Investing Behaviour

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

In most fields, studying the patterns of success is a standard way to learn. So when people come to financial markets they try the same approach. All new investors get busy investigating how successful investors made their money in the stock market. They want to know the secret behind the winning strategies. But investing is a world of counterintuitive ways.

All successful investors and traders have made their money in widely varying ways and more often than not, their strategies often contradict each other. If one market pro vouches for his or her winning method, another market savant would seem to oppose it ardently.

Jim Paul, in his book What I Learned Losing A Million Dollars, wrote —

Why was I trying to learn the secret to making money when it could be done in so many different ways? I knew something about how to make money; I had made a million dollars in the market. But I didn’t know anything about how not to lose. The pros could all make money in contradictory ways because they all knew how to control their losses. While one person’s method was making money, another person with an opposite approach would be losing — if the second person was in the market. And that’s just it; the second person wouldn’t be in the market. He’d be on the sidelines with a nominal loss. The pros consider it their primary responsibility not to lose money.

The truth is that like there is more than one way to skin a cat, there is more than one way to make money in the markets.

Obviously, there is no ‘one’ secret way to make money because the people who have achieved success in this game over the long run have done it using very different, and often contradictory, approaches. But one big lesson that almost all these people have agreed to settle for is this – Learning how not to lose money is more important than learning how to make money. 

Which means if you are looking for success in investing, your chances are better if you take the indirect approach, i.e., finding the ‘anti-patterns.’ In other words, finding ways which most often lead to losses and then actively try to avoid those patterns.

Some such anti-patterns include –

• Chasing performance
• Looking to get rich quick
• Ignoring market cycles
• Letting emotions guide decisions
• Failure to accept mistakes and cut losses
• Venturing beyond circle of competence
• Ignoring margin of safety
• Driven by FOMO – fear of missing out

The list is long, but the idea is simple. To win in investing, find the anti-patterns, and then try to avoid them.

[Read more…] about Identifying Investing’s Anti-Patterns

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

There are negative connotations attached to the word ‘loss.’ It’s considered as a synonym to failure. The words loss, wrong, bad, and failure are all regarded as same. So when someone loses money in the stock market, he or she invariably equates it to being wrong. Similarly, when someone makes a profit, it’s assumed that the person was right. But in the stock market, being right and making a profit aren’t necessarily the same thing. And being wrong and incurring a loss aren’t same either.

Jim Paul and Brendan Moynihan wrote in their book What I Learned Losing a Million Dollars –

Success can be built upon repeated failures when the failures aren’t taken personally; likewise, failure can be built upon repeated successes when the successes are taken personally…

Personalizing successes sets people up for disastrous failure. They begin to treat the successes totally as a personal reflection of their abilities rather than the result of capitalizing on a good opportunity, being at the right place at the right time, or even being just plain lucky. They think their mere involvement in an undertaking guarantees success. This phenomenon has been called many things: hubris, overconfidence, arrogance. But the way in which successes become personalized and the processes that precipitate the subsequent failure have never been clearly spelled out.

In other words, successes and failures get personalised when the ego gets involved. And bringing in the ego is the fastest way you can sabotage your investing.

The truth is that investment gains and losses are never a reflection of your intelligence or self-worth. In fact, investing is not about being right or wrong. It is about making decisions, after careful consideration. That is where you sow the seeds of future outcomes, good or bad.

But an outcome is, well, just an outcome, never to be taken personally.

When you decouple your ego from a bad outcome, it creates an opportunity for you to learn from it.

When you decouple your ego from a good outcome, it saves you from future disasters.

[Read more…] about How to Stop Sabotaging Your Investing

It’s almost always an –

• I don’t know who I am problem
• I don’t know how much pain I am willing to take problem
• I don’t have the patience to give my stocks time to grow problem
• I bought on the tip of that popular social media influencer and did not do my homework problem
• I did not diversify well problem
• I bought the stock just because it dipped problem
• I cannot resist my friends getting rich problem
• I love to fall in love with my stocks problem
• I cannot differentiate between stock price and intrinsic value problem
• I suffer from a buy at any price problem
• I borrowed to invest problem
• I invested the money I needed soon problem
• I don’t have time on my hands to see through market cycles problem
• I trade too much and too often problem
• I keep watching and worrying about stock prices problem
• I will watch the market and my portfolio again after reading this post problem

And so, I must remind myself this at all times –

A market crash is ‘never’ the problem. ‘I’ am the problem, and I must sort myself out, because that is only what I control. And if I can control the ‘I’ better, a market crash will never be a problem.

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That’s about it from me for today.

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Stay safe.

Regards, Vishal

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Howard Marks of Oaktree Capital wrote this in one of his 2006 memos to shareholders titled ‘Risk‘ –

In the investing world, one can live for years off one great coup or one extreme but eventually accurate forecast. But what’s proved by one success? When markets are booming, the best results often go to those who take the most risk. Were they smart to anticipate good times and bulk up on beta, or just congenitally aggressive types who were bailed out by events? Most simply put, how often in our business are people right for the wrong reason?

These are the people Nassim Nicholas Taleb calls “lucky idiots,” and in the short run it’s certainly hard to tell them from skilled investors.

Warren Buffett, in his brilliant 1984 article titled The Superinvestors of Graham-and-Doddsville, describes a contest in which each of the 225 million Americans starts with US$ 1 and flips a coin once a day. The people who get it right on day one collect a dollar from those who were wrong and go on to flip again on day two, and so forth. Ten days later, 220,000 people have called it right ten times in a row and won US$ 1,000.

Buffett writes –

Now this group will probably start getting a little puffed up about this, human nature being what it is. They may try to be modest, but at cocktail parties they will occasionally admit to attractive members of the opposite sex what their technique is, and what marvelous insights they bring to the field of flipping.

After another ten days, there are 215 ‘survivors’ who have been right 20 times in a row and have each won US$ 1 million. By this exercise, each have turned one dollar into a little over $1 million.

…this group will really lose their heads. They will probably write books on “How I turned a Dollar into a Million in Twenty Days Working Thirty Seconds a Morning.” Worse yet, they’ll probably start jetting around the country attending seminars on efficient coin-flipping and tackling skeptical professors with, “If it can’t be done, why are there 215 of us?”

By then some business school professor will probably be rude enough to bring up the fact that if 225 million orangutans had engaged in a similar exercise, the results would be much the same — 215 egotistical orangutans with 20 straight winning flips.

This is a very important story and the reason I am reminding you of this today is because there are now more than 215 egotistical orangutans that are talking about how they have turned small amounts of money into millions investing in stocks and cryptocurrencies and how you can do that easily too.

Worse, each of these 215 have a following of more than 215,000, so you can understand the multiplier effect of the ‘how to get rich easily from stocks’ theory.

Even worse, they are not chest-thumping hanging on trees of some far off jungle, but in a computer or mobile screen right in front of you, on YouTube, Twitter, and everywhere.

Watch out.

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That’s about it from me for today.

If you liked this post, please share with others on WhatsApp, Twitter, LinkedIn. Or just email them the link to this post.

If you are seeing this newsletter for the first time, you may subscribe here.

Stay safe.

Regards, Vishal

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

Howard Marks of Oaktree Capital, wrote this in his seminal book The Most Important Thing –

In bull markets – usually when things have been going well for a while – people tend to say ‘Risk is my friend. The more risk I take, the greater my return will be. I’d like more risk, please.’

The truth is, risk tolerance is antithetical to successful investing. When people aren’t afraid of risk, they’ll accept risk without being compensated for doing so… and risk compensation will disappear. But only when investors are sufficiently risk-averse will markets offer adequate risk premiums. When worry is in short supply, risky borrowers and questionable schemes will have easy access to capital, and the financial system will become precarious. Too much money will chase the risky and the new, driving up asset prices and driving down prospective returns and safety.

Risk, which Marks and Warren Buffett have often defined as losing significant amounts of money and permanently, often moves in the same direction as valuations.

In other words, risk increases/decreases as valuations rise/fall. At the same time, high valuations imply weak prospective returns, while depressed valuations imply strong prospective returns. Consequently, both Marks and Buffett suggest that risk is lowest precisely when prospective returns are the highest, and risk is highest precisely when prospective returns are the lowest.

Economist and investment strategist Peter Bernstein said –

The riskiest moment is when you are right.

In much of life, doing things right over and over again is a sign of skill. Consider chess players or expert musicians. They rarely make a wrong move or hit a wrong note. Also, the skill of one good musician does not cancel out the skill of other musicians, that is, it does not make it harder for others to be equally good. This is not true of financial markets. ‘Skilled’ investors’ actions cancel each other out as they quickly bid up the prices of any bargains, which makes luck the main factor that distinguishes one investor from another.

Skill in investing shines through over the long term, but a streak of being right in the short term can make anyone forget how important luck is in determining the outcome.

Watch out for that streak of being right, dear investor.

[Read more…] about Beware the Winning Streak

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

Have you heard of Kent Evans? No?

Okay, have you heard of Bill Gates? Yes?

Kent Evans was Bill Gates’ first best friend, his classmate at Lakeside School in Seattle, and a co-member of a school-sanctioned computer club called the Lakeside Programmers Group.

In the documentary Inside Bill’s Brain, Bill Gates described Kent as extremely clever, carrying a briefcase with all kinds of gadgets and magazines everywhere he went.

The two self-proclaimed geeks loved scheming about what they would be doing in the future, much to the eye rolls of their classmates who were more concerned with the activities of that moment, the upcoming school dance.

Together, they would read Fortune Magazine and imagine, “If you went into the civil service, what did you make? Should we go be CEOs? What kind of impact could you have? Should we go be generals? Should we go be ambassadors?”

Bill and Kent believed they would go on to do extraordinary things.

Just one of them did it. Bill Gates went on to start Microsoft and the rest, we know, is history.

What happened to Kent Evans?

He died in a mountaineering accident before he graduated high school.

I first read about Kent Evans in Morgan Housel’s brilliant book The Psychology of Money. Explaining the concept of luck and risk, while sharing Kent’s story, Morgan wrote –

Bill Gates experienced one in a million luck by ending up at Lakeside (being one of the rare schools to have a computer those days). Kent Evans experienced one in a million risk (dying in a rare mountaineering accident) by never getting to finish what he and Gates set out to achieve. The same force, the same magnitude, working in opposite directions.

This is just one of the wonderful stories Morgan has shared in his book to explain the important ideas around the subject of money.

Extending the topic of luck vs risk, he wrote –

Luck and risk are both the reality that every outcome in life is guided by forces other than individual effort. They are so similar that you can’t believe in one without equally respecting the other. They both happen because the world is too complex to allow 100% of your actions to dictate 100% of your outcomes.

They are driven by the same thing: You are one person in a game with seven billion other people and infinite moving parts. The accidental impact of actions outside of your control can be more consequential than the ones you consciously take.

Apply this to investing and you would realize that when you judge the financial success of others, and even your own, you must not just look at the returns made but also the risks assumed.

Doing well with money is, after all, is less about what you know and more about how you behave. The earlier you understand and appreciate it, the better off your financial return will be over the long run.

But just avoid dying early.

[Read more…] about Focus on the Risks You Take, Not Just the Returns You Make

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

David Whyte, the noted Anglo-Irish poet, said this in a 2019 interview with Krista Tippett* –

One of the interesting qualities of being human is, by the look of it, we’re the only part of creation that can actually refuse to be ourselves. As far as I can see, there’s no other part of the world that can do that. The cloud is the cloud; the mountain is the mountain; the tree is the tree; the hawk is the hawk. The kingfisher doesn’t wake up one day and say, “You know, God, I’m absolutely fed up to the back teeth of this whole kingfisher trip. Can I have a day as a crow? You know, hang out with my mates, glide down for a bit of carrion now and again? That’s the life for — ” No, the kingfisher is just the kingfisher.

And one of the healing things about the natural world to human beings is that it’s just itself. But we, as human beings, are really quite extraordinary in that we can actually refuse to be ourselves. We can get afraid of the way we are. We can temporarily put a mask over our face and pretend to be somebody else or something else. And the interesting thing is then we can take it another step of virtuosity and forget that we were pretending to be someone else and become the person we were on the surface at least, who we were just pretending to be in the first place.

This is a great lesson to take as we dip our toes into a new year.

As in life, so in investing, we often wear masks and pretend to be someone else. We listen to others except our own selves while making investment decisions. And now with the plethora of voices all over traditional and social media that tell us what to buy and when to buy, we are always second guessing our internal voice that may suggest us to do something else.

In fact, we hammer down that internal voice so much that it ceases to guide us as time passes.

The result – we venture beyond our circle of competence to buy investments we don’t understand, we overpay for stocks because others are overpaying (and so it does not seem like overpaying), we trade in and out of stocks because others are doing it and making money at that, and we start believing that investing in stocks is an easy way to get rich quick (which it often seems).

Gradually, our conviction is someone else’s, our stocks are someone else’s, our mistakes are someone else’s, and we become investors we never wanted to be.

Noted financial writer George J.W. Goodman – who used the pen name of Adam Smith – wrote this in his wonderful book, The Money Game –

If you don’t know who you are, this is an expensive place to find out.

By “this”, Smith meant the stock market.

When it comes to investing to build wealth (not to make money fast), it’s a very personal game. The risk you can take is personal. Your financial goals for which you invest, are personal. And your time horizon is personal.

If you understand this well, and play the game you understand well, stock market can be a wealth creating machine for you over a period of time. Else, you will come to regret why you came here in the first place.

So, like David Whyte may have advised, be the investor that you are. Remove the mask that is not you. Because when you do that, you will reach the real you.

Now, when you get that mask off, you may feel vulnerable, but you will be surprised how brave you will feel when you start trusting your own vulnerability.

That – bravery in the face of vulnerability – is the secret sauce of sound investing (and, of course, a happy life).

And that’s the best advice I can offer you as we move into 2022.

* The Conversational Nature of Reality – David Whyte

[Read more…] about My Advice for 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.

[Read more…] about Spoiler Alert: It’s Luck, Stupid!

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.”

[Read more…] about What We Control, and What We Don’t

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.

[Read more…] about To Get Rich, Don’t Be a Rick