Investing Behaviour

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I received an email recently where one reader asked – “What you say about long-term investing in the stock market is all good. But doesn’t it get boring after a time? I mean, first the process of reading annual reports to find good businesses, and then if you find some, holding on to them for the long run doing nothing. How does one maintain interest in this thing? How does one make this process and journey exciting?”

I thought these were good questions. In fact, questions like these used to bother me when I started out on my journey of reading annual reports, analyzing financial statements, and practicing long term investing more than a decade back.

In fact, I was talking to an investor friend recently, who confessed of boredom because he was not able to find stocks worth buying in this rising market. “Even if you are a long-term investor, what do you do but feel bored when you don’t find anything worth buying because everything seems to be so inflated?” he questioned.

“I agree,” I said.

[Read more…] about Beware the Boredom of Bull Market

Adolf Merckle was a leading German entrepreneur who, in the early 1970s, founded Germany’s first generic drug manufacturer, Ratiopharm. For several decades he also held large parts of cement company HeidelbergCement as well as vehicle manufacturer Kässbohrer.

In 2007, he was worth US$ 12.8 billion, and among the five richest people in Germany.

However, near the end of 2008, Merckle’s investment company VEM faced a liquidity shortage, and he also faced huge losses on speculation in Volkswagen shares, which he bet would fall but instead surged. It is believed that he lost as much as €500 million on this speculative bet. His trouble was made worse by the spreading financial crunch, which hit his corporate empire hard.

Crushed by watching his life’s work slip through his fingers, on 5th January 2009, Merckle walked out into the bitter cold night and threw himself under a speeding train.
“An industrialist losing a fortune on the stock market has different motives for killing himself than a father with six children who loses his job,” said Detlev Liepmann, professor of economic psychology at Berlin’s Free University. He added, “Merckle’s livelihood was certainly not threatened by his risky investments but he was threatened by shame, a loss of face in society, and a loss of honor.”

A man who spent a life working hard to do good, built a billion-dollar wealth, then lost a part of it due to wrong bets and collapse of world markets, died of guilt and shame seemingly because he equated his financial failure with failure in life.

Though at his memorial service, Gerhard Maier, a retired bishop, said, “What brought a man of great will who felt responsible to God to the point where he took his own life is something that, deep down, we humans will never comprehend.”

There is Merckle in All of Us
Well, the reason I brought in Merckle’s tragic story today is because there is a part of Merckle in all of us that causes us to feel shame for our financial mistakes – even small – that often leads us to bigger mistakes. Of course, most people in the same spot as Merckle would not think of killing themselves no matter what happens.

People talk about regret aversion and how we make decisions to avoid regretting an alternative decision in the future. But I would rather call it ‘shame aversion,’ because most of the time most if you see guilt or shame as a more powerful emotion than plain regret.

So, we feel guilty for not investing in rising stocks when we see our friends making money on them. We feel guilty of not having invested in stocks when the prices were down, and we knew (now, in hindsight) that we should have sold our houses then to invest.

We feel bad accepting we made a mistake that causes us to hold on to our losing stocks (bad businesses) because the shame of such acceptance would be too heavy to bear on our already frail hearts. So, not only would people bet heavily on hot stocks in frothy markets, but they would also double-down when these stocks fall to avoid the shame of turning their paper losses into real ones.

Losing Money on Stocks is NOT a Shame
My dear friend, there is no shame in losing money on a stock or any investment. Everyone loses at some point in time, and there is not a single investor who has never made a mistake.

Of course, that does not mean you bet your house on stocks – even the best ones. Losing ₹ 1 crore on a ₹ 100 crore net worth is not the same as losing ₹ 1 crore on a ₹ 2 crore net worth. So, you should always be worried about losing big money permanently. But that worry should show up in the kind of work you do on your process to pick stocks, not after you have already lost money.

Investing or money are such insignificant parts of this beautiful thing called life that you must not lose sleep over them, forget losing your life.

Markets change, cycles turn, everything passes, and there are numerous opportunities one gets to rise after a fall, clean the dust, give up any guilt or shame of falling, and start walking again.

The noted British writer and speaker Alan Watts said –

Man suffers only because he takes seriously what the Gods made for fun.

Russian philosopher and novelist Fyodor Dostoevsky agreed in a way when he said –

The cleverest of all, in my opinion, is the man who calls himself a fool at least once a month.

Learn from your mistakes, but stop taking them, or yourself, so seriously.

How much I wish Adolf Merckle, and others like him who passed through similar tragedies, understood this.

How much I wish you do.

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That’s about it from me for today.

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Stay safe.

Regards,
Vishal

In March 2020, when stocks all around were sinking, I wrote a post about how I was investing my money.

In that post, I mentioned about a stock I had bought in mid-February 2020 that was down 60% from my original purchase price in just a month. My total investment in the stock was then around 3% of my stock portfolio, and it was down 55% from the total invested amount.

Here is a quick update on that. That stock is now 3.5% of my portfolio and is down just around 7% from the total invested amount. The stock has almost doubled from its March lows when I wrote that post.

A few other stocks I had purchased in March and April 2020 are up anywhere between 40% and 120%.

[Read more…] about Regret Missing the Rally in Stocks? Now What?

“Somewhere beyond right and wrong, there is a garden. I will meet you there.” ~ Rumi

If you invest in stocks, at some point, you are going to lose money. Try as much as you can, but there is no way around it.

Sometimes, a stock market loss is immediate and clear. A stock you bought at a higher price has plummeted. Like this one…

In other cases, your losses are not as obvious because they are more subtle. Like for investors in this stock, who suffered a time correction by holding on for five years yet seeing slightly negative returns…

Each of these types of losses can be painful, and especially for the fact that we assign negative connotations to the very word “loss.”

A “loss” in the stock market is essentially considered as a synonym to “failure,” and as being “wrong.”

[Read more…] about Anatomy of A Stock Market Loss

Not losing money is a critical part of the stock investing process. Successful investors say it in different ways, but the point is always the same.

Warren Buffett has often said – “Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.”

But he has also said – “If you don’t make mistakes, you can’t make decisions.”

You see, the problem is not in making mistakes. The problem is in not knowing when you have made a mistake and thus not learning from it.

Unfortunately, openness to making mistakes and recognizing them is beyond most of us. Why is that?

[Read more…] about Stock Investing is a Humbling Game

Have you heard of Anthony Deden?

Well, I had not until 2018 when I came across his interview with Grant Williams. I thought that was one of the best investment interviews I had ever seen. And I stand by that thought even today.

Anthony, or Tony, is the Chairman of Edelweiss Holdings (not related to India-listed Edelweiss Financial Services), a Bermuda-based investment holding company that he launched as a fund in 2002. After building a remarkable track record, he converted Edelweiss into a holding company with over US$ 300 million in assets and holdings.

As he talked about in his interview with Grant Williams, Tony came into the profession of wealth management by accident when in 1985, he was asked to manage the monetary affairs of a family where the lead earning member had passed away. Gradually, one family became two, then three, and so on.

[Read more…] about The Most Important Stock Investment Lessons I Wish I Had Learned Earlier

A stock I bought as recently as mid-February 2020 is down 60% from my original purchase price. I bought more of the stock after it fell 20% from my first purchase, more after it fell 20% from the second purchase, and more after it fell 40% from the third purchase. My total investment in the stock is around 3% of overall stock portfolio, and it is down 55% from the total invested amount.

My total equity investment – stocks and funds – is down around 25% in the last one month.

My total financial net worth is down 15%.

So, what saved the day for me as far as my total financial net worth is concerned? Cash in hand, that I started building up from the end of 2019, in search for investment opportunities that were not to be found anywhere. Plus some income that came in over the past few weeks.

[Read more…] about How I’m Investing My Own Money Through the Crisis

All I am reading and hearing all around is this.

Volatility is your friend. Stick to the long term. Don’t touch your portfolio. Keep some cash. Invest that in a staggered manner. Recheck your asset allocation. Shuffle your stock portfolio. Don’t borrow to invest. Don’t speculate. Quickly search for new stock ideas. Stop watching news.

Well, let’s cut it all.

[Read more…] about Shaken by Stock Market Carnage? Forget Everything

1. Pull out your watchlist already created using this stock selection framework…

[Read more…] about How to Select Stocks and Survive this Stock Market Crisis

I recently spoke at the Value Investing Summit 2020 in Kuala Lumpur, on the subject of ‘financial freedom.’

Click here to watch the video of my talk, or watch below.

There are intermittent audio issues due to a problem with the microphone. But I know you are wise enough to not complain about the same and instead able to connect those dots looking at my slides and your own wisdom. 🙂

Thanks for your time!