The One Percent Almanack

Wit and Wisdom on Investing, Business, and Life

Vishal Khandelwal

Behaviouronomics: Priming

Every perception, no matter if you consciously notice, sets off a chain of related ideas in your neural network. It happens to you all the time, and though you are unaware, it changes the way you behave.

Has it happened to you to that you reached home and while turning off the engine of your car/bike you suddenly realized that you can’t recall when you took the turn right before your house? It’s as if you drove the whole way without consciously realizing. It felt as if someone else was driving while you were lost in your own thoughts.

Some call it ‘muscle memory’. Scientists believe that it’s your subconscious that did the driving while your conscious mind was lost in daydreaming and thinking about other things. The autopilot in you was being controlled by your subconscious. We can pull off tremendous feats in spite of being unaware of how we did it. That’s how powerful our subconscious minds are. But with great power comes great vulnerability too. On one hand, our subconscious serves us so well in carrying out the mundane stuff without taxing our brains and requiring our conscious attention, on the other, it is very suggestible too. Which means your subconscious mind absorbs all sorts of information from your surroundings without your permission and realization. And this information that bypasses your conscious attention and enters your mind from a backdoor, can change the way you make decisions and perceive the world around you.

Don’t believe it?

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Spotlight: What’s the Alternative?

While making an investment decision or while accepting or rejecting any bet, the important question to ask always is – “What’s the alternative?”

Warren Buffett, in his 2014 letter to shareholders, wrote…

We will never play financial Russian roulette with the funds you’ve entrusted to us, even if the metaphorical gun has 100 chambers and only one bullet. In our view, it is madness to risk losing what you need in pursuing what you simply desire.

Russian roulette is a game where the player is given the option to take a revolver, having only one bullet, put it on his own head and pull the trigger. If he survives, he stands to win a huge sum, say US$ 10 million. What’s the expected payoff for such bet?

In this game, the probability of surviving is 5/6 (assuming 6 chambers in the revolver) and the upside is US$ 10 million. Whereas probability of encountering the bullet is 1/6 and outcome of this event is the loss of one’s life. You can’t really calculate the expected payoff in this case for how do you put a loss amount on death? I guess it’s infinite.

So even if the payoff were to be in billions and even if the revolver had not six but 1000 chambers with only a single bullet, you still can’t calculate the expected value since the downside is infinite. Buffett was implying that if the downside of a bet is unacceptable to you, no matter how low the probability, you shouldn’t accept the bet.

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Life 2.0: My Friend Mohan

It was a usual day as I picked up a newspaper while waiting for a friend at a hotel lobby. My eyes were struck by an advertisement, which showed a smiling man sitting in his office chair.

“Hey, I know him,” I said to myself.

I realized that he was Mohan, my neighbour for three years, and friend for thirteen.

The reason I took time to recognize him was because I’d never expected him on the front page of a newspaper. After all, he is just a commoner like me and an employee of a state owned bank, which he was representing in this ad – smartly dressed, and with his usual vibrant and infectious smile.

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Super Investor: Sir John Templeton

“This time it’s different!”

How many times have you heard this from a stock market expert or from your friend who has made big money from stocks in a short time?

These words are commonly used in the stock markets to explain that stock prices can touch the sky, or touch the earth’s crust depending on whether they are rising or falling. But if you were to listen to the Sir John Templeton, these are four most dangerous words in investing – “This time it’s different.”

John Templeton was a legendary investor and mutual fund pioneer. Templeton became a billionaire by pioneering the use of globally diversified mutual funds. There’s another interesting fact about Sir John Templeton which is relatively less known. Both Warren Buffett and Templeton were students of Benjamin Graham albeit at different times. Templeton studied with Graham when he taught at New York University in the late Thirties, and Buffett at Columbia University in the early Fifties.

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  • InvestorInsights: Interviews with experienced value investors, learners, and deep thinkers
  • StockTalk: Thorough analysis of business models of companies (without any recommendations)
  • Behaviouronomics: Deep analysis of human behaviour and how it impacts investment decision making
  • BookWorm: Reviews of the best books on Value Investing and related subjects
  • Free Course – Financial Statement Analysis for Smart People (otherwise priced at Rs 5,900)
  • Archives: Instant access to our huge archive from the past three years
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Be Risk Averse, not Loss Averse

Note: This post was originally published in the August 2016 issue of Value Investing Almanack. To read more such posts and other deep thoughts on value investing, business analysis and behavioral finance, click here to subscribe to VIA.

On April 10, 2003, Pepsi announced a contest called “The Pepsi Billion Dollar Sweepstakes”. It was scheduled to run for 5 months starting from May in the same year.

For the contest, Pepsi printed one billion special codes which could be redeemed either on their website or via postal mail. According to Pepsi’s estimate, about 200-300 million of these codes were redeemed. Out of these, 100 codes were chosen in a random draw to appear in a two-hour live gameshow-style television special. Each of these 100 people were assigned a random 6-digit number, and a chimpanzee (to ensure a truly random number and of course to rule out any monkey business) backstage rolled dice to determine the grand prize number. This number was kept secret and the 10 players whose numbers were closest to it were chosen for the final elimination. On the evening of September 14, the final day of the contest, the event, titled Play for a Billion, was aired live. If a player’s number matched the grand prize number, he would win US$ 1 billion.
(Source: Wikipedia)

Given the scenario, it was highly unlikely that anyone would win a billion dollar. The chances were literally 1 in a billion. In spite of that, Pepsi was unwilling to bear the risk of the possible billion-dollar prize. So they arranged for an insurance company to insure the event. They paid US$ 10 million to Berkshire Hathaway to assume the risk. Yes, Warren Buffett’s Berkshire Hathaway. The same guy who is famous for his two iron rules –

1. Never lose money
2. Don’t forget rule number 1.

Then why would Buffett expose his company to such a big risk for a relatively paltry premium of US$ 10 million? Isn’t this akin to playing Russian roulette?

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