Almanack

Read about the feeling of psychological discomfort that’s produced by the combined presence of two thoughts that do not follow from one another, and how to overcome such situations.

I am sure many of you have heard the famous Aesop’s fable about the fox and the grapes. If not, here’s the story. A fox sees some high-hanging grapes and wishes to eat them. When it is unable to think of a way to reach them, it decides that the grapes are probably not worth eating, with the justification the grapes probably are not ripe or that they are sour (hence the common phrase ‘sour grapes’).

Every time I hear this story, I laugh at the delusional fox. However, I rarely imagine that a similar fox is inside me also. The fable is a classic illustration of what psychologists call Cognitive Dissonance.

Let’s see what the formal definition of Cognitive Dissonance says –

The feeling of psychological discomfort produced by the combined presence of two thoughts that do not follow from one another. The greater the discomfort, the greater the desire to reduce the dissonance of the two cognitive elements. Dissonance theory suggests that if individuals act in ways that contradict their beliefs, then they typically will change their beliefs to align with their actions.

This is a behavioural bias which evolution has wired into the human brain. In the ancient hunter-gatherer environment, if a man saw something vague it was important for him to get rid of the doubt (whether it was a harmless rabbit or a dangerous panther) immediately. A quick decision was essential for survival. This quality gave an evolutionary advantage to human beings.

But evolution is a slow process and it hasn’t caught up with the rapid changes in our environment. In the modern world, there are hardly any such life threatening situations, but the brain’s hard wiring hasn’t changed much in last few thousand years. So we continue to take decisions under the influence of these psychological reflexes.

One of the best examples of cognitive dissonance that you can see around is people who continue to smoke even after being aware of the harmful effects of smoking. How do they deal with this conflict between what they know and how they act?
[Read more…] about Behaviouronomics: Cognitive Dissonance

Unreasonable expectations cause most people to make terrible mistakes when it comes to stock market investing. We share varied thoughts on what makes for reasonable expectations

What do we want out of life? To be healthy, happy with our families, in our work, etc? What interferes with this? Isn’t it often emotions like fear, anger, worry, disappointment, stress, and sadness caused by problems, mistakes, losses, and unreasonable expectations?

Well, that last one – unreasonable expectations – is what causes most people to make terrible mistakes when it comes to stock market investing.

Consider the period of January 2006 when Google announced its financial results for the final quarter of 2005. While the company reported a sales growth of a whopping 97%, its net profit had surged by 82% over the same quarter of previous year.

Now, you would consider this to be a magnificent quarter, right? Well, investors in Google didn’t! As a reaction to these phenomenal figures, Google’s stock tumbled 16% in a matter of second. Trading in the stock had to be interrupted. When it resumed, the stock plunged another 15%. Absolute panic!

Let’s now head to April 2003, when Infosys had announced its fourth quarter and full year results for FY03. I still remember that day, because I was just a week into my new job as a stock market analyst, and was in charge of handling the software sector, and thus Infosys came under my coverage.

The company had just announced its result for the quarter and full-year ended March 2003. For the full-year, it had recorded 39% and 19% growth in sales and net profit respectively. Now you would imagine that these were pretty good growth numbers, right? I did too. But to my horror, the stock crashed by 37% over the next two days.

Imagine losing one-third of your capital in a span of two days. How would you feel? While I was not an investor in Infosys then, but being new to the stock markets, and in charge of research on Infosys, I was utterly confused, and at the same time, scared seeing such a sharp fall in the stock price.
“What’s wrong with the markets?” I asked my senior colleague. “Infosys has reported such a good result, so why has its stock been punished so badly?”
[Read more…] about Spotlight: Reasonable Expectations

Great habits are built through constant practice. The idea is to take a simple idea, and then take it seriously.

In the previous issue of Life 2.0, we talked about habits as a way of simplifying and taking control of your life. Let’s now take it one step further and explore how we can build skills at an expert level.

Everybody aspires to be really good at something. It could be a sport, an art, playing a musical instrument or any other activity like reading, painting or drawing. Sometimes when we see somebody who displays an extraordinary talent in any of these fields, it not only leaves us awestruck but inspires us.

A common myth about talent is that it’s a genetic gift and talented people are born with it. However, nothing can be further from truth. Some people do have a natural inclination towards few activities but it’s not what makes them talented.

So how do you become good at something? How do you improve your performance in a chosen activity? Well the cliché “practice, practice and practice” isn’t the entirely correct answer.

Talent is an outcome of “deliberate practice”. If you haven’t heard of this term before let me give you the definition first.

Deliberate practice is a highly structured activity engaged in with the specific goal of improving performance.

The idea was made popular by author Malcolm Gladwell in his book, Outliers. According to Gladwell, it takes 10,000 hours of practice to become a world class expert at any skill.
[Read more…] about Life 2.0: Deliberate Practice

Reputation is difficult to build but easy to lose. How we hope people in the investment industry respect this for a fact. Sadly, most don’t!

“We’ve given you so much information on our business. Now what can you do for us?” I was stumped to hear this from the CFO of a “reputed” mid-size Indian IT services company when I went to meet him sometime in 2009. I had received several such requests from lower rank managers of other companies in the past, but to expect this from a CFO was like too much!

This harmless-sounding question – “What can you do for us” – means a lot when you are stock market analyst who is preparing to write a report on a company. When a top manager asks an analyst as to what he can do for the former’s company, he is indirectly nudging the latter to write a positive report (a ‘Buy’ recommendation) on the stock. Yeah, that’s true!
[Read more…] about Ethical Analyst: Conflict of Interest

When a CEO combines his ego and willingness to put precious capital on the line to grow his company bigger, faster, it can create disaster for investors.

All of humanity’s problems stem from man’s inability to sit quietly in a room alone.” ~ Blaise Pascal

You must have heard the fairy tale where a spoiled princess reluctantly befriends a toad, who magically transforms into a handsome prince triggered by the princess kissing it.

Well, those were the older times. Today’s capitalistic society has been witness to a large number of spoiled princesses trying the same trick on a large number of toads, only to realize that the tale of them turning into princes they had heard of was just that…a fairy tale.

If you are confused why I am writing about the tale of the toad and princess, let me get straight to the point now.

If there’s one quick way a lot of companies and their CEOs have destroyed a lot of shareholders’ wealth in the past, it is through mergers and acquisitions (M&A).

So in the world of M&A, the spoiled princess is the company that is looking to acquire another company, and the toad is that other company that’s waiting to be acquired.

Now, despite 50 years of evidence demonstrating that most acquisitions don’t create value for the acquiring company’s shareholders, corporate managers continue to make more deals, and bigger deals, every year.
[Read more…] about Corporate Governance: How Companies Screw Investors

[Read more…] about StockTalk (March 2015)

A young and smart value investor Ankur Jain shares his insights on the process of sensible, long-term investing.

In this issue, we profile Ankur Jain, a value investor and investment advisor based out of Gurgaon. Ankur is a Textile Engineer from NIT, Jalandhar, and MBA from MDI, Gurgaon. He is also a Berkshire Hathaway fan. The study of textile engineering has helped him understand why most textile operations are inferior businesses as experienced and taught by Mr. Buffett

Ankur invests long term money in businesses which have a demonstrated track record of consistent earnings. He is curious about businesses and love the process of analyzing them. He dives deep into a business while reading about it and comes out once he is convinced about its beauty or the absence of it.

Apart from investing, Ankur finds himself charged up watching mysteries, playing monopoly and visiting heritage monuments. You can write to him at ankurjain2100@gmail.com.

In this interview, Ankur shares his thoughts on his investing process and philosophy and also a lot of valuable lessons for new investors.

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

Ankur Jain (AJ): The earliest influences were my relatives. A few of my relatives are in conventional businesses. I often visited their shops and other places of business etc. I was particularly fascinated by the form of writing accounts which used to be a red book called the bahi-khata. It was interesting and great fun to see how businesses were run and accounts were written.
[Read more…] about InvestorInsights: Ankur Jain

Great perspectives on investing from the wonderful investor and multidisciplinary thinker, Mohnish Pabrai.

I am sure the author of this book needs no introduction, but for the benefit of people who don’t know much about him, I am going to start with an interesting trivia. How much would you pay to have lunch with Warren Buffett? How about Rs 4 crore?

Don’t be surprised because that’s the amount Mohnish Pabrai (along with his friend Guy Spier) paid to have a private lunch with Warren Buffett in 2006.

Mohnish manages US$ 850+ million US based fund called Pabrai Funds and is a hardcore Buffett disciple. He has written another popular book called The Dhandho Investor.. However, the book I am talking about here is a rare one.

Mohnish has built 3 successful businesses in the last 25 years, including a technology company, a Buffett style hedge fund and a very successful philanthropic organization called Dakshana Foundation, which educates talented underprivileged children to qualify for IITs. With this kind of experience, I am sure he has some interesting insights for us.

In the previous issue of VIA, we had shared the link to Dakshana’s annual report. If you haven’t read it yet, I would suggest please don’t miss it.
[Read more…] about BookWorm: Mosaic: Perspectives on Investing

Always being in the thick of action can be dangerous to your long term investment returns. The habit is difficult to overcome, but you must definitely make a start. Read more to find out.

Have you noticed that there are some people who are so restless that they find it impossible to sit at one place quietly? They have very short attention span and can’t stay with one activity for long. In medical science this abnormality is known as ADHD (Attention Deficit Hyperactivity Disorder).

Now before you brush aside ADHD as something which isn’t relevant to you, allow me to hold your attention for one more second. Here is an interesting fact – Evolution has installed the seeds of ADHD in every human brain.

Some people have very severe symptoms of ADHD and they may need medical treatment. But for the rest of us this disorder manifests very subtly in our day to day decision making.

Famous scientist Blaise Pascal figured something very deep when he said, “All of humanity’s problems stem from man’s inability to sit quietly in a room alone.”

In an attempt to be efficient and productive, we force ourselves to always stay busy with some task or other. But sometimes too much activity is counterproductive. In behavioural finance, it’s called Do-Something Bias.

A wise man once said, “There is no bigger waste of time than doing something efficiently which shouldn’t be done at the first place.”

Do-something bias is not only wasteful but can harm you in the long term.
[Read more…] about Behaviouronomics: Do Something Bias