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Circle of Competence: What and Why

Tom Watson [the founder of IBM] said – “I’m no genius. I’m smart in spots and I stay around those spots.”

Charlie Munger and Warren Buffett define these spots where you are smart as your ‘circle of competence’ – the area beyond which you must not venture out if you were to make effective, profitable investment decisions.

I have talked about the circle of competence numerous times in my posts and presentations. But if you still have doubts on this concept, its relevance, the dangers of not adhering to it, when do you know something is within your circle, and how to grow that circle, here is an illustration that, to the best of my knowledge, may help you with the answers.

Click here to download a larger image
Let me know if you think I may have missed out on anything related to the subject in the above illustration.

P.S. You may read a detailed explanation on ‘circle of competence’ here.

The 39th Lesson

Life’s passing by too fast, or so it seems. I complete 39 years in my present state of existence today. That’s 14,245 days or around 57% of the average life expectancy of an Indian male.

While spiritualists would want me to believe that I have existed from anadi (before the beginning of cosmos), and will exist till ananta (infinity), I see thirty-nine years as a good enough time to find some meaning in one’s life. At least, my rapidly greying hair and receding hairline help me realize that.

Now, while it amazes me that I’ve been around that long — I feel like I’ve barely begun.

I’m not usually one to make a big deal about my birthday, but as always, it has given me an opportunity to reflect.

So, like I have done over the past three years – see here, here, and here – let me share one of the key life lessons that have guided my life over the years, and two small but wonderful books that have brought this lesson to fore every time I have read them, including when I read them this year.

[Read more…] about The 39th Lesson

What We Are Listening To: Our Favourite Podcasts on Business, Investing, and Learning

If you don’t know who Charlie Munger is, then here’s a quick introduction. He’s a billionaire and he’s 93 years old. He’s not the oldest and he is not the wealthiest but when it comes to being the “oldest billionaire”, he doesn’t have any competition.

In other words, he has the two most coveted things in this world – wealth and a long life.

His advice to us – minimize stupidity. Remarkably simple, isn’t it?

The most effective way to follow Charlie’s advice is to learn from others’ mistakes. That’s where books come into the picture. They’re the best source of vicarious knowledge.

When humans first discovered that they could persist their words and other information in physical form, it was revolutionary. According to some historians, between the years 3500 BC and 3000 BC, ancient Sumerians from Mesopotamia civilization invented the first system for storing and processing information outside their brains.

In the timescale of millions of years of human evolution, this invention is pretty recent one. Irrespective of how trivial the ability to read/write sounds, it was nothing less than a disrupting technology when it came out. Probably thousands of talented Sumerians, who were employed for memorizing information, lost their jobs.

You don’t have to teach an infant how to swallow liquid or give walking lessons to a toddler. These skills are built into the human genome. But reading isn’t part of our DNA.

My Thoughts on Value Investing, Personal Finance, and Life (Podcast)

I recently had the opportunity to get interviewed by Paisa Vaisa, an audio show/podcast based on topics around money, investing, and personal finance.

In the interview, I discuss my background, what got me to the stock market, thoughts on value investing, buying and selling stocks, core rules of personal finance, and my way of living a prosperous life without the paycheque.

I thought you might be interested in hearing me out (my kids did, for the first time). 😉

Here are the links to the podcast (around 15 minutes each) –

Part 1 (background, education, what drove me towards value investing, my teachers, biggest succcesses and failures)
Part 2 (thoughts on value investing, simple tips on building your portfolio, when to buy and when to sell stocks)
Part 3 (thoughts on personal finance, how to lead a better life by making smart money decisions)

Thanks for listening!

Latticework of Mental Models: Manufactured Memories

Yesterday when I logged into my Facebook account, it showed a picture I had posted six years back. In the frame, I was having lunch with an old school friend.

It brought a smile on my face.

Interestingly, I had completely forgotten about the lunch. I just couldn’t remember being present when that picture was taken. My brain had conveniently erased that incident from memory.

I am sure it happens to others too. Also, Facebook knows it, so they introduced this feature. Bringing back those lost memories creates a pleasant experience which isn’t much different from the one when you find money in your old pant pockets.

How would it be if we never forgot anything? Why does our brain choose to remember something and spaces out on others? Is there an evolutionary reason behind this behavioural quirk? Let’s explore these questions today.

Value Investing Workshop & Camp Millionaire: Chennai & Kolkata

If you aren’t in Chennai or Kolkata, you may skip reading this post.

If you are still reading, this is to announce our upcoming Value Investing Workshop and Camp Millionaire (money workshop for kids) in Chennai and Kolkata.

For the uninitiated, Camp Millionaire is our game and activity-based financial education program for children of age group 8 to 14 years. Kids will learn how to make, manage, multiply and donate their money wisely first hand in this day-long program and they will have fun doing it.

The main objective of this program is to provide a stimulating, fun-filled, learning environment where kids can feel safe exploring and learning the various principles, ideas, and skills needed to create a financially successful and responsible life.

The Chennai session of Camp Millionaire is on Saturday, 18th November. The Kolkata session is on Saturday, 2nd December.

Click here to know more about and register for any of these Camp Millionaire sessions.

As for our Value Investing Workshop, it’s a one-day session where I teach the most important principles and practices of value investing and move through an entire structure and process of picking up high-quality stocks using these principles.

Apart from teaching the process of picking the right kind of businesses using the rules of value investing, the Workshop also covers the core ideas in Behavioural Finance – how cognitive biases hurt our investment returns and steps an investor must take to minimize the mistakes on this account.

Overall, I have sifted through a mountain of amazing books, documents, lectures, plus my experiences in investing to bring to the table the most important practical ideas in becoming a sensible, successful, long-term investor.

The Chennai session of Value Investing Workshop is on Sunday, 19th November. The Kolkata session is on Sunday, 3rd December.

Click here to know more about and register for any of these Value Investing workshops.

Email me at vishal[at]safalniveshak[dot]com if you have any questions around these workshops.

My Interview with Morgan Housel

Note: This interview was originally published in the April 2017 issue of our premium newsletter – Value Investing Almanack (VIA). To read more such interviews and other deep thoughts on value investing, business analysis and behavioral finance, click here to subscribe to VIA.

Morgan Housel - Value Investing Almanack

I sincerely believe in what Charlie Munger often says about envy, that it is a really stupid sin because it’s the only one you could never possibly have any fun at. I am lucky to have stayed away from this sin as far as investing and other aspects of life are concerned.

But if there is one, and just one, person who arouses this sin in me every time I read him is…Morgan Housel. And it’s for the simplicity of his thoughts that he puts across through his powerful writings. I have tried to emulate Morgan several times in my writing endeavor, but he raises the bar each time he publishes something new, more simple yet more powerful.

Morgan’s posts at The Collaborative Fund, where he is currently a partner, have been a great source of learning for me. I have also read him for years at his earlier stints at The Motley Fool and The Wall Street Journal.

Morgan is a two-time winner of the Best in Business award from the Society of American Business Editors and Writers and a two-time finalist for the Gerald Loeb Award for Distinguished Business and Financial Journalism. He was selected by the Columbia Journalism Review for the Best Business Writing 2012 anthology. In 2013, he was a finalist for the Scripps Howard Award.

In this interview, Morgan shared with me his simple investing thought process, what gets most people into trouble in investing, and the people who have inspired him the most in his journey.

Let’s get started right here.

I Disclose

We are in a bull market, without doubt.

The index made up of subscribers to my investment newsletter The Safal Niveshak Post (let’s call it ‘SN Index’) has outperformed the BSE-Sensex and has crossed the critical resistance level of 36,000. The CAGR of this index over the past six years since it was launched has been 475%! This is given that it started with a base value of 1 (one) subscriber, which was me (see how good looking CAGRs are created!).

Anyways, given the buoyancy in the broader markets over the past few months, handsome gains have also been seen in the SN Index in recent times. Just over the past twelve months, the index has moved from 25,000 to 36,000 compared to the BSE-Sensex that has managed a rise from 28,000 to 32,000.

Given these stupendous, outperforming gains in the SN Index, it has also attracted a lot of new subscribers, many of whom may have come with a lot of expectations (not their mistake, but bull market’s). A lot of them have emailed me asking for my stock recommendation and money management services, while some have questioned my intention of teaching value investing instead of simply providing stock tips.

Anyways, some old timers tell me that the SN Index is heading rapidly towards the 50,000 mark (it’s their love for me, I know) while some have also quoted a figure of 100,000 to be reached by the end of 2018 (now that’s irrational exuberance, you see).

[Read more…] about I Disclose

How to Teach Kids the Value of Money

Warren Buffett is undoubtedly a famous man. And he is not just famous for his riches, but also for his rejection of the trappings of wealth. As we all know, he lives in the same house he had bought in 1958 for US$ 31,500, and his annual salary of US$ 100,000 is far less than what most CEOs (including many in India) earn.

But there’s one aspect of Buffett that many people don’t know much about. And that is about how he has brought up his kids when it comes to the subject of money.

Over the years, several interviews with his kids have revealed how Buffett’s message to them on money was loud and clear as they were growing up. And it was that money wasn’t what mattered in life. Instead, it was finding something you loved to do and then doing it.

In his book, “Life Is What You Make Of It,” Peter Buffett, a musician and the youngest son of senior Buffett writes about the values he absorbed growing up as the son of Warren Buffett and his late mother, Susan Buffett, and the path he has pursued to identify and pursue his passions in life.

He also writes about things like requiring children to do chores and letting them solve problems on their own instead of bailing them out. But he warns that children will pick up on their parents’ true beliefs about money – no matter what a parent says about money.

Safal Niveshak Stock Analysis Excel Version 3.0

A few readers have accused me in the past of being a sadist who wants them to do the dirty work of analyzing companies on their own, instead of simply recommending stocks like so many other blogs do.

But I’d rather give you a compass instead of a map, for you can confuse the map with the territory and lose your life’s savings walking that path.

In this pursuit of handing you another compass, here is Version 3.0 of my Stock Analysis Excel Sheet that you can download on your computer, read through the instructions to follow a few simple steps, and then analyze not just the past performance of a company but also arrive at its approximate intrinsic value range.

And unlike the previous versions where you were required to enter most data manually, this latest version feeds in data automatically from Screener.in website, which subsequently feeds into my sheets on financial analyses and intrinsic value calculations. So you must thank Screener’s creators and my friends Ayush and Pratyush before thanking me. 🙂