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When I Met the Legends of Investing – Part 1

I recently had a dream, where I met the legends of investing – Warren Buffett, Charlie Munger, Peter Lynch and Jim Rogers.

Since you have the right to see anything in your dream, I saw these legends visiting my home to personally teach me the nuances of investing. As I remember, the year was 2003, and I had not yet started investing in stocks. I was confused then, and thus found their visit as a great opportunity to pick their brains on investing.

Here is the transcript of my dream based on what I remember.

Me: I am a small investor, have little money to invest, and I’m not an expert. Can I really make money from the stock market?

Warren Buffett: It’s a huge structural advantage not to have a lot of money.

Look at me. The universe I can’t play in i.e., small companies has become more attractive than the universe I can play in, that of large companies. I have to look for elephants. It may be that the elephants are not as attractive as the mosquitoes. But that is the universe I must live in.

Me: But what about the intelligence? Isn’t a high level of intelligence required to succeed as an investor?

Buffett: If you are in the investment business and have an IQ of 150, sell 30 points to someone else. You do have to have an emotional stability and an inner peace about your decisions. It is a game where you are bombarded by minute-by-minute opinions. It’s not a complicated game. It’s simple, but it’s not easy. You have to have an emotional stability.

Me: You are making it sound too easy! But isn’t investing a domain of the well-educated experts like fund managers and analysts?

Buffett: You don’t need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.

Me: Okay, but what about the emotional stability part? How can I cultivate that?

Charlie Munger: I have something to add here. You’ve got to have models in your head and you’ve got to array your experience – both vicarious and direct – on this latticework of models…. The first rule is that you’ve got to have multiple models because if you just have one or two that you’re using, the nature of human psychology is such that you’ll torture reality so that it fits your models, or at least you’ll think it does… And the models have to come from multiple disciplines because all the wisdom of the world is not to be found in one little academic department.

Me: Oops! That sounds like work reserved for the brilliant few! Isn’t it?

Munger: You don’t have to be brilliant, only a little bit wiser than the other guys, on average, for a long, long time.

Buffett: Indeed! It is not necessary to do extraordinary things to get extraordinary results.

Me: But extraordinary things happen in the stock market!

Buffett: Anything can happen in stock markets and you ought to conduct your affairs so that if the most extraordinary events happen, that you’re still around to play the next day.

Me: How do I deal with such high volatility in stock prices, which makes investing so risky? Sometimes it looks like one big casino!

Buffett: Volatility does not measure risk. Past volatility is not a measure of risk. It’s nice math, but it’s wrong.

Me: Wrong? But that’s what the financial professors teach…even the reputed ones! Are you saying they are all wrong?

Buffett: Because people who teach finance use the mathematics that they have learned, they translate volatility into all types of measures of risks — it’s nonsense. Risk comes from the nature of certain types of business, and from not knowing what you’re doing. If you understand the economics of the business that you’re engaged in and you trust the people you are partnering with, you’re not running significant risk.

Me: Simplify that, please!

Buffett: Volatility is a symptom that people have no idea of the underlying value. Risk comes from not knowing what you’re doing.

Me: So how do I know what I am doing?

Munger: Develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to become a little wiser every day.

In my whole life, I have known no wise people who did not read all the time-none, zero. You would be amazed at how much Warren reads-and at how much I read. My children laugh at me, they think I’m a book with a couple of legs sticking out.

Me: But what should I read?

Buffett: Read Ben Graham and Phil Fisher, read annual reports. Read The Intelligent Investor, by far the best book on investing ever written. What do you say, Charlie?

Munger: I have nothing to add.

Buffett: Jim, you have been silent all this while. You want to add something here?

Jim Rogers: Well, the best advice I ever got was – read everything. If you get interested in a company and you read the annual report, you will have done more than 98% of the people on Wall Street. And if you read the footnotes in the annual report you will have done more than 100% of the people on Wall Street. I realized right away that if I just literally read a company’s annual report and the notes — or better yet, two or three years of reports — that I would know much more than others.

Me: As if that was so simple! There are thousands of listed companies. Where do I start?

Buffett: Start with the A’s!

Me: Is that so simple? Do I read annual reports of all companies?

Buffett: Stick to your own circle of competence…if you don’t know enough to know about the business instantly, you won’t know enough in a month or in two months. You have to have sort of the background of understanding and knowing what you do or don’t understand. That is the key. It is defining your circle of competence.

Me: But I am just a layman. I don’t anyways understand a lot of businesses.

Buffett: The important thing is not how big the circle is, the important thing is the size of the circle; the important thing is staying inside the circle. And if that circle only has 30 companies in it out of 1000s on the big board, as long as you know which 30 they are, you will be OK. And you should know those businesses well enough so you don’t need to read lots of work.

What do you say Peter?

Peter Lynch: Well, I too have a simple philosophy. It is – Never invest in any idea you cannot illustrate with a crayon.

Me: Oh Peter, are you kidding? I mean, if my kid can draw a company’s business with a crayon, is she ready to invest in it?

Lynch: Everyone has the brainpower to follow the stock market. If you made it through fifth-grade math, you can do it.

Me: So is a fifth grader capable enough to invest in stocks? That sounds incredible!

Lynch: I am not saying so! What I am saying is – Behind every stock is a company. Find out what it’s doing.

Me: This is getting too tough now! Who has time to work hard and do the research, and then buy stocks that may prove to be duds? I think I’ll be better in the company of bonds.

Lynch: If you hope to have more money tomorrow than you have today, you’ve got to put a chunk of your assets into stocks. Sooner or later, a portfolio of stocks or stock mutual funds will turn out to be a lot more valuable than a portfolio of bonds or CDs or money-market funds.

Me: But Andrew Mellon said, “Gentlemen prefer bonds.” So why should one own stocks?

Lynch: Gentlemen who prefer bonds don’t know what they’re missing.

Me: Maybe! But is investing in stocks really so important? I mean I am already making enough from my job.

Lynch: In the long run, it’s not just how much money you make that will determine your future prosperity. It’s how much of that money you put to work by saving it and investing it.

Haven’t you read what Einstein wrote? The most powerful force in the universe is compound interest.

Me: Yes, I read that somewhere and understand the concept of compounding. But is that a good enough reason why I must invest in stocks?

Munger: Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of things.

Ben Franklin once said, “Money can beget money, and its offspring can beget more.” Never interrupt it unnecessarily.

Me: Yeah fine. But doesn’t compounding only work in the long term?

Buffett: No matter how great the talent or effort, some things just take time: You can’t produce a baby in one month by getting nine women pregnant.

Me: That’s right! But Keynes said, “In the long run we are all dead.” So why should I worry about what will happen to my money 30 years from now? I may not be alive then!

Buffett: Someone’s sitting in the shade today because someone planted a tree a long time ago.

Charlie, you have something to say on this?

Munger: I have nothing to add.

“Wake up Vishal!” I heard as I rubbed my eyes. My wife was standing in front of me. “Now you also dream investing? Oh God!”

Well, my dream ended there. But since I’m not yet satisfied with what I heard, I will try and meet these legends (and some more) in my future dreams – to pick their brains on how to go about identifying good stocks, how to develop the right investment behaviour, and broadly, how to become a successful investor.

Wish me good luck!

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About the Author

Vishal Khandelwal is the founder of Safal Niveshak. He works with small investors to help them become smart and independent in their stock market investing decisions. He is a SEBI registered Research Analyst. Connect with Vishal on Twitter.

Comments

  1. Srinivasan M says:

    Dear Vishal,
    Your mind seems to have a lot of mental models on how to make lazy investors read and understand. You’ve had a very noble dream. Waiting for your next sweet dreams.

  2. Superb dream interview vishal. Wonderful basics revised with the legends in this interview. Please make this idea of dream interview to happen again with different questions. Really amazed at your creativity, coz you have the writing style as that of Prof Bakshi (Creative and Insightful). The best line I liked of this interview was that of charlie “I have nothing to add” (His pet line) lolz. Great write up vishal once again.

    Regards,
    Vikas Kukreja

  3. You are an amazing guy Vishal. Superb post!!

  4. Manish Sharma says:

    Oh!! Your wife woke you up too soon, Vishal!! 🙂 Will wait for Part-II of your dream..
    Nice compilation of various quotes from guru investors. However, the golden quote of Buffett that ‘Investing is simple, but not easy’ rules supreme. Although, one does not require hi IQ and superior mathematical skills, but still one should not over-simplify certain things. Investing is a tough game for retail investor and anyone who is using it as second option needs to be extra careful. You need above average intelligence to understand, learn and implement mental models from varied fields such as biology, physics, statistics and psyhology. Munger emphasised a agreat deal on probability espeially bayesian theory to assess the probability of investment bet. When the hedge fund player Ray Dalio asked for advice from Charles Munger..he said…Read History.. now go, figure!
    Similarly, there are other quotes and stories and all the great players have distilled their philosophy in simple terms, but it does not mean that it is easy to follow them. Investing is a gamble, and assessing risk-reward ratio is the key..

  5. Vishal Patil says:

    Really great thought process and even clearly written up. While reading I felt as If it is happening with me.
    Simply Superb !!!!

  6. As usual, lucid writing, wisdom which touches the heart.

    Thanks Vishal, your every post is worth weight in gold!

    Shantanu

  7. Harshad Parulekar says:

    Very Interesting thought process in deed.
    This reminds me of writing style of Napoleon Hill’s Think and Grow Rich.

  8. That’s a wonderful thought process..:) I really liked it..Thanks for posting your dream..:)

  9. Munger: I have nothing to add.

    Typical Munger 🙂

  10. It is very well woven together.
    The signs of a master are in how simple a way he can explain complex stuff.
    So you too are getting there ‘SIMPLE’ or already there.
    Thank you.

  11. Vishal, you mentioned four investing legends in your dream..of course, you might be the fifth person in someone else’s dream…:) Great article..!!

  12. elegant writing…still unable to start with the 30s, unable to make out annual reports of 100+ pages and with foot notes its all greek. donot know hoe to have coviction of doing and than beliving in it.

    • Hi, start with reading the management’s discussion and analysis. If it sounds very flowery or hugely optimistic or has arbitrary photos and graphics, that is a first sign of caution.
      Yes accounting is another language and here are courses, sites and books which can help you decipher most of the items. It will take time but is not, not doable.

  13. Vishal,

    That’s a great dream and thanks for writing the whole conversation here 🙂

    Really amazing, keep writing such complex things in interesting and captivating way.

    Regards,

    Avadhut

  14. Saurav Jalan says:

    Thanks Vishal for sharing the wisdom in a lucid manner. Really, enjoyed reading it. Keep writing such posts 🙂

  15. Genius work….
    Thank you,waiting anxiously for the second dream.

  16. When Buffett says an investor should sell 30 points if his IQ is 160, does he mean an investor needs an IQ of 130?

  17. Hello Vishal,

    I don’t know where to post this so sorry for posting it in an inappropriate column.

    I don’t know if you track Zylog System- recently the stock price of Zylog has come down from 300 odd levels to 108 Rupees (10-12 trading session- locked in lower circuit). The company has posted quite decent results -y o y and q o q in last 3-4 years ..good dividends.

    I am surprised no channels or newspapers are discussing or doing any investigation on this stock. Few weeks back the management notified that they are increasing stake in the company but it seems to be a wrong information. They have pledged almost 50% of their holding.

    I have gone through the annual reports – there is no information on why the company has pledged their shares- no reasons whatsoever. how would a retail investor know if the company has not pledged it’s shares for personal purpose.

    I have learnt a lesson – Pledge % of promoters holding = dump the stock ( unless and until it comes from reputed group like the Tata’s or Bajaj) .

    It would be really great if you can come up with an article on pledged shares like what are the risk involved , what are the factors to be looked for .. Thanking you in advance.

  18. Awesome dream. Thanks.

  19. Kunal Asodaria says:

    I wish everybody can have sort of dream you had. One wise man well said – “You are what you surrounded by 5 people”.

    Probably Vishal is in-directly surrounded by these legendary gentlemen who adds valuable deep insight.

  20. Joyanta says:

    Hi,

    What a read. there is much wisdom in this article.

    Thanks very much.

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