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You are here: Home / 2024 / Archives for September 2024

Archives for September 2024

The Psychology of Investing #3: When Control is Just An Illusion

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

This is a masterpiece.

– Morgan Housel, Author, The Psychology of Money

Get Your Copy Now

Become a wiser investor in just 5 minutes

Join The Journal of Investing Wisdom and receive insightful ideas on investing, stock analysis, and human behaviour. Plus, unlock access to free chapters of my upcoming books, multiple e-books, and my stock analysis excel. All for FREE!

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The Internet is brimming with resources that proclaim, “nearly everything you believed about investing is incorrect.” However, there are far fewer that aim to help you become a better investor by revealing that “much of what you think you know about yourself is inaccurate.” In this series of posts on the psychology of investing, I will take you through the journey of the biggest psychological flaws we suffer from that causes us to make dumb mistakes in investing. This series is part of a joint investor education initiative between Safal Niveshak and DSP Mutual Fund.


The Art of Thinking Clearly is an excellent book by Rolf Dobelli. In one chapter, Dobelli shares a couple of instances –

Every day, shortly before nine o’clock, a man with a red hat stands in a square and begins to wave his cap around wildly. After five minutes he disappears. One day, a policeman comes up to him and asks: ‘What are you doing?’ ‘I’m keeping the giraffes away.’ ‘But there aren’t any giraffes here.’ ‘Well, I must be doing a good job, then.’

A friend with a broken leg was stuck in bed and asked me to pick up a lottery ticket for him. I went to the store, checked a few boxes, wrote his name on it and paid. As I handed him the copy of the ticket, he balked. ‘Why did you fill it out? I wanted to do that. I’m never going to win anything with your numbers!’ ‘Do you really think it affects the draw if you pick the numbers?’ I inquired. He looked at me blankly.

[Read more…] about The Psychology of Investing #3: When Control is Just An Illusion

The Dangers of Storytelling in Investing: How to Avoid the Narrative Fallacy


Become a wiser investor in just 5 minutes

Join The Journal of Investing Wisdom and receive insightful ideas on investing, stock analysis, and human behaviour. Plus, unlock access to free chapters of my upcoming books, multiple e-books, and my stock analysis excel. All for FREE!

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Imagine explaining why a leaf fell from a tree at 3:42 PM on a Tuesday.

Was it the wind? The age of the leaf? A butterfly flapping its wings in Kashmir?

In reality, it was most likely a combination of multiple factors, many too small for us to even notice.

Well, every movement in the stock market is like that leaf, but infinitely more complex. However, here we have a story for every leaf falling.

[Read more…] about The Dangers of Storytelling in Investing: How to Avoid the Narrative Fallacy

Letter to A Young Investor #3: The Quiet Wonder

I am writing this series of letters on the art of investing, addressed to a young investor, aiming to provide timeless wisdom and practical advice that helped me when I was starting out. My idea is to help young investors navigate the complexities of the financial world, avoid misinformation, and harness the power of compounding by starting early with the right ideas and steps. This series is part of a joint investor education initiative between Safal Niveshak and DSP Mutual Fund.


Become a wiser investor in just 5 minutes

Join The Journal of Investing Wisdom and receive insightful ideas on investing, stock analysis, and human behaviour. Plus, unlock access to free chapters of my upcoming books, multiple e-books, and my stock analysis excel. All for FREE!

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Dear Young Investor,

I hope you are doing well and are eager to learn more about the financial path ahead of you.

In today’s letter, I want to share an idea that, if you grasp and embrace well, can change your financial destiny in ways you may not have even dreamed of.

It is a force so subtle, yet so powerful, that it is frequently overlooked until its repercussions grow too big to be disregarded. But before I tell you about that, let me tell you a story.

[Read more…] about Letter to A Young Investor #3: The Quiet Wonder

The Optimism Trap: How We Misjudge Risk and Rewards

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

This is a masterpiece.

Morgan Housel, Author, The Psychology of Money
Get Your Copy Now

Become a wiser investor in just 5 minutes

Join The Journal of Investing Wisdom and receive insightful ideas on investing, stock analysis, and human behaviour. Plus, unlock access to free chapters of my upcoming books, multiple e-books, and my stock analysis excel. All for FREE!

No charge. Unsubscribe anytime.


There is a quirk in human nature that is as old as time itself. Yet, it is as relevant today as it was when our ancestors first started trading seashells.

I am talking about the tendency to see the world through rose-coloured glasses when it comes to potential gains, while simultaneously downplaying the very real risks that lurk in the shadows.

Now, this not just a passing academic observation, but a force that affects not only our everyday lives but also our economies and even the path of history. And it is worth pausing to think about how it might be affecting your own choices, big and small…in life, investing, everywhere.

[Read more…] about The Optimism Trap: How We Misjudge Risk and Rewards

Understanding and Avoiding Financial Manias: Part 2 – The Inevitable Fall

Financial manias, or market bubbles, have been a regular part of economic history. From the Dutch Tulip craze in the 1600s to more recent events like the dot-com bubble and the 2008 financial crisis, these patterns keep repeating. Despite past lessons, people still fall for these moments of market madness.

By studying these past bubbles, we can spot common patterns. This helps us understand why they’re hard to stop and how we can better protect ourselves from their worst effects.

I recently briefly explained to a friend how these manias work and how people typically behave during them. You can read that here.

However, exclusive to Mastermind members, I have created this three-part detailed series to dive deeper into how financial manias operate, why they keep happening, and share some ideas on how to deal with them. Understanding the mental, social, and economic factors behind these events can help us resist their appeal and make smarter investment choices.

Read the first part on the anatomy of a financial mania.

Here is the second part on the inevitable fall, and the most important lessons you can draw from it.

This content is reserved for Mastermind Members. To access, please login below with your membership credentials.

If you are not a member, please consider joining the Mastermind Membership to access my most comprehensive value investing course, plus practical, time-tested ideas in investing, human behaviour, business analysis, and decision making, and get onto the path of becoming a better version of yourself.

 
 
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Understanding and Avoiding Financial Manias: Part 1 – The Anatomy

Financial manias, or market bubbles, have been a regular part of economic history. From the Dutch Tulip craze in the 1600s to more recent events like the dot-com bubble and the 2008 financial crisis, these patterns keep repeating. Despite past lessons, people still fall for these moments of market madness.

By studying these past bubbles, we can spot common patterns. This helps us understand why they’re hard to stop and how we can better protect ourselves from their worst effects.

I recently briefly explained to a friend how these manias work and how people typically behave during them. You can read that here.

However, exclusive to Mastermind members, I have created this three-part detailed series to dive deeper into how financial manias operate, why they keep happening, and share some ideas on how to deal with them. Understanding the mental, social, and economic factors behind these events can help us resist their appeal and make smarter investment choices.

Let’s begin the series with this first part on how a financial mania typically unfolds, and the most important lessons you can draw from it.

This content is reserved for Mastermind Members. To access, please login below with your membership credentials.

If you are not a member, please consider joining the Mastermind Membership to access my most comprehensive value investing course, plus practical, time-tested ideas in investing, human behaviour, business analysis, and decision making, and get onto the path of becoming a better version of yourself.

 
 
Forgot Password

The Cycle of Financial Manias

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

This is a masterpiece.

Morgan Housel, Author, The Psychology of Money
Get Your Copy Now

Become a wiser investor in just 5 minutes

Join The Journal of Investing Wisdom and receive insightful ideas on investing, stock analysis, and human behaviour. Plus, unlock access to free chapters of my upcoming books, multiple e-books, and my stock analysis excel. All for FREE!

No charge. Unsubscribe anytime.


The Cycle of Financial Manias: A Simple Explanation

One of the best things about reading history books, especially the financial side of it, is that you realize how not much has changed in how we behave when it comes to our money. And that is the reason financial bubbles keep happening, because human nature does not change.

Whether it’s the Dutch Tulip craze of the 1600s or the 2000s dot-com bubble, the global financial crisis, and the mania we are seeing in certain pockets of the stockmarket now, it seems we never learn.

But the more we study these past bubbles and manias, the better we can identify patterns in which they generally come to pass. This not only gives us insights into how such events are so hard to prevent, but also how we can prepare ourselves to deal with them better, without getting killed.

I recently explained to a friend, in a simple way, about the cycle of manias and human behaviour. Here is the chain of thoughts that we followed through, which may help you too if you are interested in understanding such a cycle, how it develops, and what happens ultimately.

First, What Creates a Financial Mania

  1. It all starts with the exciting prospect of making money. When people see others getting wealthy, they join the action.
  2. As people make money, they start to feel intelligent and competent. They think they have figured out a secret that others have not.
  3. There is a common belief that wealthy people must be intelligent (look no further than your favourite social media account). This makes us trust the judgement of those who have already made money in the boom.
  4. As more people buy in, prices go up. This seems to confirm that it is a good investment, attracting even more buyers.
  5. Everyone seems to agree that this is a great opportunity. It becomes hard to question if it is really a good idea.

Second, What Leads to Its Fall

  1. At some point, people realize that prices cannot keep going up forever.
  2. Once this happens, or there is an external trigger (like central banks raising rates, or a health or socio-economic crisis), hell breaks loose. Everyone tries to sell at once. Prices plummet.
  3. After the crash, people look for someone to blame. They do not want to admit they might have been foolish.
  4. Instead of learning from the experience, people often focus on the wrong questions: What caused the crash? Who should be blamed?

Third, Why We Fail to Learn

  1. It is hard to admit we were wrong or got carried away.
  2. Many people believe markets are always right, making it hard to accept that sometimes they go crazy.
  3. As time passes, we forget the pain of past crashes and get excited about new opportunities.
  4. Each new mania comes with reasons why it is not like the previous ones.

Fourth, What Can We Do?

  1. Remember that if something seems too good to be true, it probably is.
  2. Studying past manias can help us spot new ones.
  3. Try not to get caught up in excitement or panic.
  4. Instead of following trends, try to understand the real value of investments.

While explaining all this to my friend, I also reminded him how the basics of human nature have not changed much for thousands of years. We are still drawn to the excitement of getting rich quick (and now also look down upon those who can’t). But when we understand the entire cycle of mania, then crash, and our failure to learn from the same, we can try to make wiser financial decisions and avoid getting caught up in the next big bubble, as and when it happens.

I left him with this passage from John Kenneth Galbraith’s book ‘A Short History of Financial Euphoria’ –

When will come the next great speculative episode, and in what venue will it recur – real estate, securities markets, art, antique automobiles? To these there are no answers; no one knows, and anyone who presumes to answer does not know he doesn’t know. But one thing is certain: there will be another of these episodes and yet more beyond.

Fools, as it has long been said, are indeed separated, soon or eventually, from their money. So, alas, are those who, responding to a general mood of optimism, are captured by a sense of their own financial acumen. Thus it has been for centuries; thus in the long future it will also be.

Investing, at its core, is a deeply personal journey. Yes, we operate within markets that are moved by collective actions and collective madness. But our individual paths to financial well-being are unique. If we remember this, by staying true to our own analysis and convictions, we give ourselves the best chance of surviving panics and manias, as and when they come to pass.

The crowd may sometimes seem to have wisdom. But more often than not, true investing wisdom comes from the ability to think independently, act rationally and, occasionally, to stand alone.


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

This is a masterpiece.

Morgan Housel, Author, The Psychology of Money
Get Your Copy Now

What I’m Thinking

If your investments keep you up at night, it’s not your returns that need adjusting, but your investing strategy. True wealth is peace of mind.

***

Letting the crowd’s optimism blind you to risks in investing…is one of the biggest risks you take as an investor. Beware.

***

The wisest choices rarely feel good in the moment. True growth, personal or financial, requires living through periods of discomfort and delayed gratification.


Quotes I’m Reflecting On

Holding cash is uncomfortable, but not as uncomfortable as doing something stupid.

– Warren Buffett

***

What you should learn when you make a mistake because you did not anticipate something is that the world is difficult to anticipate. That’s the correct lesson to learn from surprises: that the world is surprising.

– Daniel Kahneman

***

Favourable surprises are easy to handle. It’s the unfavourable surprises that cause the trouble.

– Charlie Munger


That’s all from me for today.

If you know someone who may benefit from today’s post, please share it with them.

If you are new here, please join my free newsletter – The Journal of Investing Wisdom – where I share the best ideas on money and investing, behavioral finance, and business analysis to help you secure your financial independence so you can live the life you deserve.

Also check out –

  • Online courses on value investing, financial statements analysis, and financial freedom.
  • The One Percent Show – Interviews with legends in investing and business
  • The Inner Game Podcast – Monologues on investing, decision making, learning, and living a good life
  • Books – All the books I have written and published so far
  • Stock Analysis Excel – To help you pick winning stocks

Thank you for your time and attention.

~ Vishal

A Philosophy for a Long, Happy, Rich Life

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As Warren Buffett turned 94 the day before yesterday, I found myself reflecting on his extraordinary life and that of his late partner, Charlie Munger, who passed away at 99 last year.

Their longevity is impressive enough, but what truly stands out is the quality of those years – the clarity of thought, the continued passion for their work, and the seemingly unshakeable contentment they exuded.

So, what’s their secret?

[Read more…] about A Philosophy for a Long, Happy, Rich Life

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