Almanack

I sincerely believe in what Charlie Munger often says about envy, that it is a really stupid sin because it’s the only one you could never possibly have any fun at. I am lucky to have stayed away from this sin as far as investing and other aspects of life are concerned.

But if there is one, and just one, person who arouses this sin in me every time I read him is…Morgan Housel. And it’s for the simplicity of his thoughts that he puts across through his powerful writings. I have tried to emulate Morgan several times in my writing endeavor, but he raises the bar each time he publishes something new, more simple yet more powerful.

Morgan’s posts at The Collaborative Fund, where he is currently a partner, have been a great source of learning for me. I have also read him for years at his earlier stints at The Motley Fool and The Wall Street Journal.

Morgan is a two-time winner of the Best in Business award from the Society of American Business Editors and Writers and a two-time finalist for the Gerald Loeb Award for Distinguished Business and Financial Journalism. He was selected by the Columbia Journalism Review for the Best Business Writing 2012 anthology. In 2013, he was a finalist for the Scripps Howard Award.

In this interview, Morgan shared with me his simple investing thought process, what gets most people into trouble in investing, and the people who have inspired him the most in his journey.

Let’s get started right here.

My Interview with Morgan Housel

Note: This interview was originally published in the April 2017 issue of our premium newsletter – Value Investing Almanack (VIA). To read more such interviews and other deep thoughts on value investing, business analysis and behavioral finance, click here to subscribe to VIA.

In this interview, Morgan shared with me his simple investing thought process, what gets most people into trouble in investing, and the people who have inspired him the most in his journey.

Let’s get started right here.

StockTalk ( October 2017)

I Disclose

We are in a bull market, without doubt.

The index made up of subscribers to my investment newsletter The Safal Niveshak Post (let’s call it ‘SN Index’) has outperformed the BSE-Sensex and has crossed the critical resistance level of 36,000. The CAGR of this index over the past six years since it was launched has been 475%! This is given that it started with a base value of 1 (one) subscriber, which was me (see how good looking CAGRs are created!).

Anyways, given the buoyancy in the broader markets over the past few months, handsome gains have also been seen in the SN Index in recent times. Just over the past twelve months, the index has moved from 25,000 to 36,000 compared to the BSE-Sensex that has managed a rise from 28,000 to 32,000.

Given these stupendous, outperforming gains in the SN Index, it has also attracted a lot of new subscribers, many of whom may have come with a lot of expectations (not their mistake, but bull market’s). A lot of them have emailed me asking for my stock recommendation and money management services, while some have questioned my intention of teaching value investing instead of simply providing stock tips.

Anyways, some old timers tell me that the SN Index is heading rapidly towards the 50,000 mark (it’s their love for me, I know) while some have also quoted a figure of 100,000 to be reached by the end of 2018 (now that’s irrational exuberance, you see).

[Read more…] about I Disclose

InvestorInsights: Gautam Baid

Gautam Baid, CFA, is Portfolio Manager, Global Equities at Summit Global Investments, an SEC-registered investment advisor based out of Utah, USA. Prior to his current role, he served at the Mumbai, London and Hong Kong offices of Citigroup and Deutsche Bank as Senior Analyst in their healthcare investment banking teams. Gautam is a CFA Charter holder from CFA Institute, an MBA in Finance from Nirma University, Ahmedabad, India and an MS in Finance from ICFAI University, Hyderabad, India. He is a strong believer in the virtues of lifelong learning and is an ardent student of the value investing philosophies of Benjamin Graham, Warren Buffett and Charlie Munger.

Safal Niveshak (SN): Gautam, could you tell us a little about your background and journey, how you got into value investing?

BookWorm: Outliers

We, as a society, love the idea that runaway success stories are a simple function of individual merit. This is especially true when people try to explain the cases of extreme successes like billionaires and the world-class performers. Work ethic, talent, and attitude are only part of the success puzzle. The other pieces like circumstantial factors are either frowned upon or ignored.

“I started investing at the age of 11,” says Warren Buffett, “I was wasting my life until then.” With that kind of early start, today 87 years old Buffett has accumulated a whopping 76 years of investing experience. Who in the world can match that? No wonder Buffett has held the spot of second richest man in the world since last twenty-five years.

So, does it mean that anyone who, with Buffett’s level of intelligence, spends three-quarters of a century analyzing businesses and studying annual report can become as successful as Warren Buffett?

We like to think that most wildly successful people have earned their success only through talent and hard work. It’s quite rare to find a biography of a successful person which credits his or her success to pure dumb luck. Dig deeper into their stories, and you’d discover that many unseen factors influenced the outcome. Interestingly, most of those elements lie beyond an individual’s control.

[Read more…] about BookWorm: Outliers

Behaviouronomics: Peltzman Effect

As human activities are made safer, it tends to make us overconfident and take higher risks. This unintended consequence of increased safety has vast implications including, but not limited to, adventure sports, road safety, and stock markets.

Question for you. How many parachutes does one need to try skydiving? One, two?

Technically, none. That is if you want to jump only once. To do it more than once you need the parachute. Don’t you?

Well, I agree this was a weak attempt of starting this post with humour. But on a serious note, I am sure you know that every skydiver jumps with a reserve parachute. And what if the both the chutes don’t open? Well…so much for skydiving!

Instead of wondering about the number of parachutes, a more interesting question to ask here is this: does an additional chute make skydiving safer? “Of course! It should,” most people will argue, “When a skydiver knows that there’s a backup for the emergency, wouldn’t he feel safer? Isn’t that the reason skydiving, as a sport, has become so popular that hundreds of thousands of people indulge in it every year?”

But if you dig deeper into above statement, you’d realise that there lies the paradox of safety. Statistics reveal that even though skydiving equipment has made huge leaps forward for improving reliability, the fatality rate has stayed roughly constant when adjusted for the increasing number of participants.

The backup parachute and other safety measures seem to reduce the risk only for a short while until the skydivers start feeling safer and, unfortunately, overconfident. This overconfidence promotes the skydivers to attempt even riskier manoeuvres which defeats the purpose of having the additional safety.

Skydiving pioneer Bill Booth observed – “The safer skydiving gear becomes, the more chances skydivers will take, in order to keep the fatality rate constant.”

This phenomenon isn’t limited to skydiving alone. Take skiing for example. Recent studies indicate that skiers wearing helmets go faster on average than non-helmeted skiers, and that overall risk index is higher in helmeted skiers than non-helmeted skiers. Moreover, while helmets may help prevent minor head injuries, increased usage of safety headgear has not reduced the overall fatality rate.

So, am I arguing that people should stop wearing helmets and jump with a single chute only? No. That would be a defeatist view. My intention is to draw your attention to a less known behavioural bias called Peltzman Effect.
[Read more…] about Behaviouronomics: Peltzman Effect

How to Teach Kids the Value of Money

Warren Buffett is undoubtedly a famous man. And he is not just famous for his riches, but also for his rejection of the trappings of wealth. As we all know, he lives in the same house he had bought in 1958 for US$ 31,500, and his annual salary of US$ 100,000 is far less than what most CEOs (including many in India) earn.

But there’s one aspect of Buffett that many people don’t know much about. And that is about how he has brought up his kids when it comes to the subject of money.

Over the years, several interviews with his kids have revealed how Buffett’s message to them on money was loud and clear as they were growing up. And it was that money wasn’t what mattered in life. Instead, it was finding something you loved to do and then doing it.

In his book, “Life Is What You Make Of It,” Peter Buffett, a musician and the youngest son of senior Buffett writes about the values he absorbed growing up as the son of Warren Buffett and his late mother, Susan Buffett, and the path he has pursued to identify and pursue his passions in life.

He also writes about things like requiring children to do chores and letting them solve problems on their own instead of bailing them out. But he warns that children will pick up on their parents’ true beliefs about money – no matter what a parent says about money.

Spotlight: Value Investing in the Age of Disruption

In a world where you can’t predict the direction from which disruption will strike, how do you deal with the challenge of finding and owing businesses that may not be disrupted, or avoiding the ones that may be?

In 1968, Warren Buffett accepted a seat on the board of Grinnell college’s endowment fund. Joe Rosenfield, Buffett’s friend at Grinnell, was making an initial investment of $100,000 in a small semiconductor startup. He offered Buffett to participate in the deal which he refused.

That startup was Intel and the value of $100,000 invested in Intel at that time, which Rosenfield did, is worth billions of dollars today. However, Buffett doesn’t count that as a missed opportunity because one of his investing rules is understanding the business, i.e., to be able to have a pretty good idea where it will be in ten years. He didn’t understand Intel in 1968.

Safal Niveshak Stock Analysis Excel Version 3.0

A few readers have accused me in the past of being a sadist who wants them to do the dirty work of analyzing companies on their own, instead of simply recommending stocks like so many other blogs do.

But I’d rather give you a compass instead of a map, for you can confuse the map with the territory and lose your life’s savings walking that path.

In this pursuit of handing you another compass, here is Version 3.0 of my Stock Analysis Excel Sheet that you can download on your computer, read through the instructions to follow a few simple steps, and then analyze not just the past performance of a company but also arrive at its approximate intrinsic value range.

And unlike the previous versions where you were required to enter most data manually, this latest version feeds in data automatically from Screener.in website, which subsequently feeds into my sheets on financial analyses and intrinsic value calculations. So you must thank Screener’s creators and my friends Ayush and Pratyush before thanking me. 🙂