Let’s Start with Safal Niveshak
Here are some useful posts from Safal Niveshak archive which you might want to read again…
- John Templeton was the founder of the Franklin Templeton Group. His 16 rules for stock market success.
- A big lesson I wish I’d learned early in my investing life.
- Have you taken your investment oath? If not, here’s one to get you started. Print it, fill it, stick it in front of your work desk, read it, and practice it every day.
- How to increase your savings by 9200%. A real life story.
Rolf Dobelli’s The Art of Thinking Clearly is one book I like going back to again and again. Dobelli has done a fine job of compiling a list of mental models especially from the field of psychology.
Winner’s curse is an interesting mental model capturing the auction phenomenon. Dobelli writes –
The Winner’s curse suggests that the winner of an auction often turns out to be the loser. Industry analysts have noted that companies that regularly emerged as winning bidders from these oilfields auctions systematically paid too much, and years later went under. This is understandable…The highest bid at an auction is often much too high – unless these bidders have critical information other aren’t privy to.
Today this phenomenon affects us all. From eBay to Groupon to Google AdWords, prices are consistently set by auction. Bidding wars for cellphone frequencies drive telecom companies to the brink of bankruptcy.
Initial public offerings (IPO) are also examples of auctions. And, when companies buy other companies – the infamous mergers and acquisitions – the winner’s curse is present more often than not. Astoundingly, more than half of all acquisitions destroy value, according to a McKinsey study.
So why do we fall victim to the winner’s curse? First, the real value of many things is uncertain. Additionally, the more interested parties, the greater the likelihood of an overly enthusiastic bid. Second, we want to outdo competitors.
According to Charlie Munger, open-outcry auctions are a perfect set up for driving people to highly irrational behaviour. Auction is a place where multiple psychological biases act together, creating a lollapalooza effect, and results in a series of bad decisions.
You don’t have to go very far in search of an example. Here’s an excerpt from Prof. Bakshi’s recent post, where he talks about Tata Steel’s disastrous acquisition of Corus in 2006 in an competitive open-outcry auction. –
Just before Tata Steel’s first bid on 20 October, 2006, the market cap of the company was about Rs 26,000 cr. On 31 January, 2007 Tata Steel won it’s bid for Corus after offering 608 pence per share for the target company, valuing it for about $11 billion. Eight years later, Tata Steel’s market cap stands at Rs 23,000 cr. What an amazing case of value destruction! And Hindalco’s acquisition of Novelis was not different.
Knowing what happens to people who get into open-outcry, auction-like situations, psychologically astute people like Buffett and Munger have a no-fault rule when they get invited to auction situations.
The rule is: Don’t Go.
Stimulate Your Mind
Forget the stock market for now, and consider some amazing content we read in recent times…
- Motor skills are as cognitively challenging” in their way as traditional brainteasers such as crossword puzzles or brain-training games. Learning a new sport may be good for the brain.
- It’s amazing how liberating it can be to say “I don’t know. Recognizing our flaws is the beginning of wisdom.
- When computers start doing the work of people, the need for people often increases. The automation paradox.
- Charlie Munger says, “All I want to know is where I am going to die, so that I never go there.” You can learn a lot in life from anti-models since they teach you the sort of person you do not want to be. A dozen such learnings from Bernie Madoff.
Skip the auctions.
Stay happy, stay blessed and stay invested.
Be kind to others, and to yourself.
Vishal & Anshul