Investing

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Investing and the Art of Catching Falling Knives

It was the middle of 2013. I was reading the annual report of Ashok Leyland, the second largest commercial vehicle manufacturer in India after Tata Motors.

The company had reported a 3% decline in sales in the year ended March 2013, and profit had declined by 23%. The stock, as I checked then, had been punished and was trading at Rs 20 when I was reading its annual report. That was P/E of around 12 times, or an earnings yield (E/P) of 8%.

The company had done well in the previous years in terms of growth but was hurt by the overall decline in the commercial vehicle industry, and especially in its core business of medium and heavy-duty vehicles.

Anyways, the stock looked enticing then, not just due to its low P/E, but also because of its absolute low stock price of just Rs 20.

The Paradox of Knowledge

Tourist: This is a dangerously steep road with a sharp bend. Why isn’t there a hazard sign for motorists to slow down?

Guide: We had a warning sign untill yesterday. But since accidents were rare, officials concluded that the spot isn’t that dangerous after all. So they removed the sign.

Tourist: Don’t you think the rarity of the accidents was precisely because of the warning sign?

Guide: Ugh..

Amused at the stupidity of the officials? That’s because it’s easy to spot the cause and effect relationship between ‘presence of warning sign’ and ‘frequency of accidents.’ You can test the hypothesis. Remove the warning sign and if too many cars start plunging down the valley, there we have it – a clear correlation between an action and its consequences.

High Quality Vs Low Price

If you pay peanuts, you get monkeys. ~ Old adage

If you remember the stock market crash of 2008, you also remember that it spared almost no stock. Companies, even the well-managed ones, lost half or more of their market capitalization in few months.

As an example, Pidilite (makers of Fevicol), which was one of those extremely well-managed businesses then, lost 55% between December 2007 (just before the crash started) and March 2009 (the bottom). Titan and HDFC Bank, two other stalwarts, lost 50% each. In short, the crash was like a bad dream for people even in these marquee stocks.

But for those who held on to their nerves, and to these stocks, the next decade was about to turn into a beautiful dream.

As an example, assume you were owning Pidilite near its peak in December 2007 and went into a deep sleep that continued till today (June 2018). Your return from the stock would have been around 1,000% (CAGR of 26%) over this decade!

How Much is Enough?

As I was talking with my daughter Kavya about the importance of making a living doing work she loves, and saving and investing well, she asked a question that trumped me. I was not prepared for it.

“How much is enough, Papa, to live a happy life?” she asked.

Kavya’s question reminded me of a recent post I did about my talk to a group of friends. The focus of my talk was on a few important questions I have tried to seek answers to at various stages of my life, and that have helped me tremendously in choosing a path that, when I look back at, I am glad I chose.

One of the questions that I talked about was – How much is enough?

[Read more…] about How Much is Enough?

Feynman’s Hack and the Map of the Cat

Richard Feynman, a celebrated scientist and the winner of Nobel prize in Theoretical Physics, was infamous for barging into any classroom (unrelated to Physics) in his university. He would then ask questions and make his fellow professors uncomfortable.

One day Feynman decided to attend a Biology class. Being aware of Feynman’s history of mischief, the Biology professor posed a condition to discourage him. Feynman could attend the class provided he would do all the assignments and write research papers like everyone else attending that class. To the professor’s surprise, Feynman agreed.

Feynman’s first assignment required him to study the nervous system of cats. So he went to the librarian in the biology section and asked her if she could give him a map of the cat.

“A map of the cat, sir?” she asked, horrified. “You mean a zoological chart!”

The Most Important Question We Never Ask

A few years ago, the key executives of Disney summoned a study of their theme parks to figure out what kids found most absorbing.

Were they more enticed by Mickey and Minnie Mouse, or were they more in awe of Cinderella’s castle? Were they attracted more by the sweet-smelling snacks or colourful toys that were sold at the parks?

The study revealed that it wasn’t the Disney magic that captured the young children’s attention the most. Instead, it was their parents’ cell phones, especially when the parents were using them. And because the parents were always staring at their phones, the kids wanted to as well – even when they were surrounded by giant mice, spinning teacups, and the magic of pumpkin turning into a carriage.

Today, more of us are hooked to our devices, which in turn keep us hooked to work…and away from the more important things in life. An average American spends over two hours on his or her smartphone every day.

An average Indian smartphone user spends almost three hours every day on his or her device. We check them first thing in the morning, and often the last thing at night.

Now, what are the consequences of such an addiction towards cell phones?

Consistency, the Playground of Dull Minds

Two men went to a priest to resolve a dispute.

Having listened to the first, the priest said, “You are right.” When the second man insisted on being heard, the priest listened to him and said, “You’re also right.”

The priest’s wife was overhearing the conversation from the next room. She called out, “But they can’t both be right!” The priest paused for a moment, reflected on what the wife said and then concluded, “And you’re right too.”

How wonderful that we’ve met with a paradox, observed Great Danish physicist Niels Bohr, “Now we have a hope of making some progress.” Bohr wasn’t the only one who thrived on contradictions. It’s said that Einstein discovered relativity by way of resolving an apparent conflict between electromagnetism and mechanics.

A physicist is only too happy, writes Carlo Rovelli in his book Seven Brief Lessons on Physics, “when he finds a conflict of between successful theories: it’s an extraordinary opportunity.”

The Books That Made Me – Part 2

In the first part of this series, I profiled books on life and living that have inspired me the most. In this second part, I cover books on learning, thinking, and decision making (more coming in the third part).

Before I begin, here’s something worth reiterating. You should not read good books for the sake of talking about them. Mentioning them by name may give you the appearance of literacy, but you do not have to read them to outshine someone else at a dinner party. Reading is a means toward living a good human life. It’s a means toward living the life of a free man/woman.

Anyways, what follows below is not an exhaustive list but is made up of books I go back to time and again, and return wiser.

The Books That Made Me – Part 2 - Safal Niveshak

Let’s start right away with my favourite books on learning, thinking, and decision making.

Where is the Stock Market Headed: A Conversation With My Friend

“What is happening with the stock market, Vishal?” my very concerned trader-who-thinks-he-is-an-investor friend Ravi asked me on phone.

“Why Ravi, what happened?” I asked in my usual show of ignorance.

“Hey, haven’t you seen the crash in small and midcap stocks?”

“Okay, so you already know what is happening with the stock market, right?” I asked.

“Vishal, I have already lost all my profits in this crash, which I made during the past two years.”

“Oh! Were you playing around with stuff like Vakrangee, or PNB, or Suzlon?”

“I know I am bad at investing, but not so bad Vishal. Luckily, I never got into these stocks.”

“Wonderful. Now tell me how I can help you,” I asked.

“Tell me if you have any clue where the stock market is headed?” Ravi asked.

Warren Buffett, Humility, and 25 Other Lessons in Investing

This is going to be the shortest post on Safal Niveshak, but one with the most amount of wisdom (it doesn’t come from me, of course).

What follows below is a series of tweets from James O’Shaughnessy, the chairman and founder of O’Shaughnessy Asset Management, and the author of What Works on Wall Street.

The entire thread is worth reading, given that it contains the most important things an investor in stocks must understand, appreciate and tie into his/her investment philosophy.

It’s a gem of a tweetstorm, and I suggest you read through this and, maybe, print this out as it can serve as a wonderful reminder when you feel lost in the world of investing and the information overload that’s a part of it.

1/ I have been a professional investor for over 30 years. What follows is some things I think I know and some things I know I don’t know. Let’s start with some things I know I don’t know.

— Jim OShaughnessy (@jposhaughnessy) May 10, 2018

Click on the tweet above to read the entire series, or click here.