Spotlight

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

Peter Kaufman has done an amazing job compiling some of the world’s best lessons on investment behaviour into a masterpiece. We know it as Poor Charlie’s Almanack, which is a collection of speeches and talks by Charlie Munger.

While the entire book is one amazing journey through the mind of one the greatest investment and behavioural thinkers of our times, one part that takes the cake is where Kaufman has condensed Munger’s teachings into a checklist.

He calls this “Investing Principles Checklist”, as it contains the core principles that has made Munger the brilliant investor he is today.

[Read more…] about The World’s Best Investing Checklist

This is the fourth part of the series where I’m sharing with you 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.

20 Rules of Formulating Knowledge

It’s estimated that one thing common between forty percent of medical students in western countries is a tool called Anki. Anki assists them in assimilating a gargantuan amount of information that medical education requires. Similarly, many language learning enthusiasts also use Anki to memorize the vocabulary of a new language. However, outside these two cohorts, Anki software is pretty much unknown. Recently, Anki has been picking up interest among people from the programming community and a bunch of self-proclaimed life-long-learners — Yours truly being one of them.
[Read more…] about Spotlight: Lindy Beyond Books – Part 4