Blog – Value Investing Almanack – Safal Niveshak

Behaviouronomics: Serpico Effect

December 10, 2017

When it’s easy to cheat and steal in a system, the psychological forces of incentive caused bias and social proof tendency feed each other and result in a very dangerous phenomenon where the system becomes hostile towards the honest participants.

In 2004, a US-trained young research executive joined an Indian generic drug company. In the first few months of his employment, Dinesh Thakur was not only appalled but utterly shocked to learn about the widespread unethical practices in the company. Upon further investigation, he was flabbergasted to discover the extent to which the firm, Ranbaxy Laboratories, had provided false data to the World Health Organization (WHO).

Ranbaxy had been seeking prequalification — which enables pharmaceutical companies to sell their products to WHO member countries — for drugs used by HIV patients in South Africa. The U.S. was the largest buyer of these drugs…[Thakur] discovered a company culture that not only tolerated fraud, but also apparently celebrated and encouraged it among its employees. He found that the company was playing fast and loose with its testing of drugs. The company had taken shortcuts, never tested their products before they released them to the market and fabricated data in its clinics to prove they would work in patients. (Source:Fighting a culture of fraud)

Ranbaxy board ignored Thakur’s findings and was asked to leave the company. However, the story doesn’t end there. Thakur decided to do something about this problem. He reported it to U.S. FDA (Food & Drug Administration). It took eight long years for FDA to investigate the fraud. In 2013, Ranbaxy pleaded guilty to the charges and was fined $500 million. Thakur collected $48 million for his whistle-blower role.

Spotlight: Avoid Multiplying by Zero

December 5, 2017

Most real-world systems are multiplicative in nature. Multiplicative systems are counterintuitive because human brain tends to think in terms of averages. In this post, we explore the connection of mathematics, through the study of multiplicative systems, with Charlie Munger’s idea of avoiding serious mistakes for ensuring superior performance over the long term.

The story of this fund manager is fascinating, instructive and true.

For fifteen consecutive years (1991-2005) Legg Mason Capital Management Value Trust fund, run by Bill Miller, outperformed the S&P 500 index. Not just the overall fifteen-year performance but for every single year in that period. In a world where less than twenty-five percent of the fund managers beat the market in a given year, doing it for 15 calendar years in a row is noteworthy. Even legendary investors like Peter Lynch couldn’t achieve this feat, i.e., consistently doing better than the broader market for such a long time.

Let’s put Miller’s performance in a more tangible form. If you invested $10,000 with Mr. Miller fund at the beginning of 1991, you would have $98,000 at the end of 2005. That’s a 10-bagger in fifteen years, i.e., close to 15 percent CAGR. Not bad. Not great either. However, what’s remarkable was the consistency of market outperformance. The returns came like clockwork. Year after year.

Could it be the case of survivorship bias? Pure luck? Michael Mauboussin, a very successful money manager and author of numerous useful books on investing, estimated that the probability of beating the market in the 15 years ending 2005 was 1 in 2.3 million. Conclusion – it wasn’t luck. Bill Miller was smart and knew his game.

Jason Zweig, a noted financial journalist and official editor of Benjamin Graham’s classic The Intelligent Investor, wrote this about Bill Miller in one of his articles –

Steadfast in his convictions and imperturbable under pressure, Mr. Miller was the ultimate iconoclast. He ran a fund with “value” in its name that feasted on technology

He bought Amazon.com during the Internet bubble. He bought Google in its initial public offering, when it was considered insanely overvalued by many. Your garden-variety fund manager studied economics in college, got an MBA and went straight into money management. Mr. Miller, by contrast, worked as an Army intelligence officer, pursued a Ph.D. in philosophy and was chairman of the Santa Fe Institute, a think tank devoted to the study of complexity in nature and society.
[Read more…] about Spotlight: Avoid Multiplying by Zero

Life 2.0: Do Good Deeds

November 30, 2017

It is not without reason that elders and a whole host of books and literature advocate doing selfless acts of kindness towards other people. Here is a true incident that a friend shared with me that has me believing that it pays as well to do good deeds in one’s life, whenever one gets a chance to do so.

This friend was boarding a flight and had booked an aisle ticket for himself. When he got to his seat, he saw an old woman sitting on his seat, talking to someone on the phone. He signalled to her that she was on his seat, to which the woman responded by shifting her legs so that he could get inside to the middle seat. She still had her phone stuck to her ears.

My friend finally spoke to her. “Excuse me Madam, but I think you are on my seat”, he said.

“You sit inside no?” pat came the reply from the old woman.

My friend looked at her in wonder and was about to retort to her when he thought the better of her age and went inside, plopping down in the middle seat, grumbling to himself and rolling his eyes at the old woman.

<!–more–>

Want to Read More? This content is exclusive for members of Value Investing Almanack. Login to read if you are a member. Else, click here to subscribe.

Benefits to VIA Members

Spotlight: Big ideas from Value Investing and why applying them in your investment decision making will be a great deal
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

Become a VIA Member. Click to Subscribe

Fighting the Last War

November 30, 2017

In Safal Niveshak’s Art of Value Investing workshops, when we discuss the mental biases, we show the following video to our participants (click on the image to watch). If you haven’t attended our workshop, then I would suggest that you pause here and watch this video before reading further. It’s a test of your awareness so don’t cheat 🙂

I hope you watched it. How did you do? By now you know that I am not interested if you got the count right. Did you spot the Gorilla in your first attempt? Yes? You have seen this video before, haven’t you?

The intention of the Gorilla experiment, as you must have learned in the video, wasn’t to test your observation skills. It was to demonstrate a critical behavioural bias called Inattentional Blindness. It’s one of the big ideas from the field of psychology. If you want to know more about it, you can read this post on our blog.

The learning here is that when we’re focussing intently on one thing, we may miss something else which is there in plain sight. Watching a video about invisible dancing gorilla isn’t going to make you immune to inattentional bias. I am going to prove this in a minute. Here’s another version of the gorilla experiment. Let’s see if you can win

<!–more–>

Want to Read More? This content is exclusive for members of Value Investing Almanack. Login to read if you are a member. Else, click here to subscribe.

Benefits to VIA Members

Spotlight: Big ideas from Value Investing and why applying them in your investment decision making will be a great deal
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

Become a VIA Member. Click to Subscribe

Investor Insights: Kenneth Jeffrey Marshall

November 21, 2017

Note: This interview was originally published in the November 2017 issue of Value Investing Almanack. To read more such interviews and other deep thoughts on value investing, business analysis and behavioral finance, click here to subscribe to VIA.

Kenneth Jeffrey Marshall - Value Investing Almanack - Safal Niveshak

Kenneth Jeffrey Marshall is an American value investor, teacher, and author. He teaches value investing in the masters in finance program at the Stockholm School of Economics in Sweden, and at Stanford University. He also teaches asset management in the MBA program at the Haas School of Business at the University of California, Berkeley. He is the author of the 2017 bestselling book Good Stocks Cheap: Value Investing with Confidence for a Lifetime of Stock Market Outperformance published by McGraw-Hill. He holds a BA in Economics, International Area Studies from the University of California, Los Angeles; and an MBA from Harvard University. He splits his time between California and Sweden.

Safal Niveshak (SN): Thanks for doing this interview, Kenneth! Please tell us a little about your background and journey, and how you got into value investing?

Kenneth Marshall (KM): Well, I was first shown value investing in the late 1980’s. But it wasn’t like some sudden enlightenment. It actually took me a decade to get it. I’d rather not think about the cost of that delay.