The One Percent Almanack

Wit and Wisdom on Investing, Business, and Life

BookWorm: Mosaic: Perspectives on Investing

Great perspectives on investing from the wonderful investor and multidisciplinary thinker, Mohnish Pabrai.

I am sure the author of this book needs no introduction, but for the benefit of people who don’t know much about him, I am going to start with an interesting trivia. How much would you pay to have lunch with Warren Buffett? How about Rs 4 crore?

Don’t be surprised because that’s the amount Mohnish Pabrai (along with his friend Guy Spier) paid to have a private lunch with Warren Buffett in 2006.

Mohnish manages US$ 850+ million US based fund called Pabrai Funds and is a hardcore Buffett disciple. He has written another popular book called The Dhandho Investor.. However, the book I am talking about here is a rare one.

Mohnish has built 3 successful businesses in the last 25 years, including a technology company, a Buffett style hedge fund and a very successful philanthropic organization called Dakshana Foundation, which educates talented underprivileged children to qualify for IITs. With this kind of experience, I am sure he has some interesting insights for us.

In the previous issue of VIA, we had shared the link to Dakshana’s annual report. If you haven’t read it yet, I would suggest please don’t miss it.
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Behaviouronomics: Do Something Bias

Always being in the thick of action can be dangerous to your long term investment returns. The habit is difficult to overcome, but you must definitely make a start. Read more to find out.

Have you noticed that there are some people who are so restless that they find it impossible to sit at one place quietly? They have very short attention span and can’t stay with one activity for long. In medical science this abnormality is known as ADHD (Attention Deficit Hyperactivity Disorder).

Now before you brush aside ADHD as something which isn’t relevant to you, allow me to hold your attention for one more second. Here is an interesting fact – Evolution has installed the seeds of ADHD in every human brain.

Some people have very severe symptoms of ADHD and they may need medical treatment. But for the rest of us this disorder manifests very subtly in our day to day decision making.

Famous scientist Blaise Pascal figured something very deep when he said, “All of humanity’s problems stem from man’s inability to sit quietly in a room alone.”

In an attempt to be efficient and productive, we force ourselves to always stay busy with some task or other. But sometimes too much activity is counterproductive. In behavioural finance, it’s called Do-Something Bias.

A wise man once said, “There is no bigger waste of time than doing something efficiently which shouldn’t be done at the first place.”

Do-something bias is not only wasteful but can harm you in the long term.
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Spotlight: The Tyranny of Valuations

Valuing stocks seems like a tough task in itself and more difficult is drawing a line between paying up and overpaying. Here are some insights on this topic I draw from investing legends and their experience.

Charlie Munger said this in his landmark speech titled – A Lesson on Elementary, Worldly Wisdom As It Relates To Investment Management & Business…

Over the long term, it’s hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, you’re not going to make much different than a 6% return—even if you originally buy it at a huge discount.

 Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you’ll end up with a fine result.

Now, if I were to look at some of the high quality businesses in India, it surely seems that investors are taking Mr. Munger’s idea about paying an “expensive looking price” very seriously. Here are, for instance, the P/E ratios of some high quality businesses…

 

Data Source: Screnner.in

In Lewis Carroll’s “Through the Looking Glass”, Alice’s finds that she has to run faster and faster just to stay in place.

Well, in our country,” said Alice, still panting a little, “you’d generally get to somewhere else if you run very fast for a long time, as we’ve been doing.

Here’s the advice Red Queen, an antagonist in the story, offers Alice…

A slow sort of country!” said the Queen. “Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!

In sum, the Red Queen advises Alice to exert ever more effort just to maintain her current position.
Evolutionary biologist Leigh Van Valen took inspiration from the Red Queen’s words and proposed a principle called the Red Queen Effect in 1973 to explain how, for an evolutionary system, continuing development is needed just in order to maintain its fitness relative to the systems it is co-evolving with.
In biology, this means that animals and plants don’t just disappear because of bad luck in a static and unchanging environment, like a gambler losing it all to a run of bad luck at the casino.
Instead, they face constant change – a deteriorating environment and more successful competitors and predators – that requires them to continually adapt and evolve new species just to survive.
This theory has been applied to explain the relatively high speeds of rabbits and foxes, each of which developed faster running abilities in an attempt to gain respective advantage in the predator-prey relationship between these two animals.
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Life 2.0: Habits of Life

The key to bringing lasting change in your life is by way of great habits. And the best way to build great habits is by starting small and building up.

I hope you would agree with me that life isn’t all about stock market investing or for that matter just about money. Making money is only a means to a greater end i.e., living a happy life.

It’s true that for many people stock market investing is a passion and they don’t do it just for money. However, it circles back to the logic that the activity of investing in stock market makes them happy. So investing is just a tool to achieve something more important – personal happiness.

The age old wisdom suggests that happiness is brought about by the right balance of financial, mental, physical and spiritual health. What financial abundance does is that it gives you an option to stop worrying about money all the time and focus your energy towards other happiness factors.

But you don’t have to wait till you are financially free to start your work on other areas of life. You can start today. Let’s pick up one area, say health and see how you can bring a change in this part of your life.

Everybody knows that to be more healthy and fit, you need to exercise and eat well. It is a common knowledge and part of everybody’s new year resolution. Problem is that these resolutions are short lived and motivation to carry on the new activity dies down rapidly after few days.
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EthicalAnalyst: Ethics in Investment Business

Honesty and ethical practices are of utmost importance in any business, and especially in the investment business that remains clouded under mistrust. What’s wrong and what must be righted is what we discuss here.

The richest one percent of this country owns half our country’s wealth, five trillion dollars. One third of that comes from hard work, two thirds comes from inheritance, interest on interest accumulating to widows and idiot sons and what I do, stock and real estate speculation. It’s bullshit. You got ninety percent of the American public out there with little or no net worth. I create nothing. I own. We make the rules, pal. The news, war, peace, famine, upheaval, the price per paper clip. We pick that rabbit out of the hat while everybody sits out there wondering how the hell we did it. Now you’re not naive enough to think we’re living in a democracy, are you buddy? It’s the free market. And you’re a part of it. You’ve got that killer instinct. Stick around pal, I’ve still got a lot to teach you.


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