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Anatomy of A Stock Market Loss

“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.”

Why We Make Bad Decisions

Here is some stuff I am reading and thinking about this weekend…

Book I’m Reading – What I Learned Losing A Million Dollars
The backdrop of this book is the true story of a trader called Jim Paul. His career in stock market started with a string of unusual successes that vaulted him from a dirt-poor country boy to jet-setting-millionaire. However, after 15 years of uninterrupted success, all of Jim’s wealth was wiped out in a matter of few weeks when he lost $1.6 million in a speculative trade. This devastating failure led him to intense self-reflection and discovery of some unusual insights about success and failure.

The Most Important Stock Investment Lessons I Wish I Had Learned Earlier

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.

Thinking, the Einstein Way

Here is some stuff I am reading and thinking about this weekend…

Book I’m Reading – Who Moved My Cheese
I read this little book multiple times before quitting my job to start work on Safal Niveshak in 2011. It is about, well, coping up positively with change. Who Moved My Cheese illustrates the simple fact that change will happen, whether we choose to accept it or not. The defining factor is how we deal with it; whether we allow ourselves to change or insist on staying the same.

What Stock Market Disclosures Must Read Like

Here is what a general stock market disclosure reads like –

Stock Market Disclosure (as it is said): I, the analyst, do not have any holding in the stocks discussed but these stocks may have been recommended to clients in the past. The stocks recommended are based on our analysis which is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. The views expressed in this research report accurately reflect the personal views of the analyst about the subject securities or issues, and no part of the compensation of the research analyst was, is, or will be directly or indirectly related to the specific recommendations and views expressed by research analyst in this report. It is important to do your own research and analysis before making any investment.

Well, without much malice, that’s what the regulator requires but that’s also a decent use of jargon to confuse the reader while at the same time cleaning yourself up of any misadventures that may happen with your advice in the future.

In that light, I believe, stock market disclosures should read like what is stated below, because that is what the reality is like in most cases.

ROCE-Growth Matrix, and Few Potential Wealth Creators (Update)

I did a post in March 2019 on one of the best theories I have read on the importance of high ROCE and good earnings growth, which make a great combination for long-term wealth creation.

This theory came from Bharat Shah of ASK Group, who wrote a book (sad, it’s not available publicly) titled “Of Long Term Value and Wealth Creation from Equity Investing.”

You Are A Black Swan

Here is some stuff I am reading and thinking about this weekend…

Book I’m Reading – The Black Swan
Black swan is a Latin expression, which was commonly used as a metaphor to describe something impossible or something non-existent. It came from the old-world belief that all swans are white since no one had seen a black swan before. Every time someone spotted a white swan, it was confirmation of their belief i.e., “all swans are white.” But this long held notion was invalidated the day first black swan was spotted.

A black swan event has following three attributes, writes Taleb in his book –

First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme impact (unlike the bird). Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.

[Read more…] about You Are A Black Swan

Life is Easy. Why Do We Make It So Hard?

Being locked down at home isn’t something new or unusual for me. I have been working from home for the past nine years. And when I say working from home, I mean consciously being locked down, with my eyes in my books or on the computer screen and my hands on the keyboard most of the time.

However, this situation is unusual for my kids. Like all kids, they are finding it uneasy not being able to meet their friends and go out and play, though they understand the responsibility of not doing so as of now.

So, one of my responsibility as a “locked-at-home-father-with-locked-at-home-kids” is to come up with ideas to keep them from getting bored. And one of those ideas has been for our kids to tell us stories that they have read or heard. It’s like they are enacting as parents and me and my wife as kids, waiting to hear good night stories before we sleep.

Here is a story my eight-year-old told us last night, which I thought had a great lesson for most of us chasing success, fame, wealth, and everything that we think makes life better.

86,400 Seconds

Occasionally, I send out this special post with a few ideas I am reading and thinking about. Plus, a question I am meditating on.

If you wish to receive this post – apart from others I write regularly on investing, decision making, behavioral finance – please sign up below.

Anyways, here is some stuff I am reading and thinking about this weekend…

Book I’m Reading – A Few Lessons from Sherlock Holmes
This is a brilliant book from Peter Bevelin. Through this book, he has distilled Arthur Conan Doyle’s Sherlock Holmes into bite-sized principles and key quotes. In fact, this book is much more than a collection of quotes. It is a way to learn the powers of observation, understand the limits of our mind, and counter the narrative fallacy.

Sherlock Holmes is the epitome of rationality, and when it comes to making businesses decision, a rational thinking goes a long way in keeping you out of trouble.

Thinking is mostly an automatic process for everybody but while making critical decisions in life (and in business of investing) one needs to come out of the autopilot mode and learn the art of thinking clearly. Sherlock Holmes give us a framework, a blue print if you will, of thinking.

[Read more…] about 86,400 Seconds

Investing and the Power of Uncertainty

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.

With the possible exception of Warren Buffett, no investor today commands more respect than Baupost Group’s Seth Klarman. Since founding his investment partnership in 1983, Klarman has not only produced unrivaled returns, but he has also from time to time offered wise and timeless commentary on markets and the craft of investing.

Klarman is the author of Margin of Safety, Risk Averse Investing Strategies for the Thoughtful Investor, which became a value investing classic ever since it was first published in 1991.

Anyways, Klarman wrote a letter to his clients in February 2009, that contained some timeless ideas on investing, including the power that investors can derive from uncertainty.

In this letter, titled “The Value of Not Being Sure”, Klarman described the biggest challenge in investing, how he was responding to the market’s turmoil then and why he considered fear of the unknown such a great motivator.

Here is an insightful piece from this letter –

Time horizons have shortened even more than usual, to the point where the market’s 4:00 p.m. close seems to many like a long-term commitment. To maintain a truly long-term view, investors must be willing to experience significant short-term losses; without the possibility of near-term pain, there can be no long term gain.

Buying early on the way down looks a great deal like being wrong, but it isn’t. It turns out you won’t be able to accurately tell who’s been swimming naked until after the tide comes back in.

If you look to “Mr. Market” for advice, or if you imbue him with wisdom, you are destined to fail. But if you look to Mr.Market for opportunity, if you attempt to take advantage of the emotional extremes, then you are very likely to succeed over time.

If you see stocks as blips on a ticker tape, you will be led astray. But if you regard stocks as fractional interests in businesses, you will maintain proper perspective. This necessary clarity of thought is particularly important in times of extreme market fluctuations.

In defense of ‘uncertainty’, he wrote…

Uncertainty breeds doubt, which can be paralyzing. But uncertainty also motivates diligence, as one pursues the unattainable goal of eliminating all doubt. Unlike premature or false certainty, which induces flawed analysis and failed judgments, a healthy uncertainty drives the quest for justifiable conviction.

Click here to download this 2-page letter, and read it from start to end.

Klarman does not advise you to go all out leaving your process behind, but understand the power of uncertainty in a new light and then try to benefit from it.