Archives for 2021

35 Ideas from 2021

The Sketchbook of Wisdom: Now at a Special New Year Discount (Till 5th January 2022)

Buy your copy of the book Morgan Housel calls “a masterpiece” at a special New Year discount, which is available only till 5th January 2022. It contains 50 timeless ideas – from Lord Krishna to Charlie Munger, Socrates to Warren Buffett, and Steve Jobs to Naval Ravikant – as they apply to our lives today, and is a great gift for someone with whom you wish to share the wisdom of ages. Click here to buy now.

Right before the year ends, I thought I’d share a handful of ideas I’ve read, learned, re-learned, and wrote about in the past twelve months. Here are 35 of them, in no particular order of importance. I hope you find these useful, as much as I did.

1. You or Me are Not the Market

Earning the long-term returns of the market, of the past or the future, is not in our control. Managing our risks and avoiding ruin, mostly is.

“Rationality is avoidance of systemic ruin,” advices Nassim Taleb.

Trying to avoid the ruin the stock market system enforces upon people who disregard its workings is rational. Believing that you can beat the system at it, by playing the game mindlessly, isn’t.

Someone wise once said –

People destroy themselves in unique interesting ways. Systems destroy people in uniform boring ways.

Now the problem with beating the system for some time is that we get a swelled head. We start believing that if the stock we have invested in has earned us magnificent returns over the past 2-3 months or years, it was entirely an element of our skill and no luck. Yes, that’s how the mind behaves and makes us believe.

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Spoiler Alert: It’s Luck, Stupid!

The Sketchbook of Wisdom: Now at a Special New Year Discount (Till 5th January 2022)

Here is the latest issue of The Journal of Investing Wisdom, where I share insightful stuff on investing I am reading and thinking about. Let’s get started.

A Thought

The luckiest part of my investing career is that I’ve been old enough to have invested through multiple bad markets and still young enough to take advantage of the lessons learned.

What I have realized by investing through the crisis periods is that one of the best ways to learn how crises unfold is to learn from the past and not be complacent to the possibility of them occurring in some form or other.

I remember attending a company’s analyst meet in around 2006. It was held in a three-star hotel in a crowded part of Mumbai. Before the meeting began, the company’s safety officer briefed us about the emergency exits and nearest hospitals.

Now, what were the chances of an emergency happening? Probably miniscule. But the loss, if it happened, would be significant.

That lesson applies to investing too. When you multiply the probability of loss into the magnitude of loss, it becomes meaningful. That is the reason why airlines do a safety demonstration before every flight, and surgeons go through their checklists before every surgery.

As an investor, that should be your standard operating procedure too. You should be mentally ready to see your investments go down by 50% rapidly and be prepared to act rationally when that happens.

Investing is largely a game of luck, and relying on luck tends to make us fragile. So it pays to listen to Nassim Taleb who argues that “it does not matter how frequently something succeeds if failure is too costly to bear.”

That is a wonderful, even if a bitter, lesson to take especially when you are basking in the glory of your short term success in the stock market. But that’s a lesson worth taking.

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What We Control, and What We Don’t

The Sketchbook of Wisdom: Now at a Special New Year Discount (Till 5th January 2022)

Here is the latest issue of The Journal of Investing Wisdom, where I share insightful stuff on investing I am reading and thinking about. Let’s get started.

A Thought

The one year period between Feb. 2015 and Feb. 2016 was a particularly bad one for the markets. The broader markets fell around 20% during this period, and there were multitude of stocks that cracked 30-40%. Howard Marks, the legendary investor and Chairman of Oaktree Capital Management, described the situation in the stock market in his Feb. 2016 memo to clients thus –

My buddy Sandy was an airline pilot. When asked to describe his job, he always answers, “hours of boredom punctuated by moments of terror.” The same can be true for investment managers, for whom the last few weeks have been an example of the latter. We’ve seen bad news and prices cascading downward. Investors who thought stocks were priced right 20% ago and oil $70 ago now wonder if they aren’t risky at their new reduced prices.

In the rest of the memo, he went on to explain why Mr. Market – representative of the stock prices – has nothing valuable to offer to investors through his daily mood swings –

Especially during downdrafts, many investors impute intelligence to the market and look to it to tell them what’s going on and what to do about it. This is one of the biggest mistakes you can make. As Ben Graham pointed out, the day-to-day market isn’t a fundamental analyst; it’s a barometer of investor sentiment. You just can’t take it too seriously. Market participants have limited insight into what’s really happening in terms of fundamentals, and any intelligence that could be behind their buys and sells is obscured by their emotional swings. It would be wrong to interpret the recent worldwide drop as meaning the market “knows” tough times lay ahead.

Predicting the subsequent movement of stock prices, like I have mentioned umpteen times in my posts, or the next mood swing of Mr. Market, whether he will be in the best of his spirits or worst – is a loser’s game.

Focusing on where the earnings and cash flows of the underlying businesses you own, or want to own, are going to go long term is what you must focus on.

Your behaviour and expectations are under your control, and so is the amount of risk you wish to take and the time you have in hand. Stock prices and future returns aren’t under your control and thus you must leave them at what they do best, that is, fluctuate.

“If owning stocks is a long-term project for you,” warns psychologist Daniel Kahneman, “following their changes constantly is a very, very bad idea. It’s the worst possible thing you can do, because people are so sensitive to short-term losses. If you count your money every day, you’ll be miserable.”

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To Get Rich, Don’t Be a Rick

The Sketchbook of Wisdom: A Hand-Crafted Manual on the Pursuit of Wealth and Good Life

Buy your copy of the book Morgan Housel calls “a masterpiece.” It contains 50 timeless ideas – from Lord Krishna to Charlie Munger, Socrates to Warren Buffett, and Steve Jobs to Naval Ravikant – as they apply to our lives today. Click here to buy now.

Here is the latest issue of The Journal of Investing Wisdom, where I share insightful stuff on investing I am reading and thinking about. Let’s get started.

A Thought

Mohnish Pabrai, the famed investor whom I interviewed in the fourth episode of The One Percent Show, has a lot of lessons to share that he learned from the charity lunch with Warren Buffett he won in 2007. One of the best insights for me, which Warren shared with Mohnish, was about the story of Rick Guerin, who was Warren’s and Charlie Munger’s partner in the 1970s.

Warren had even praised Rick Guerin in his 1984 essay titled “The Superinvestors of Graham-and-Doddsville,” in which he outlined famous value investors and their performances. Warren included in the essay the following table which summarized the performance of Rick’s fund Pacific Partners –

But then, Rick pretty much disappeared off the map, and today not many people know of him as must as they know of Warren and Charlie.

So, when Mohnish asked Warren during the lunch, “Whatever happened to Rick Guerin?” the latter replied something on these lines –

Charlie and I always knew that we would become incredibly wealthy. But we were not in a hurry to get wealthy; we knew it would happen. Rick was just as smart as us, but he was in a hurry. And so actually what happened was that in the 1973-74 downturn, Rick was levered with margin loans. And the stock market went down almost 70% in those two years, and so he got margin calls, and he sold his Berkshire stock to me. I bought Rick’s Berkshire stock at under $40 apiece, and so Rick was forced to sell shares at … $40 apiece because he was levered.

Warren then gave Mohnish this invaluable advice –

If you’re an even slightly above average investor who spend less than they earn, over a life time you cannot help but get rich, if you are patient.

No one else has ever taught about the dangers of leverage and impatience the way Warren taught Mohnish in that one lunch outing.

Rick’s is just one of the many forgotten stories in the stock market, which could have had much better endings but for greed and impatience.

Look around you, open your inbox, or browse through you Twitter, YouTube feeds, and you will hear stories of people in a hurry, trying to get rich in the stock market or otherwise, with seemingly little effort (and then teaching the world how to get rich fast). The fact is that we now live in a society that promotes immediate gratification.

However, the lesson from the likes of Warren, Rick, and even Mohnish is that to do really well as an investor, you just need these four attributes – be slightly above average, spend less than you earn, invest your savings well, and be patient with your investments.

Then, as Warren says, over a lifetime, you cannot help but get rich.

P.S. Except for the investing mistake that cost him dearly, Rick was admired by Warren and Charlie. Read Charlie’s thoughts about Rick in the latter’s obituary. Another lesson here – you won’t be remembered for your investing successes or failures as much as you would be remembered for the person you were. Another reason to stop taking investing so seriously, and spending a much greater time being that good person who will leave the world a better place than he/she found.

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The 43rd Lesson

Life’s passing by too fast, or so it seems. I complete 43 years in my present state of existence today. That’s more than three-fifths of the average life expectancy of an Indian male.

As I look back at my life, the third year of a decade has been particularly lucky or good for me, and the 43rd year was no different. On the work front, I wrote and published The Sketchbook of Wisdom and started The One Percent Show, both initiatives being very fulfilling for me.

Now, while spiritualists would want me to believe that I have existed from anadi (before the beginning of cosmos) and will exist till ananta (infinity), I see forty-three years as a good enough time to find some meaning in one’s life. At least, my rapidly greying hair and receding hairline help me realize that.

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The Classic Mistake Most Investors Make

The Sketchbook of Wisdom: A Hand-Crafted Manual on the Pursuit of Wealth and Good Life

Here is the latest issue of The Journal of Investing Wisdom, where I share insightful stuff on investing I am reading and thinking about. Let’s get started.

A Thought

One of the key, rarely noticed, skills of the best investors out there is that they often separate their hard work from their action. What this means is that the moment they identify as good business worth investing in may not be the moment they actually buy it. There is sometimes a pause, a wait, a re-reflection, and only then if it is warranted, an action.

This is unlike what we do most of the time, in life and in investing. We do the hard work, and we act on the conclusion. There is rarely a moment of pause and reflection.

I interviewed Vinod Sethi, ex-MD and CIO of Morgan Stanley India, in the second episode of The One Percent Show. Out of the many insights he shared over our 150 minutes of interaction, here is one that stood out for me that led me to appreciate even more the idea of pausing and waiting for the right time to invest in an idea I have worked upon.

Vinod said –

People have this natural urge that if I have spent 100 hours doing something, then I must act. Whereas my view is that act when prices are going to go up or down, not when you have completed your homework. The market is not waiting for you to complete your homework for the prices to go up or down. I would always urge a lot of my analysts, including myself, to delink analysis from decision-making. Because you have spent a hundred hours on something, you don’t need to act.
The key to being a good money manager is to not act, or not link your hard work to your action. Delink the two. Keep working, because the point of conviction and intuition comes when it comes. But at that time, your homework should be complete. That time you shouldn’t be running around doing homework, because that intuition point will happen when it happens. It is all sitting in your brain. But you act when your intuition wakes up. In a way, the market whispers in your ear.
At the end of the day, I’d say that’s what it is. Because there are 10,000 listed stocks and why would you zone in on something? You need to do a lot of work, but don’t believe or don’t live under the delusion that your work has got you this brilliant idea.
The work has given you the foundation for good seeds to grow. It’s like a garden, which has been well fertilized and watered for some roses to bloom. That’s your research on a daily basis. But the act of the rose coming is when there is a confluence of events, like when a stock is dirt cheap or forgotten or expensive. There’s the real world out there and you’re ready with your homework.
Let’s put it this way. It is like there’s a woolly mammoth coming at you and I give you a gun with a few bullets. There are two ways you can respond. I’ve given you a gun with bullets, so you can start firing. The other way to look at it is to just sit and fire when the woolly mammoth shows up. So, research is like loading the gun, having the bullets. The opportunity is the mammoth showing up. They’re not linked. Having a gun gives you the arrogance that I will fire and can hit the mammoth. That is a classic mistake of most analysts.

This has been one of the most wonderful insights I have received from anyone on The One Percent Show so far.

What Vinod suggested is that you must keep doing your work of identifying good investment opportunities, but if the prices are not right, and there is no margin of safety, don’t act. Least of it, don’t act just because you have done the hard work. Stocks do not bother about your hard work.

But when the time is right – and you are ready with your idea and capital – the market will whisper in your ear.

Wait for that whisper. And only when you hear it, act.

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Never Take a Risk You Do Not Have to Take

The Sketchbook of Wisdom: A Hand-Crafted Manual on the Pursuit of Wealth and Good Life

Here is the latest issue of The Journal of Investing Wisdom, where I share insightful stuff on investing I am reading and thinking about. Let’s get started.

A Thought

The world often looks, and is, like a disorderly place, full of random events. And the irresistible urge to seek patterns can get us into serious trouble when we take this tendency to the field of finance and investing.

As investors, it is important to know that we are dealing with something where randomness and chance can distort the expected outcome in the short term.

Nassim Taleb wrote in Fooled by Randomness –

…risk-conscious hard work and discipline can lead someone to achieve a comfortable life with a very high probability. Beyond that, it is all randomness: either by taking enormous (and unconscious) risks, or by being extraordinarily lucky. Mild success can be explainable by skills and labor. Wild success is attributable to variance.

Time and again it has been proved that majority of stock price changes are nothing more than random jitters in the system for which no explanation is ever required. Yet you can find people obsessing over every movement and explaining it like kids spotting animal shapes in the clouds.

You don’t have to be one of those.

In fact, you just have to do your work, and then let randomness do its own.

Like Taleb advises, risk-conscious hard work and discipline can lead you to achieve a comfortable life with a very high probability.

If you are trying to seek anything else through your investments in the market, you may be playing with fire.

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The Only Road to Riches

Here is the latest issue of The Journal of Investing Wisdom, where I share insightful stuff on investing I am reading and thinking about. Let’s get started.

A Thought

You or me are not the market. Earning the long-term returns of the market, of the past or the future, is not in our control. Managing our risks and avoiding ruin, mostly is.

“Rationality is avoidance of systemic ruin,” Nassim Taleb writes.

Peter Bernstein writes in his brilliant book Against the Gods –

Survival is the only road to riches. Let me say that again: Survival is the only road to riches. You should try to maximize return only if losses would not threaten your survival and if you have a compelling future need for the extra gains you might earn.

Trying to avoid the ruin the stock market system enforces upon people who disregard its workings is rational.

Believing that you can beat the system at it, by playing the game mindlessly, isn’t.

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Urgent Reminder: It’s Your Hard Earned Money

When you invest in a business you don’t understand but just because its stock price is rising…

When you invest in stocks with money that, if you lose, can hurt you badly…

When you invest purely based on tweets and “influencer” videos who promise you quick, easy riches…

When you invest in “assets” that you – and most other people – do not understand but just out of the fear of missing out…

Remember it’s your – or your mom’s or dad’s – hard-earned money.

Don’t lose it chasing easy money.

Sir John Templeton said the four most dangerous words in investing are “this time it’s different.”

What he meant was that there are fundamental laws with respect to investment risk and return that can bend for a while but do not ultimately break.

I may be old school, but I see many-many more people trying to bend these fundamental laws – most in their 20s – than I have ever seen in the past 18+ years of being in the market.

We are certainly in a new age economy, and this may just be the dawn of a new era for the Indian economy (though a lot of variables need to work perfectly for that to happen). But the level of outrageousness that I see in the behaviour of masses is too difficult to ignore or not be concerned about.

This is especially true of those betting on cryptocurrencies without understanding the underlying fundamentals.

As per stats, India has more than 10 crore cryptocurrency owners, the largest in the world by far (US lags far behind at 2.7 crore). Just imagine this number for a country where it has taken more than 40 years for 5 crore people to invest in equities.

The way things are going, I fear it’s going to end badly for a lot of people.

As little as I understand it, there certainly is a future for new age tech, blockchain, cryptocurrency, etc. It will take its own time to unravel. Most of us away from the front-end of tech can’t even make proper sense of that future. But that should not lead us to use our hard-earned money to bet on it to get rich fast.

It’s like playing Russian roulette with one bullet and five empty chambers and believing that the bullet would come only after you pull the fifth trigger, by when you would have already become a billionaire and will obviously not pull the sixth trigger.

But who knows when the bullet will strike, and you will become a statistic? Like, who knows when the cryptocurrency madness would hit a peak and instead of making you rich fast, it may lead you to lose everything you earned the hard way?

It’s easier for celebrities to appear on advertisements and tell you that “Crypto is not hard, it’s very easy.” But remember that they get paid for their acting, not for their advice. Plus, they have nothing to lose when you lose.

This is also true for financial influencers who are all over YouTube and other social media showing you (often live) where and how much there are investing in such currencies (and stocks, and IPOs). Remember that they get paid for how much time you spend on their channels, not for their advice. Plus, they also have nothing to lose when you lose.

I believed the world couldn’t get noisier 10 years back. Then I believed it couldn’t get noisier 5 years back. How wrong I was!

The level of noise all around is unprecedented, and amidst this, your behavior with your money is your only edge and guard to help you survive this noise and the madness it is causing.

This time is not any different, and I wish you realize this now and not when the tide goes out.

There will be a lot of naked swimmers then. I wish you are not one of them.

I wish you a very happy Diwali, and a peaceful, sane, year ahead.

Video: Ask Me Anything: YouTube LIVE with Vishal Khandelwal – Session #1

I did my first ever YouTube Live Ask Me Anything (AMA) session yesterday, and received a great response. The idea was to try and answer questions on stock market investing (except on specific stocks), investing process, basic personal finance, starting up, failing, blogging, minimalism, and living a good life.

Here is the video of the entire session, with timestamps, so that you can jump straight to your topics of choice.

I plan to do such AMA sessions at regular intervals. If you wish to know about them and join them, just subscribe to my YouTube channel here.

If you are not able to watch the video above, click here to watch.