Anshul Khare

A Hidden Cost Called Rented Suit Liability

August 21, 2018 | 11 Comments

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Lloyd’s of London, a 300-year-old insurance body, collects more than 33 billion pounds in gross premium every year. Its history goes back to the 17th century.

In 1906, when a major earthquake destroyed more than 80 percent of the Californian city of San Francisco, Lloyd paid out all the policyholder claims, irrespective of the terms of their policies. That cemented Lloyd’s reputation in the American market.

However, in the 1990s, this insurance behemoth was brought to its knees by a risk that had gone unnoticed for decades. After California earthquake episode, Lloyd started underwriting wide-ranging general liability cover to US businesses, including asbestos manufacturers.

Thousands of employees who had worked in asbestos plants were diagnosed with asbestosis, a deadly lung disease, twenty years later. These workers claimed the compensation from their former employer in 1990s. The employer, in turn, claimed it to the insurance companies like Lloyd who wrote the policy in the 1960s. Lloyd had failed to understand the nature of future risk and thus faced near bankruptcy.

Latticework of Mental Models: Lollapalooza Effect

August 13, 2018 | 10 Comments

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Why were Warren Buffett and his creation, Berkshire Hathaway, so unusually successful?

In 2007 Wesco Annual Meeting, someone asked the above question from Charlie Munger. He replied –

If that success in investment isn’t the best in the history of the investment world, it’s certainly in the top five. It’s a lollapalooza.

Lollapalooza in the conventional sense means something outstanding of its kind. A person, a thing or an event that is particularly impressive, or extraordinarily attractive. But being multidisciplinary learners, we shouldn’t be satisfied with the conventional definitions, should we? Moreover, Charlie Munger doesn’t use lollapalooza just for its dictionary meaning.

Here’s the definition of Lollapalooza taken from the book Poor Charlie’s Almanack –

Lollapalooza is, as personified by Charles Munger, the critical mass obtained via a combination of concentration, curiosity, perseverance, and self-criticism, applied through a prism of multidisciplinary mental models.

When Charlie Munger uses the word lollapalooza, he often attaches the word “effects” (as in “lollapalooza effects”) which means that multiple factors are acting together in ways that are feeding back on each other. [Read more…] about Latticework of Mental Models: Lollapalooza Effect

Whatever the Chatter, Corn Keeps Growing

July 26, 2018 | 23 Comments

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As students of value investing, we’ve all read about numerous businesses that Warren Buffett has invested in the last fifty years.

A number of these names regularly appear in Buffett’s annual letters. Especially the ones which he continues to hold – Coca-Cola, See’s Candy, Nebraska Furniture Mart, GEICO, etc. Buffett never gets tired explaining why these companies are great businesses to own.

Each of his investment is an instructive story with valuable lessons to learn. But whenever asked about his best investment, he’s quick to point out that it wasn’t a stock. He says –

Of all the investments I ever made, buying Ben’s book (The Intelligent Investor by Benjamin Graham) was the best (except for my purchase of two marriage licenses).

The Paradox of Knowledge

June 28, 2018 | 8 Comments

Tourist: This is a dangerously steep road with a sharp bend. Why isn’t there a hazard sign for motorists to slow down?

Guide: We had a warning sign untill yesterday. But since accidents were rare, officials concluded that the spot isn’t that dangerous after all. So they removed the sign.

Tourist: Don’t you think the rarity of the accidents was precisely because of the warning sign?

Guide: Ugh..

Amused at the stupidity of the officials? That’s because it’s easy to spot the cause and effect relationship between ‘presence of warning sign’ and ‘frequency of accidents.’ You can test the hypothesis. Remove the warning sign and if too many cars start plunging down the valley, there we have it – a clear correlation between an action and its consequences.

The Turkey Illusion

June 13, 2018 | 7 Comments

Note: This post was originally published in the May 2018 issue of Value Investing Almanack (VIA). To read more such such insights on behavioural finance and other deep thoughts on value investing and business analysis, click here to subscribe to VIA.

When anyone asks me how I can best describe my experience in nearly forty years at sea, I merely say, uneventful. Of course there have been winter gales, and storms and fog and the like. But in all my experience, I have never been in any accident…of any sort worth speaking about. I have seen but one vessel in distress in all my years at sea. I never saw a wreck and never have been wrecked nor was I ever in any predicament that threatened to end in disaster of any sort.

Those were the words of E.J. Smith, captain of RMS Titanic, the ship that sank in the North Atlantic Ocean on 15 April 1912, after colliding with an iceberg during its maiden voyage, drowning 1500. Out of 2200 people onboard only 700 could be saved.

Since it has never happened in the past it’s unlikely to happen in the future. That’s perhaps the most dangerous assumption to make when the stakes are high. Smith’s mistake wasn’t in failing to predict the disaster. No one could have. His blunder was in not preparing for it.

On Titanic, there weren’t enough lifeboats for 2200 people. To add insult to an injury, the lifeboats actually had the capacity for more than 700 people but in confusion to get the ladies and the children first, many lifeboats were lowered partially filled. They hadn’t practiced the emergency evacuation protocols properly.

[Read more…] about The Turkey Illusion