Special Report

Paul Graham is a very successful venture capitalist. He is an accomplished entrepreneur and the founder of YCombinator, a startup incubator. But it’s not Graham’s accolades that sparkle, it’s his deeply thoughtful mind. The collection of essays on his blog that he’s been writing since 2004 is a treasure trove of wisdom for anyone who is in serious pursuit of learning how to think.

One of my favourite essays is How to Make Wealth. In this masterpiece, Graham argues –

Suppose you are a little, nimble guy being chased by a big, fat, bully. You open a door and find yourself in a staircase. Do you go up or down? I say up. The bully can probably run downstairs as fast as you can. Going upstairs his bulk will be more of a disadvantage. Running upstairs is hard for you but even harder for him.

Replace the little nimble guy with a small investor and the bully with a big institutional investor. In fact, the bully doesn’t necessarily have to be the institutional investor. Big-fat-bully represents majority of players in the stock market. And to outperform this bully a small investor needs to run upstairs. Running upstairs in this context means exploiting the structural strength that financial markets bestow on the small investor. What’s this strength?

[Read more…] about The Big Edge of a Small Investor

On the morning of the Battle of Waterloo in 1815, Napoleon Bonaparte smugly assured his generals, “I tell you Wellington is a bad general, the English are bad soldiers; we will settle this matter by lunchtime.”

Then, around 100 years later, just before the Titanic was about to embark on its maiden journey, one passenger asked a ship’s agent for extra insurance on some valuables in her luggage. The agent replied, “Ridiculous. This boat’s unsinkable.”

Captain Smith himself was asked about the safety of the Titanic. He answered – “I cannot imagine any condition which would cause a ship to founder. I cannot conceive of any vital disaster happening to this vessel. Modern shipbuilding has gone beyond that.”

Then, after the ship had struck the iceberg, a passenger asked her employer if they should do something about it. He replied, “Go back to bed. This ship is unsinkable.”

Move forward another 87 years and consider the example of Enron, and the e-mail that Kenneth Lay, then the CEO, sent to his employees in 2001. He declared, “Our performance has never been stronger, our business model has never been more robust. We have the finest organization in American business today.” That was less than four months before Enron filed for bankruptcy.

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Before you get put off by the cheesy title, let me share a few words about the author. Joel Greenblatt managed money for Gotham Capital from 1985 to 2006 and generated an annualized returns of 40 percent during that period. In case that didn’t make you jump on your seat, let me put that number in proper perspective (and give you a glimpse into the massive power of compounding). If you invested Rs 1 lac in Gotham fund, over 20 years your initial investment would have turned into a staggering sum of around Rs 8.4 crore

Joel is a practitioner of value investing and pretty successful at it. And to add icing on the cake, Greenblatt is an adjunct professor at Columbia Business School. Which means, he’s an experienced teacher too. This unique mix of skills is extremely rare in the world of investing. This ability to teach by simplifying the ideas is what separates the likes of Warren Buffett and Charlie Munger from all the other successful value investors. Joel Greenblatt is pretty much up there in the same league.

As the title says, it’s a little book. A little over 100 short pages. But don’t get fooled by its brevity and the simplicity of Greenblatt’s message.

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The funny thing about quotes is that you can find anything said by an eminent personality that proves your point. History has produced numerous philosophers and genius thinkers who have made a variety of contradictory statements. Some have contradicted their intellectual rivals and some have even contradicted themselves.

Another risk of using famous quotes to prove your point is that the person reading the quote may not have the proper context in his mind and end up interpreting the sentence in a totally different manner.

Nevertheless, famous quotes are famous for a reason. Einstein’s quotes aren’t famous just because Einstein said them. In fact, many of the aphorisms attributed to Einstein weren’t even uttered by him. The famous quotes have the tendency to get etched in our memory because they pack the right combination of the words to convey a powerful idea in the most efficient manner. They may not be true but they make you think.

A quote has served its purpose if it makes you think. Whether you agree with it is something you can decide after you have worked out your own mental muscles by giving it an independent thought. That’s why reading a book of quotes can be a very rewarding experience. Especially, if the book has been written by your favourite author. Nassim Taleb, known for writing thick and idea-dense books, has also authored a relatively less known book called The Bed of Procrustes. He writes –

Aphorisms, maxims, proverbs, short sayings, even, to some extent, epigrams are the earliest literary form – often integrated into what we now call poetry. They carry the cognitive compactness of the sound bite….Aphorisms require us to change our reading habits and approach them in small doses; each one of them is a complete unit, a complete narrative dissociated from others.

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“Dad! I’ve secured the best grade in English.”

“But son what good is that? You have to pursue engineering, earn the best grades in Math and Science like your best friend does.”

“Mom, look I’ve won this Art competition!”

“That’s great my dear, but focus on your studies. These paintings won’t help you in your career.”

“Dad, I’ve secured 85 per cent marks in finals!”

“But son, the highest in your class is 93 per cent. So this is not up to the mark. You must work harder.”

If you have heard such interaction between parents and kids, or have experienced it yourself, let’s face it. Not a day goes by that you’re not tempted to glance to the left and to the right to see how your child, or even you, measure up to the people around.

But it doesn’t stop there, does it?

You’re tempted to compare your spouse to other spouses, your salary to others’ salaries, your car to others’ cars…and your stocks to others’ stocks.

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