Spotlight

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?

The emotions of envy hinge on the habit of maximizing the returns in every area of life. Habitual maximisers always have a creeping anxiety about missing something. If you don’t stop at a near-satisfactory solution, it may take you an eternity to reach the smallest conclusion or perform the smallest act.

Lalchand, a new investor decides to pay a visit to the Mecca of Indian stock market – The Dalal Street. As he approaches the BSE building, a big bright glow sign board catches his attention.

“Guaranteed Multibagger Stock Ideas. Free!” The dancing lights around the letters were hypnotic.

His eyes immediately started searching for all too familiar star mark which usually punctuates such claims and leads you to conditions-apply disclaimer. Unable to find it, he gives in to the temptation and enters the building. An attractive receptionist greets Lalchand. She walks him into a spacious office.
[Read more…] about Spotlight: Envy, A Powerful Motivator but a Lousy Satisficer

There are strong parallels between Tupperware parties and the stock market investing. A Tupperware party is a whirlpool of psychological forces that suck the partygoers into making unnecessary purchases. A stock market isn’t much different.

In 1938, Earl Tupper developed a technology for air-tight plastic containers. His patented “burping seal” design distinguished his product from the competitors. However, despite being a revolutionary product, Tupperware sales did not pick up for first ten years.

Then in 1949, one of Earl’s sales representative, Brownie Wise, began selling Tupperware products through home parties. The idea was that housewives would invite friends and neighbours at home and the party would be a combination of social event and sales presentation.

[Read more…] about Spotlight: One Big Tupperware Party That’s Stock Market