Spotlight

Investing is simple, but not easy. Still there are a few eternal rules that, if you can tie them well with your investment process, should make the journey profitable.

The Wizard: Do not arouse the wrath of the great and powerful Oz! I said come back tomorrow!

Dorothy: If you were really Great and Powerful, you’d keep your promises!

The Wizard: [As Toto reveals him behind a curtain] You presume to criticize the Great Oz? You ungrateful creatures! You’re lucky that I’m only holding this till tomorrow, instead of the next twenty years from now!

Dorothy: [Pulling aside the curtain] Who are you?

The Wizard: I am the great and powerful…Wizard…of Oz.

Dorothy: You are? I don’t believe you.

The Wizard: I’m afraid it’s true. There’s no other Wizard except me.

Dorothy: Oh, you’re a very bad man!

The Wizard: Oh, no, my dear, I… I’m a very good man – I’m just a very bad Wizard.

In the noted 1939 American musical comedy-drama fantasy film The Wizard of Oz, one of the lead characters Dorothy, along with her dog Toto, is swept away by a tornado to the Land of Oz. It is ruled by a tyrant in whom people had vested extraordinary powers, but who was later exposed as vulnerable as the spell surrounding Oz is broken.

The stock market is like that Wizard in which people vest extraordinary powers from time to time. Look back to the mania of 1999 or 2007 and you’d know where I am coming from.

The promise of easy money lures more and more people to the stock market during such times when “nothing can go wrong” and “investing looks very easy.” But when the spell breaks – it ultimately does – those very people appear vulnerable. These are the times when Warren Buffett’s quote appears like a gospel truth –

Only when the tide goes out do you discover who’s been swimming naked.

Charlie Munger says –

[Investing is] not supposed to be easy. Anyone who finds it easy is stupid.

Now, that’s a great deal of wisdom packed into a few words. What Charlie supposedly means by this is that while it is pretty simple to earn average results from stocks, it isn’t easy to make superior investments and earn outsized returns for a long period of times. So people, let by the spell of bull markets, who think making great money from stocks is easy are in for a nasty surprise.
[Read more…] about Spotlight: Investing’s Few Eternal Truths

Most of us invest in the first place is to attain financial freedom so that we do not have to worry about money. But most of us become slaves of the short term stock price movements. And that creates stress. And stress is bad, very bad.

9:20 AM – Log into trading account/portfolio tracker. Check today’s gains/losses. Close window.
10:00 AM – Log into trading account/portfolio tracker. Check today’s gains/losses. Close window.
3:00 PM – Log into trading account/portfolio tracker. Check today’s gains/losses. Close window.
3:15 PM – Attempt to start a project at work. Fail. Open window. Log into trading account/portfolio tracker. Check today’s gains/losses. Close window.
3:16 PM – See last 15 minutes and extrapolate…

Sound familiar? Is this what you do? Are you constantly checking your stock trading account or online portfolio tracker minute after minute, day after day, wasting your time and probably killing your peace and returns? Well, since you are a subscriber to Value Investing Almanack, there’s a great probability that this situation does not sound familiar.

But in case you have been an investor in stocks over the past 10-15 years, and have seen occasional periods of great volatility, there’s a great probability that you have been through such situations when you repeatedly and stressfully checked your stock account to see how down you were on a given day or month.
[Read more…] about Spotlight: Zebras Don’t Get Ulcers, Investors Do

Randomness in itself is not risky when it comes to investing in the stock market. But how you manage that randomness is what matters in the final outcome of your investment process.

Imagine you are offered to play a betting game with a regular dice. The deal is that if your chosen number turns up, you win and get back double the amount you bet. Would you play this game?

Using simple probabilities, we can see that the expected value of this wager is negative. How? The probability of each number on the dice (with six faces) is 1/6. So expected value = 2 x (⅙) – 1 x (⅚) i.e., -(1/2).

If someone agrees to play this game, he’s blindly speculating. Isn’t he? He obviously doesn’t understand probability. The outcome of a dice throw is pretty random and you can’t hope to make money from randomness. But hang on. The game is about to get little more interesting and profitable.

If you’re informed (by reliable sources) that the dice is completely loaded (unfair) and number 6 turns up on every throw, would you bet your money now? Of course. The game is no more random for you. But for a person who doesn’t have this specialized information about dice, the game is still plagued by randomness.

Which means randomness could be subjective. It is not absolute – the same event is more random to one person than to another. Notice that the extent of randomness decreases with the knowledge we obtain (the dice is loaded and favours the number 6). Which simply translates to the idea that the better we understand the business we are exposed to, professionally or through a stock purchase, the less random the environment is to us.

The dice example might look very obvious and uninsightful but if you could draw a parallel in investing, the lesson learnt can turn a losing investment strategy to a winning one. Because there is strong correlation between randomness and risk.
[Read more…] about Spotlight: Randomness and Investment Risk

I read a column on Forbes’ website sometime back that contained a narration from one Nancy Ortberg, who was once a nurse at a hospital emergency room in California.

In her story, Nancy described something astonishing that she witnessed in the emergency room.

“It was about 10.30 pm,” she said. “The room was a mess. I was finishing up some work on the chart before going home. The doctor with whom I loved working was debriefing a new doctor, who had done a very respectable, competent job, telling him what he’d done well and what he could have done differently.

[Read more…] about The Intangibles of Assessing Management Quality

This is the fourth part of the series where I’m sharing those essays, articles, and speeches that pass the Lindy Filter. If you haven’t heard about this strange term called Lindy Filter, please read a detailed post I had written about Lindy Effect a few years back.

[Read more…] about Lindy Beyond Books – Part 5