Blog – Value Investing Almanack – Safal Niveshak

Behaviouronomics: Innumeracy

September 17, 2017

Numeracy is the ability to intuitively understand numbers, their magnitude, their relationships, and how they are affected by operations. Unfortunately, innumeracy is far more widespread and socially accepted than illiteracy. To avoid poor decisions in money and investments it’s supremely important that one understands the language of numbers and develops a sense of probability.

In the 2.5 million years of human evolutionary history, homo sapiens never had to deal with numbers until about 12,000 years ago when complex societies began to appear. In the wake of the Agricultural Revolution, a completely new type of information became vital – numbers.

A critical step was made sometime before the ninth century AD, when a new partial script was invented, one that could store and process mathematical data with unprecedented efficiency. This partial script was composed of ten signs, representing the numbers from 0 to 9 – the Arabic numerals. When several other signs were later added to the Arab numerals (such as the signs for addition, subtraction and multiplication), the basis of modern mathematical notation came into being.

Unfortunately, human brain never got a chance to adapt to storing and processing numbers. Yet the development of modern society is firmly standing on the foundation of mathematical principles. In fact, until last few centuries, the common man didn’t have to deal with much mathematics. Anything beyond simple addition or subtraction was reserved for scientists and scholars who indulged in advance concepts for their own amusement.

Spotlight: Anti-Patterns from the History of Humankind

September 15, 2017

Anti-pattern is a field of study in software engineering, which is defined as the commonly occurring solution to a problem that generates decidedly negative consequences. History, including that of investing, should be studied using the lens of anti-patterns.

Benjamin Graham’s book The Intelligent Investor is one of the greatest investment classics. I know that you already know it but I wanted to write it again so that I don’t forget it. In the introduction of the book, Graham reminded us of the famous poet George Santayana’s quote, “Those who do not remember the past are condemned to repeat it.”

It’s not just a quote but a warning. Unfortunately, most people choose to ignore this warning. German philosopher Friedrich Hegel confirmed it when he observed, “The only thing we learn from history is that we learn nothing from history.”

The interesting thing about using quotes is that you can always find some wise words uttered by someone to prove your point. The two quotes that I used above were meant to highlight the importance of learning from history. To contradict it, let me tell you what Warren Buffett wrote in his 1991 letter to investors – “If history books were the key to riches, the Forbes 400 would consist of librarians.”

BookWorm: When Genius Failed

September 15, 2017

The true story of how a hedge fund, run by a team of super smart Nobel laureates, tried to out think the market and failed. It’s a remarkably instructive tale of how intelligence, when corrupted by arrogance and hubris, eventually leads to disasters.

Success, they say, leaves clues. So does failure. Unfortunately, the world focuses too much on learning only from successes. Success alone leaves the learning equation incomplete.

Identifying patterns is the key to drawing useful lessons from the past. Success patterns are just one part. The patterns left by failure are the remaining part of the puzzle. To succeed, one has to study both. Learning ‘what to do’ from success patterns and learning ‘what to avoid’ from failure patterns.

A person trying to get ahead in the world, with no will to study the failures, is akin to the proverbial one-legged man who is trying to score points in an ass-kicking contest.

Behaviouronomics: Focusing Illusion

August 30, 2017

If I ask you, “Are you unhappy?” what kind of thoughts have I triggered in your mind?

For most people presented with this question, the mind invariably wanders off to some of the unpleasant episodes in life. There’s nothing to worry if this was a question asked in a happiness survey by an innocent volunteer. But such questions are typically framed by people who are in the business of persuasion or manipulation. This is a trick question which is designed to lead your mind precisely to those thoughts which the questioner wants you to think.

Robert Cialdini, in his new book Pre-Suasion, has termed this persuasion strategy as Target Chuting. He writes –

If I inquired whether you were unhappy in, let’s say, the social arena, your natural tendency to hunt for confirmations rather than for disconfirmations of the possibility would lead you to find more proof of discontent than if I asked whether you were happy there. This was the outcome when members of a sample of Canadians were asked either if they were unhappy or happy with their social lives. Those asked if they were unhappy were far more likely to encounter dissatisfactions as they thought about it and, consequently, were 375 percent more likely to declare themselves unhappy.

And the reason for such tendency is our good old confirmation bias. Its scientific name is positive test strategy, writes Cialdini, “But it comes down to this: in deciding whether a possibility is correct, people typically look for hits rather than misses; for confirmations of the idea rather than for disconfirmations. It is easier to register the presence of something than its absence.”

And once your attention has been drawn towards a specific set of thoughts, the mind tends to assign unnecessarily high weightage to those thoughts.

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Reading isn’t a Race

August 30, 2017

Recently I started reading a book called The Moral Saying of Publius Syrus. There were two reasons I picked it up. First, it came as a recommendation from multiple places. When a book name starts popping up numerous times, I move its rank up in my to-read list. Second, it was a small book. The thought of finishing a book in 1-2 hours is very enticing. But it’s deceiving too and I’ll circle back to this thought later in the post.

As I patiently worked my way through the first few pages of Publius Syrus’ book, it was clear that I wasn’t enjoying it. But the more boring it became the more I took it on my ego. I didn’t want to give up on a supposedly great classic. I just wanted to finish the book and heave a sigh of relief.

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