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Latticework of Mental Models: Porter’s Five Forces Analysis

Peter Lynch, who successfully ran Fidelity’s Magellan mutual fund for more than a decade, has often mentioned that investors are well advised to buy a business that’s so good that an idiot can run it because sooner or later an idiot will run it. That’s Lynch’s trademark style of saying that some businesses have structural advantages.

The easiest example that comes to mind is when Vijay Mallya ran two different kinds of businesses i.e the liquor business and the airline business. The alcohol business has great economics and aviation industry is known for its horrible economics. It didn’t matter how skillful Mallya was (or wasn’t). The outcome of the events in these two cases proves Lynch’s point.

So how do you find businesses which have a structural advantage? The search should begin by evaluating the industry. If one can answer following questions then he or she can get deeper insights about the industry.

Is this a good industry to look for quality businesses?
Is this is a mediocre industry, but are there companies which are exceptionally good performers?
What are the growth drivers for the industry?
What are the challenges?
What factors might influence how the industry might do in the future?
Who are the dominant players? Why are they dominant?

Of course, one needs to read a lot about the industry and the companies operating in it to answer above questions. But there’s is smarter approach to get quick insights on the competitive nature of any industry. And that brings us to a very important mental model – Porter’s Five Forces Analysis. [Read more…] about Latticework of Mental Models: Porter’s Five Forces Analysis

Safal Niveshak Stream – November 12, 2016

Note to Readers: In Stream, we suggest worthwhile reading material on a variety of topics, not all of which are directly related to investing. Some of the articles require you to be paid subscriber of those sites. However, it is often possible to read such articles by going to Google News and searching for the article’s title.

Some nice stuff we are reading, watching, and observing at the start of this weekend…

Life/Learning

(1250 words / 6 minutes read) The ability to expand your mind and strive for lifelong learning is more critical to your success than you think. Don’t give up on lifelong learning. Ever. Research shows that it pays beyond the skills you acquire. More than ever before, a challenged, stimulated brain may well be the key to a vibrant later life. There are a few skills that are hard to learn but pay off for the rest of your life. Like the skill of adaptability…

We live in ever-changing world which is unlikely to ever slow down. So, what mattered yesterday (e.g. skill, knowledge, social circle, etc.) very much so might not be worth a dime tomorrow. Change used to be slow and incremental: now it is rapid, radical and unpredictable.

Adaptability enables us to dwell on new circumstances and stay on top of the situation. Of course, this skill is best when combined with insight, giving us fresh perspective before the change itself. Growth depends on how adaptable you are. To stay relevant, most companies will need people who can change with time.

[Read more…] about Safal Niveshak Stream – November 12, 2016

Safal Niveshak Stream – November 9, 2016

Some nice stuff we are reading, watching, and observing during the middle of this week…

Investing/Stock Market

(1700 words/7 minutes read): It’s said that there’s very little we can learn from successes for studying successful people is fraught with survivorship bias. However, one shouldn’t outrightly reject the idea of looking at methods of successful because it does have some value. John Huber in his latest post on the competitive advantage of an owner-operator writes –

…the risk of succumbing to survivorship bias is a risk worth taking. I’d rather risk that bias in exchange for the reward of potentially learning something useful from these success stories…They key is trying to reverse engineer their success while simultaneously being aware of the inherent bias can occur when analyzing these situations…. So it’s good to be aware of bias (hindsight, survivorship, etc…), but it’s not worth letting those biases restrict you from trying to learn why something or someone became so successful.
(3 minutes watch): Here’s the next episode of Latticework Video Series. In this video we explain a very important mental model from the field of Statistics, called Mean Reversion, and what investing lessons one can draw from this big idea. Click here to watch the video. [Read more…] about Safal Niveshak Stream – November 9, 2016

Don’t Dump Your Stocks On Trump

Anshul wrote about the mental model of Antifragility some time back. It is a term coined by Nassim Taleb, and he defines it as being the opposite of fragility. So, things that benefit from shocks are antifragile. They thrive and grow when exposed to volatility, randomness, obstacles, disorder, unexpected events, change, and stressors.

An example of something that’s antifragile is Hydra, a serpent-like creature from Greek mythology that grew two new heads every time you cut one off. In Indian mythology, there is a similar character called Raktavija, a demon who had the magic boon that every drop of blood shed from his body gave rise to another Raktavija (literally the blood borne).

In this context, one thing or character that looks highly antifragile in today’s world is…hold your breath…Donald Trump. 🙂

This US presidential candidate has received massive criticism – and for obvious reasons – ever since he entered the field. But note this, the more he has been criticized for his past deeds and present words, the more robust his base has become. In fact, despite whatever the world thinks of the character of Donald Trump, this guy is on the verge of becoming the world’s most powerful man.

Latticework of Mental Models: Ludic Fallacy

On October 23, 2010, Francis Crippen, an American national, drowned while swimming in the sea near the shores of United Arab Emirates. He was only 26 years old.

Francis’ story shouldn’t strike you as very unusual. Thousands die every year because of drowning. In fact, your best guess would be that it’s such a non-event that it wouldn’t have found even a single mention in any of the prominent newspapers. However, what I haven’t told you about Francis is that he was no ordinary swimmer.

All three of Crippen’s sisters were competitive swimmers. Being inspired by his sister Maddy, Crippen started swimming at the age of six. Maddy was a 2000 Olympian in the 400 individual medley. Crippen’s other sister Claire was an Olympic Trials qualifier. Teresa Crippen, Fran’s third sister was a member of U.S. national swimming team. Francis himself was a six-time US National Champion and won several international medals.

This is the account of the events that followed on that fateful day.

Value Investor Interview: Rohit Chauhan

Note: This interview was originally published in the October 2016 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.

I recently interviewed Rohit Chauhan for our premium newsletter, Value Investing Almanack.

Rohit Chauhan is an Engineer / MBA with 20+ years of experience, working in different functions in large corporations in India and abroad. Rohit was introduced to the value investing philosophy in the mid 90s and has since then followed it in managing money for himself and others who have entrusted their capital to him.

Rohit has been writing on the topic of investing for the last 11 years through his blog.

In his interview with Safal Niveshak, Rohit shares his wide investment experience and how small investors can practice sensible investment decision making.

My Multibagger Diwali Idea

Stop right here if you are looking for a stock idea from me, because most of my multibagger ideas are outside the stock market. 😉

But if you are still reading this, you may be interested to know the multibagger Diwali idea I am going to share. Don’t you?

Well, it’s festival time and I won’t waste much of yours.

My multibagger idea for this Diwali is to start a chain of gifting books that inspire.

I am starting with gifting one book that has inspired me to one person I know. I expect that person to then pay it forward by gifting one book to one of his or her friends, and the chain continues…till someone does not want to gift the book. 🙂

You don’t have to wait for someone to send you a book before you can begin.

Mahatma Gandhi said, “Be the change you want to see in this world.” So today I urge you to start the chain you want to be a part of. Anyone reading this can start his or her own chain. Trust me, you can’t even imagine how far the ripple effects of your small act can reach.

Pay It Forward

Lily Hardy Hammond wrote, “You don’t pay love back; you pay it forward.”

Ralph Waldo Emerson, in his 1841 essay titled Compensation, wrote, “In the order of nature we cannot render benefits to those from whom we receive them, or only seldom. But the benefit we receive must be rendered again, line for line, deed for deed, cent for cent, to somebody.”

Same is with knowledge. The only way you can pay back for the knowledge you have received is to pay it forward. Become a funnel, says Prof. Sanjay Bakshi, not a sponge.

One way to do that is to teach someone what you have learned. The other is to simply gift a good book.

But then, how does gifting a book make for a multibagger idea?

Well, knowledge, as you would have heard Warren Buffett say a lot of times, builds like compound interest. And because knowledge builds like compound interest, it gives you an exponential return. And what causes an exponential return makes for a multibagger over time.

Now, when you get a book as a gift, and you read it, it adds to your knowledge. And when you pay it forward by gifting a book to someone else and that person reads it, it adds to his/her knowledge. Over time, as a society, we get more knowledgeable and hopefully wiser. And that’s the idea of starting this chain.

So this Diwali, read a book…gift a book…and spread the light of wisdom all around you.

Anshul and I wish you a very happy Diwali and prosperous New Year.

P.S.: To ensure that this movement benefits maximum number of people, gift the book to someone who isn’t part of this already. So Anshul and I, by default, shouldn’t be in your chain.

Note: If you were to buy your books for gifting by clicking on the image below (or through this link), Amazon would pay me a small commission. The books won’t cost you any extra. And then I will give away 100% of the commission for the betterment of the under-privileged.

Safal Niveshak Stream – October 26, 2016

Some nice stuff we are reading, watching, and observing during the middle of this week…

Life/Learning

(2100 words/9 minutes read): Do you know the three important life skills nobody ever taught you? Please don’t take it personally, be open to changing your long and dearly held beliefs and the most important one – get comfortable with uncertainty…

When something tragic happens and you become horribly hurt, as much as your pain has you absolutely convinced that this must be about you, remember that hardship is part of choosing to live, that the tragedy of death is what gives meaning to life, and that pain has no prejudice — it afflicts us all. Deserving or not deserving isn’t part of the equation.

When you decide to change careers, there’s no one there telling you which career is right for you. When you decide to commit to someone, there’s no one telling you this relationship is going to make you happy. When you decide to start a business or move to a new country or eat waffles instead of pancakes for breakfast, there’s no way of knowing — for certain — if what you’re doing is “right” or not.

Developing the ability to simply do things for no other reason than curiosity or interest or hell, even boredom — the ability to do things with no expectation for result or accolade or productivity or fanfare — will train you to better make these big ambiguous life decisions. It will train you to simply start on something without knowing where in the hell it’s going.

[Read more…] about Safal Niveshak Stream – October 26, 2016

5 Ways to Create Luck in Investing and Life

A wise man once said, “I am a great believer in luck. The harder I work, luckier I get.”

Believers in this saying usually belong to the meritocratic school of thought. They claim, “If you’re good, you don’t need luck.”

If you’re successful it’s a natural human tendency to assume the credit for your success. After all, you must have worked hard for it and you surely deserve it. But when I think of my life, I have seen and met many individuals for whom, in spite of working extremely hard, success remained elusive.

Goes with saying that I have also met those who achieved great heights with relatively much lesser effort. These are the people who manage to attract much more than their fair share of luck. Usually, we look down on such people with some envy and disdain. It’s assumed that any success founded on an element of luck is inherently undeserving.

Do you know someone who always manages to find himself in the right place at the right time? Before you label him as lucky, ask yourself – do you think his luck is out of pure randomness? Perhaps he has a knack for arriving at the right place and at the right time.

Common sense tells us that luck can’t be controlled and it’s all about chance and probability. But what if someone told you that there was a way to control luck? Not in an esoteric way but in a rational way? If you feel like scoffing at such an idea, I would urge you to have an open mind. Just for the sake of curiosity.

Safal Niveshak Stream – October 22, 2016

Some nice stuff we are reading, watching, and observing at the start of this weekend…

Investing/Stock Market

Jason Zweig, The Wall Street Journal’s investing columnist, in an interview with Philip Tetlock, the co-author of “Superforecasting: The Art and Science of Prediction,” explore why amateurs can actually be better than experts at predicting the future, and what the experts can learn from it…

One reason is that experts sometimes know too much. I was talking once to John McLaughlin, former director of the CIA, about the end of the Cold War period, and he was remarking that the analysts who were slowest to recognize that East Germany was disintegrating were the people who had been on the case for 20 years.

It was the newbies coming in who got it pretty quickly. And there’s a lot of psychological evidence that attests to the power of preconceptions to grip us and make it hard for us to be timely belief updaters. So sometimes knowledge is actually an impediment. Another big factor is that there is a large amount of uncertainty in the world. So no matter how smart you are, it isn’t going to give you a lot of traction.

[Read more…] about Safal Niveshak Stream – October 22, 2016