Spotlight

In 2014, JPMorgan Asset Management did a study and discovered that the 40 best days accounted for more than the entire S&P 500 return from 1993–2013. In other words, if someone traded only on these specific 40 days, i.e., invested his money in S&P 500 in the morning and sold in the evening then he would have the same returns as someone who stayed invested for 20 years.
[Read more…] about The Risk of Being Out of the Game

Archimedes — a Greek mathematician — was born in 287 BC in the seaport city of Syracuse, Sicily. Some consider him as the greatest mathematician of all time. Although he’s known for the discovery of Archimedes Principle, his often quoted for his famous saying —

Give me a lever long enough and a fulcrum on which to place it, and I shall move the world.

While Archimedes did not invent the lever, his did extensive work on the usage of levers. Archimedes designed block-and-tackle pulley systems, allowing sailors to use the principle of leverage to lift objects that would otherwise have been too heavy to move.

A lever is a simple machine that amplifies an input force to provide a greater output force, which is said to provide leverage. There isn’t a single mechanical device in the world which doesn’t use the laws of the lever.

When people realized that leverage could magnify the effect of non-physical things too the first thing they tried it on was money. In the last few decades, the world of finance has taken Archimedes’ words literally.
[Read more…] about The Dagger of Debt

In his 2010 letter to shareholders, Warren Buffett tells a joke —

Customer: Thanks for putting me in XYZ stock at 5. I hear it’s up to 18.
Broker: Yes, and that’s just the beginning. In fact, the company is doing so well now, that it’s an even better buy at 18 than it was when you made your purchase.
Customer: Damn, I knew I should have waited.

Reading this joke the first time, I laughed at broker’s convoluted argument and the stupidity of the customer. How can a stock be better buy at 18 than it was at 5?
[Read more…] about Exploration Vs Exploitation

A few months back I had written a post on Benford’s Law. It’s a fraud detection method to estimate if a given financial statement could be fake. In other words, it tells you if the numbers in a document are cooked up or real. When I first learned about Benford’s Law, I was like a kid with a new toy. I wanted to play with it immediately. Being a programmer, I wrote a small piece of code to extract the numbers from an annual report and test those numbers against Benford’s rule.

The next logical thought was to use my code and run it on the annual reports of all the publicly listed companies. This way, I could immediately identify all the companies which could be faking numbers. Wouldn’t that be cool? For some time, I even dreamed of floating a startup with this killer fraud detection product. I was going to be rich.

Now, instead of building my million dollar startup, I am writing this post. That should already give you a hint how that story turned out.
[Read more…] about The Tyranny of Screening Tests: From Medicine to Investing

It took the world by surprise when Warren Buffett announced that he’d be donating all his personal wealth to Bill Gates foundation. Till then people imagined Buffett and Gates as two fierce businessmen trying to outdo each other for the top spot on the Forbes list of billionaires. Bill Gates has dominated that list for a good part of last 25 years. Buffett has also remained in top five for the same period.

So Buffett’s decision came out as a shocking announcement. However, very few people knew that Warren Buffett and Bill Gates had been very close friends since 1991. They watch movies, go on family vacations and play bridge together.

In 1996, Bill Gates wrote about an incidence when Buffett invited him to play a game of rolling dice. He showed a set of four dice to Gates and proposed that both of them choose once die each from the set and discard the remaining two. Then whoever rolls a higher number most often would be the winner. [Read more…] about An Early Bird Or The Second Mouse?