Let’s Start with Safal Niveshak
Just in case you missed any of this on Safal Niveshak over the last few days…
- In life and investing, “It will never happen to me!” is a widely held but dangerous notion. You must avoid it at all costs!
- There’s this one great investment you can ever make for yourself and your loved ones. I’m already making it. What about you?
- Here’s your chance to get into the mind of one of the best Indian investment thinkers. Prof. Sanjay Bakshi agrees for a second interview for Safal Niveshak. Ask him your question here.
Join The Safal Niveshak Mastermind, my special one-year course in Value Investing to reinvent how you invest and take control of your financial life. Click here to know more and subscribe. Subscriptions for the first batch close on 25th August 2013!
“The art of investment has one characteristic that is not generally appreciated. A creditable, if unspectacular, result can be achieved by the lay investor with a minimum of effort and capability; but to improve this easily attainable standard requires much application and more than a trace of wisdom.”
The ironical truth about investing is that, despite hundreds of rules that guide the practice of being an investor, there is no rule that works all the time, and in the same manner.
Investing is, after all, not like a game of football where the ground and the ball remain the same throughout the ninety minutes of play. It’s more like cricket where the pitch changes its behaviour with every new ball, and the ball changes is shape every time it’s bowled.
So, when you are an investor, the environment in which you play isn’t controllable, and circumstances rarely repeat exactly. What’s most important then is how you behave when others are behaving oddly.
One of the best tools to think and behave better in investing is what Howard Marks calls the “second level thinking”. Here is how Marks explains it in his book The Most Important Thing…
- First-level thinking says, “It’s a good company; let’s buy the stock.” Second-level thinking says, “It’s a good company, but everyone thinks it’s a great company, and it’s not. So the stock’s overrated and overpriced; let’s sell.”
- First-level thinking says, “The outlook calls for low growth and rising inflation. Let’s dump our stocks.” Second-level thinking says, “The outlook stinks, but everyone else is selling in panic. Buy!”
- First-level thinking says, “I think the company’s earnings will fall; sell.” Second-level thinking says, “I think the company’s earnings will fall less than people expect, and the pleasant surprise will lift the stock; buy.”
In other words, first-level thinking, as the name suggests, is what comes to our mind first. And given that our mind is searching for simplicity, in most cases, this kind of thinking is simplistic and superficial, and just about everyone can do it (a bad sign for anything involving an attempt at superiority, like in investing).
In essence, if you wish to perform better than the rest – or in other words, perform better than average – your thoughts actions, expectations, and portfolio have to diverge from the norm.
Most importantly, you don’t have to be just different, you also must get it right…not 100% of the times, but it’s good to aim for a distinction…that is 75%. And for that, you need to practice second-level thinking.
Here is what Howard Marks writes on investing defensively in his amazing book The Most Important Thing…
When friends ask me for personal investment advice, my first step is to try to understand their attitude toward risk and return. Asking for investment advice without specifying that is like asking a doctor for a good medicine without telling him or her what ails you.
So I ask, “Which do you care about more, making money or avoiding losses?” The answer is invariably the same: both. The problem is that you can’t simultaneously go all out for both profit making and loss avoidance. Each investor has to take a position regarding these two goals, and usually that requires striking a reasonable balance. The decision should be made consciously and rationally.
Stimulate Your Mind
Here’s some amazing content I read during the week gone by…
- Handy list of some great books on the psychology behind human decision making and irrationality
- Great, practical way to avoid death!
- Bihar orders head-teachers to taste all school lunches before they are served to children. Now that’s a simple solution to a complex situation.
- Anyone can learn from their own experience. The competitive advantage comes from being able to learn from the experience of others. Now, what about learning from history’s most hated?
Sure, children are stubborn, noisy, and often hard to deal with. But they also possess some of the most fearless and creative minds in the world, a trait that should be made second nature to anyone grown up.
My daughter, for instance, won’t take “I don’t know” for her “Why?” questions. She is fearless in the face of things I consider as daunting – like trying something new.
She will look at everything in a new, fresh way. For her, there isn’t “one right way” do a thing.
To a child the world is a playground and everything therein is a toy. If, as grown-ups, we can look at life, work, and our problems in the same way and then try to find solutions, we would indeed possess power of kings.
You see, there is always enjoyment hiding in what you do, you just have to find it. Start taking a look at your world with a renewed sense of vigour, like a child does.
You will be much happier with the results of your hard work.
The renowned chair designer Bill Stumpf was once asked what criteria he used to select new projects.
He responded – “There are three things I look for in my work: I hope to learn something, I want to make some money, and I’d like to have some fun. If the project doesn’t have the promise of satisfying at least two of these, then I don’t sign on.”
That’s the way to go!
If you haven’t done it already, sign up here to receive Poke the Box in your email…and get ready for stimulating Saturday mornings.
Play like a child.
Please avoid death.
Till next weekend…
Chief Poker – Poke the Box
The renowned chair designer Bill Stumpf was once asked what criteria he used to select new projects. He responded – “There are three things I look for in my work: I hope to learn something, I want to make some money, and I’d like to have some fun. If the project doesn’t have the promise of satisfying at least two of these, then I don’t sign on.”
I really liked this. If any of us have these as an opportunity we must must exercise our option.
Very well written post Vishal ! Thank you !!
In my opinion, the second-level thinking becomes even more important when we are dealing with complex adaptive systems. A wonderful post compiled by Jana on his blog.
Second-level thinking can also be developed by pondering over some interesting case studies like –
CS 1: There was a problem with mice on campus. The solution for exterminating the mice was to pay students $1 for every dead mouse they delivered. It worked ! Until the students began breeding the mice in order to make more money.
CS 2: The authorities wanted to ensure smooth traffic movement between Noida and Delhi even as one carriageway of Kalindi Kunj bridge was closed for repair. So, recently they allowed toll-free travel on DND Flyway from 9 am to 10 am and from 5 pm to 7 pm. What they did not anticipate was the commuters viewing this as an opportunity to save Rs 22 (toll for a car) as they zipped past the toll gates. Starting 8.30 am, and again around 4.30 pm, cars begin to line up at the entrance of the Flyway. The drivers sit in wait for the toll gates to open, allowing them a free drive for the day.This defeats the purpose of making it toll-free. By waiting till 9 am or 5 pm, they add to the traffic volume during peak hours. All to save Rs 22? That, too, is pointless because by waiting for that long, they get stuck in a jam at the Ashram choke point and spend money on fuel.
I think these specific instances are more about “unintended consequences” but can be associated with the mental models of “Inversion” and “Second level thinking”.