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You are here: Home / Archives for Investing Behaviour

Investing Behaviour

What to Do When There’s No Stock to Buy?

The Sketchbook of Wisdom: Now Available at a Special Discount

Buy your copy of the book Morgan Housel calls “a masterpiece.” It contains 50 timeless ideas – from Lord Krishna to Charlie Munger, Socrates to Warren Buffett, and Steve Jobs to Naval Ravikant – as they apply to our lives today. Click here to buy now and claim a special dicount, which is available only till 15th September 2023.


Investing is difficult.

But not investing – sitting with cash and not finding stocks worth buying – is more painful.

After all, to most of us, activity equals achievement.

The need to remain active at all times is what leads CEOs to make bad capital allocation decisions, especially during heady times. And that is what leads most investors – big or small – to buy overpriced stocks.

We all want to be in the thick of action – largely because we hate the feeling of missing out on the party.

But then, as Charlie Munger says…

It takes character to sit there with all that cash and do nothing. I didn’t get to where I am by going after mediocre opportunities.

What to Do When There’s Nothing to Buy?
This is one of the most common questions I am being asked these days.

“I am not finding value in the stock market anymore,” asked a friend. “What should I do now?”

“Accumulate cash,” I replied.

“But that’s tough.” he said.

“Why?” I asked.

“Because cash in bank is a wasted opportunity,” he replied. “And why should I hold cash when it is paying nothing while stocks can grow my money much faster?”

Over the years and after learning my lessons (from not holding cash) the hard way, I’ve found several reasons to ‘hold cash’ when I have nothing to buy. Here are the biggest two –

  1. When cash is paying nothing and stocks have a greater probability of losing, nothing beats losing.
  2. If I don’t have cash, it is almost impossible for me to take advantage of opportunities that may present themselves in the future.

Accepting these reasons has made me fearless of holding/accumulating cash when I do not find (much) value in the stock market.

Of course, this is not with the intent to time the market – which is impossible. The intent is to avoid acting when I find no reasons to act.

As Seth Klarman wrote in his wonderful paper titled The Painful Decision to Hold Cash, the idea is to –

…remain liquid, defy the steady drumbeat of performance pressures, and wait for the prices of at least some securities to drop. (One doesn’t need the entire market to become inexpensive to put significant money to work, just a limited number of securities.)

But then, as Klarman also wrote –

Human beings are only endowed with so much patience, after all. Few are able to look past near-term returns, and today anything appears to offer better returns than cash.

Also, given their relative-performance-oriented, competitive nature, investors loathe the possibility of underperformance that comes from sitting on the sidelines; they find it better to be in the game (unless, of course, the market drops). Most significantly, they remain highly skewed toward the greed end (how much can you make?) and away from the fear end (how much can you lose?) of the spectrum of investor emotions. In short, investors remain the consummate yield gluttons, seeking high return without regard for the likelihood of actually achieving it or for the risk incurred in the process.

You see, investing doesn’t always mean “buying something”.

In fact, as Warren Buffett said –

Much success can be attributed to inactivity. Most investors cannot resist the temptation to constantly buy and sell.

Here is an insight from Prof. Sanjay Bakshi whom I asked this question few years back –

There is no “nothing to buy” situation. If you ignore transaction costs and taxes, you are in-effect, selling every stock you want to hold, and buying it back at market price everyday. Remaining invested in a position is the functional equivalent of selling it for cash and deploying that cash in the position at its prevailing market price.

I think you mean “nothing new to buy.” But if you think about that carefully, there is a disconnect. If you are, in effect, “buying” your existing positions every day, then when you say there is nothing “new “to buy, aren’t you also, in effect saying that you prefer to own what you do but don’t want to deploy new cash in those very positions? Now there may be good reasons for not deploying new cash in old positions but the reason cannot be that your old positions are overvalued, for if they are overvalued, then why are you, in effect, buying them today?

Two good reasons to not deploy new cash in old positions could be: (1) need to diversify; (2) setting aside capital in expectation of a new, lucrative opportunity arriving in due course in which you prefer to hold cash (Mr. Buffett uses this “carrying-a-loaded-gun-waiting-for-the-right-elephant-to-appear” approach).

If there is nothing new to buy, by doing nothing, you’re still buying cash. Cash has huge option value, but delivers negative real rates of return. Sometimes, in life, when all choices are bad, you simply choose the least worse choice.

What else could you do? Holding cash which earns a small negative return may not be a great choice, but it’s better than holding other assets which can greatly depreciate in value.

Another advice when investors face such difficult choices is this: Lower Your Expectations.

Finally, here is what Vinod Sethi, the ex-MD and CIO of Morgan Stanley India advised in the second episode of The One Percent Show –

People have this natural urge that if I have spent 100 hours doing something, then I must act. Whereas my view is that act when prices are going to go up or down, not when you have completed your homework. The market is not waiting for you to complete your homework for the prices to go up or down. I would always urge a lot of my analysts, including myself, to delink analysis from decision-making. Because you have spent a hundred hours on something, you don’t need to act.

The key to being a good money manager is to not act, or not link your hard work to your action. Delink the two. Keep working, because the point of conviction and intuition comes when it comes. But at that time, your homework should be complete. That time you shouldn’t be running around doing homework, because that intuition point will happen when it happens. It is all sitting in your brain. But you act when your intuition wakes up. In a way, the market whispers in your ear.

At the end of the day, I’d say that’s what it is. Because there are 10,000 listed stocks and why would you zone in on something? You need to do a lot of work, but don’t believe or don’t live under the delusion that your work has got you this brilliant idea.

The work has given you the foundation for good seeds to grow. It’s like a garden, which has been well fertilized and watered for some roses to bloom. That’s your research on a daily basis. But the act of the rose coming is when there is a confluence of events, like when a stock is dirt cheap or forgotten or expensive. There’s the real world out there and you’re ready with your homework.

Let’s put it this way. It is like there’s a woolly mammoth coming at you and I give you a gun with a few bullets. There are two ways you can respond. I’ve given you a gun with bullets, so you can start firing. The other way to look at it is to just sit and fire when the woolly mammoth shows up. So, research is like loading the gun, having the bullets. The opportunity is the mammoth showing up. They’re not linked. Having a gun gives you the arrogance that I will fire and can hit the mammoth. That is a classic mistake of most analysts.

In short, keep doing your work of identifying great investment opportunities, but if the prices are not right, and there is no margin of safety, don’t act. Least of it, don’t act just because you have done the hard work. Stocks do not bother about your hard work.

But when the time is right, and you are ready, as Vinod said, the market will whisper in your ear.

Act then.


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.

Thank you for your time.

Regards,
Vishal


The Sketchbook of Wisdom: Now Available at a Special Discount

Buy your copy of the book Morgan Housel calls “a masterpiece.” It contains 50 timeless ideas – from Lord Krishna to Charlie Munger, Socrates to Warren Buffett, and Steve Jobs to Naval Ravikant – as they apply to our lives today. Click here to buy now and claim a special dicount, which is available only till 15th September 2023.

Why Most of Us Are Bad at Investing

The Sketchbook of Wisdom: Now Available at a Special Discount

Buy your copy of the book Morgan Housel calls “a masterpiece.” It contains 50 timeless ideas – from Lord Krishna to Charlie Munger, Socrates to Warren Buffett, and Steve Jobs to Naval Ravikant – as they apply to our lives today. Click here to buy now and claim a special dicount, which is available only till 15th September 2023.


…because most of us in the stock market, most of the time, do not do investing, which is…

  • Thinking how markets work,
  • Understanding how other investors behave and why not to behave like most of them,
  • Studying businesses,
  • Sticking only with what is simple and what we understand,
  • Buying stocks at appropriate valuations,
  • Owning those businesses knowing they are ‘businesses’ and not just symbols on your screen, and
  • Being patient with those businesses and holding on till they remain good businesses.

Instead, we are busy…

  • Envying (others making money fast or losing money slow),
  • Cloning (others’ stock ideas mindlessly),
  • Predicting (future of markets, stock prices, and economy),
  • Fearing (missing out on future gains),
  • Regretting (past mistakes),
  • Avoiding (accepting current mistakes),
  • Denying (reality, especially when it’s harsh), and
  • Indulging (in useless information and noise)

And if that’s not all, these often lead us to –

  • Trading (frequently, which adds to our costs),
  • Averaging down (on bad businesses),
  • Boasting (about our lucky short-term gains), and sometimes
  • Trolling (other investors on social media, who have not performed as well as us in the recent past).

With such a busy schedule, where is the time to practice investing?

Countless wise people have advised us for centuries that to become good at anything, we do not need to always add more things but give up on some of them.

However, when it comes to investing, giving up on everything mentioned above is not as easy as it sounds. All these (mis)attributes and (mis)behaviours make us human (except trolling others), and thus there is no point trying hard to eliminate all of them from our lives at one go.

But if we work towards minimizing these – some starting today, and others over a period of time – we may end up with an outcome better than we had ever imagined.

I would leave you with a couple of quotes, which signify how what we think and do now, help us create our destinies –

Watch your thoughts; they become words.
Watch your words; they become actions.
Watch your actions; they become habits.
Watch your habits; they become character.
Watch your character; for it becomes your destiny.

– Lao Tzu

You are what your deep, driving desire is.
As your desire is, so is your will.
As your will is, so is your deed.
As your deed, is so is your destiny.

– Brihadaranyaka Upanishad

For good or bad, investing does not follow any other path.

Of Lucky Idiots and Orangutans

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

Buy your copy of the book Morgan Housel calls “a masterpiece.” It contains 50 timeless ideas – from Lord Krishna to Charlie Munger, Socrates to Warren Buffett, and Steve Jobs to Naval Ravikant – as they apply to our lives today. Click here to buy now.


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 elsewhere 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 Twitter, YouTube, and everywhere.

Buffett said –

Only when the tide goes out do you discover who’s been swimming naked.

Sir John Templeton said –

The four most dangerous words in investing are: this time it’s different.

This time is not any different, and I wish you realize this now and not when the tide goes out.

There will be a lot of naked swimmers then. I wish you are not one of them.

Watch out.


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

Beware the Boredom of Bull Market

Mastermind 17th Batch Admission Ends in 2 Days

Join 10,000+ students from 30+ countries and learn the structured, step-by-step process of stock picking as practiced by the world’s most successful stock market investors. Click here to join now and claim ₹6000 discount.


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

Stock Investing is a Humbling Game

Mastermind 17th Batch Admission Ends Tomorrow (15th July)

Join 10,000+ students from 30+ countries and learn the structured, step-by-step process of stock picking as practiced by the world’s most successful stock market investors. Click here to join now and claim ₹6000 discount.


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?

Two reasons. The first, our society’s phobia for making mistakes, something that begins at school, where we learn to learn what we are taught rather than to resolve problems. We are fed with facts, and those who make the fewest mistakes are considered to be the smarter ones. So we learn that it is embarrassing to not know and to make mistakes. We feel bad when we find out we have made a mistake or do not know something.

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

Influencers are Not the Problem

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

Buy your copy of the book Morgan Housel calls “a masterpiece.” It contains 50 timeless ideas – from Lord Krishna to Charlie Munger, Socrates to Warren Buffett, and Steve Jobs to Naval Ravikant – as they apply to our lives today. Click here to buy now.


Blaming the system is soothing because it lets you off the hook. But when the system is broken, we wonder why you were relying in the system in the first place.

~ Seth Godin

This story dates to September 2008. I remember this clearly because it happened on the day Lehman went bust.

The event is more vivid for me because, when the news broke out, I was less than a mile away from Lehman’s headquarters, with a school friend.

My friend, who was working in the tech division of another investment bank in the city, met me to discuss his India investments. His portfolio had already taken a beating in the financial crisis that had started at the beginning of 2008.

[Read more…] about Influencers are Not the Problem

10 Qualities of Great Investors

Admission Open: Value Investing Workshops – Offline (Mumbai) and Online

1. Offline Workshop: Mumbai – After a gap of 2 years, I am back with my live, offline Value Investing workshop. The first session is planned in Mumbai on Sunday, 22nd January 2023. I am accepting only 50 students for this session, and less than 10 seats remain now. Click here to know more and join the Mumbai workshop.

2. Online Workshop – Admissions are also open for the January 2023 cohort of my online value investing workshop. The workshop involves 22+ hours of pre-recorded, detailed lectures and Q&A sessions, plus a 3-hour live online Q&A session scheduled on Sunday, 15th January 2023 (tomorrow). I am accepting 50 students in this cohort, and less than 5 seats remain now. Click here to know more and join the online workshop.

* * *

One of the first lessons I learned from my yoga teacher was that “yoga is not about rapid movements but long pauses. Slow down, calm down, don’t hurry, and trust the process.”

The thing about yoga — or any exercise — is that there isn’t a comfort zone. But if you have a sound process, and practice it diligently, over time it starts to work for you.

The act of investing your money, as I realize, isn’t much different from practicing yoga. A superior process and greatness often go hand in hand in yoga, and also in investing. For serious investors, thus, it’s wise to learn to trust the process that generates winning investment results.

I came across one such time-tested process framework while reading Michael Mauboussin’s “Reflections on the Ten Attributes of Great Investors.” Mauboussin is Head of Consilient Research at Counterpoint Global, Morgan Stanley Investment Management, and author of some amazing books like The Success Equation and More Than You Know. He is a highly successful value investor, and thus the process he has laid out in his note is a great help for any serious investor seeking a winning investment process.

Here are my reviews of the ten attributes Mauboussin has laid out in his note.

[Read more…] about 10 Qualities of Great Investors

The Investor’s Manifesto (2022)

This is for you. This is from someone like you.

It is an Investor’s Manifesto.

It is something you can reflect back on if you ever felt stuck in your investing life.

If you believe in it, follow it, and stand for it, your investing life will be good.

Click here to download the manifesto.

Read it. Print it. Frame it. Face it. Remember it. Do it.

This is YOUR Manifesto.

And if you find value in it, please share it.

How to Manage Risk of Randomness in Investing

Admission Open: Value Investing Workshop (Online) – October 2022 Cohort

I have opened admission to the October 2022 cohort of my online value investing workshop. The workshop includes 22+ hours of pre-recorded, detailed lectures and Q&A session, plus a 3-hour live Q&A session. 

I am accepting only 50 students in this cohort, and first 25 can claim a special discount. Click here to know more and join the workshop.


A Few Ideas I’m Thinking About

Here are a few ideas I have been thinking about over the last few days.

How to Manage Risk of Randomness in Investing

“All of life is a management of risk, not its elimination,” writes Walter Wriston, former chairman of Citicorp.

Randomness is the fabric that weaves the interaction of everything around us. Since you can’t remove randomness from our affairs, you can’t get rid of the risk also. Peter Bernstein in his book Against the Gods writes –

The essence of risk management lies in maximizing the areas where we have some control over the outcome while minimizing the areas where we have absolutely no control over the outcome and the linkage between effect and cause is hidden from us.

[Read more…] about How to Manage Risk of Randomness in Investing

My Advice to a Young Investor – Part 3

The Sketchbook of Wisdom: Did you get your copy?

Buy your copy of the book Morgan Housel calls “a masterpiece.” It contains 50 timeless ideas – from Lord Krishna to Charlie Munger, Socrates to Warren Buffett, and Steve Jobs to Naval Ravikant – as they apply to our lives today. Click here to buy now.


This is the third part of this unintended series on my single biggest advice to a 26-year-old investor.

First, she asked – What advice would I offer to a 26-year-old to do well in her career?

I offered this advice – Play games that you can win.

Then, she asked – How do I know which games to play where I can win?

I offered this advice – First, try to answer this question: ‘What do I desire?’ Then, do a few things that you desire to do, maybe 2 or 3, and then gradually you will gravitate towards the number one out of those 2 or 3. Keep learning, keep exploring, and you should find that one game that would become the only that you would like to be in. And once you have found that game you should play, start playing, get better at it over time, and you should win – not against others but along with others who are also playing that game.

Anyways, then she asked – But how do I get over the fear to even start playing the game that I can win?

[Read more…] about My Advice to a Young Investor – Part 3
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