Hi, Welcome to 3rd Special Edition
Brief Overview of What We will cover in this Issue
Detailed Key Takeaways from the book I am reading Currently
Key Takeaways from Investing Articles and Blogs
Why fees matter over the long run
Fear and Greed
Company Valuation & Inflation
Small Important Investing Video Clips
Autos and Speciality Chemicals
Why PSU Trades at a low Valuation
Fintech Data is useless?
Well known Fund manager’s insights on Proxy of Electronic Manufacturing & Aptus Holding
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Combating Negative Influences
The only road to consistent outperformance. To distinguish yourself from others, you need to be on the right side of those mistakes.
Many people will reach cognitive conclusions from their analysis, but what they do with those conclusions varies all over the lot because psychology influences them differently. The biggest investing errors come not from factors that are informational or analytical, but from those that are psychological
The first emotion that serves to undermine investors’ efforts is the desire for money, especially as it morphs into greed.
There’s nothing wrong with trying to make money. Indeed, the desire for gain is one of the most important elements in the workings of the market and the overall economy. The danger comes when it moves on further to greed.
Greed is an extremely powerful force. It’s strong enough to overcome common sense, risk aversion, prudence, caution, logic, the memory of painful past lessons, resolve, trepidation, and all the other elements that might otherwise keep investors out of trouble.
The combination of greed and optimism repeatedly leads people to pursue strategies they hope will produce high returns without high risk; Afterwards, hindsight shows everyone what went wrong: that expectations were unrealistic and risks were ignored.
Fear is an overdone concern that prevents investors from taking constructive action when they should.
Call it the holy grail or the free lunch, but everyone wants a ticket to riches without risk. Few people question whether it can exist or why it should be available to them. At the bottom line, hope springs eternal.
No strategy can produce high rates of return without risk. And nobody has all the answers;
One of the most harmful aspects of Human Nature
However negative the force of greed might be, always spurring people to strive for more and more, the impact is even stronger when they compare themselves to others.
In the world of investing, most people find it terribly hard to sit by and watch while others make more money than they do.
Investing shouldn’t be about glamour, but often it is.
Investors hold to their convictions as long as they can, but when the economic and psychological pressures become irresistible, they surrender and jump on the bandwagon.
The desire for more, the fear of missing out, the tendency to compare against others, the influence of the crowd, and the dream of the sure thing— these factors are near-universal. Thus they have a profound collective impact on most investors and most markets.
The Real challenge lies in figuring out who the winners will be, and what a piece of them is really worth today
Investors allowed their common sense to be overridden in the bubble. They ignored the fact that not all the companies could win, that there would be a lengthy shake-out period, that profitability wouldn’t come easily from providing services gratis, and that shares in money-losing companies valued at high multiples of sales (since there were no earnings) carried great danger.
To avoid losing money in bubbles, the key lies in refusing to join in when greed and human error cause positives to be wildly overrated and negatives to be ignored. Doing these things isn’t easy, and thus few people are able to abstain. In just the same way, it’s essential that investors avoid selling— and preferably should buy— when fear becomes excessive in a crash.
There’s no simple solution: no formula that will tell you when the market has gone to an irrational extreme, no foolproof tool that will keep you on the right side of these decisions, no magic pill that will protect you against destructive emotions. As Charlie Munger says, “It’s not supposed to be easy.”
Contrarianism
To buy when others are despondently selling and to sell when others are euphorically buying takes the greatest courage, but provides the greatest profit.
- SIR JOHN TEMPLETON
There’s only one way to describe most investors: trend followers
“Buy low; sell high” is the time-honored dictum, but investors who are swept up in market cycles too often do just the opposite. The proper response lies in contrarian behavior: buy when they hate ’em and sell when they love ’em.
Accepting the broad concept of contrarianism is one thing; putting it into practice is another.
It can be extremely painful when the trend is going against you.
Finally, it’s not enough to bet against the crowd. Given the difficulties associated with contrarianism, the potentially profitable recognition of divergences from consensus thinking must be based on reason and analysis. You must do things not just because they’re the opposite of what the crowd is doing, but because you know why the crowd is wrong. Only then will you be able to hold firmly to your views and perhaps buy more as your positions take on the appearance of mistakes and as losses accrue rather than gains.
Investment success requires sticking with positions made uncomfortable by their variance with popular opinion.
The thing most interesting about investing is how paradoxical it is: how often the things that seem most obvious— on which everyone agrees—turn out not to be true.
The reality is simpler and much more systematic: Most people don’t understand the process through which something comes to have outstanding moneymaking potential.
If everyone likes it, it’s probably because it has been doing well. Most people seem to think outstanding performance to date presages outstanding future performance. Actually, it’s more likely that outstanding performance to date has borrowed from the future and thus presages subpar performance from here on out.
~ If everyone likes it, it’s likely the area has been mined too thoroughly— and has seen too much capital flow in— for many bargains to remain.
~ If everyone likes it, there’s a significant risk that prices will fall if the crowd changes its collective mind and moves for the exit.
Superior investors know —and buy— when the price of something is lower than it should be. And the price of an investment can be lower than it should be only when most people don’t see its merit. Large amounts of money aren’t made by buying what everybody likes. They’re made by buying what everybody underestimates. . . .
Successful investors are said to spend a lot of their time being lonely.
If you believe the story everyone else believes, you’ll do what they do. Usually, you’ll buy at high prices and sell at lows. You’ll fall for tales of the“ silver bullet” capable of delivering high returns without risk. You’ll buy what’s been doing well and sell what’s been doing poorly. And you’ll suffer losses in crashes and miss out when things recover from bottoms. In other words, you’ll be a conformist, not a maverick; a follower, not a contrarian.
Why you should buy when there is uncertainty
By the time the knife has stopped falling, the dust has settled and the uncertainty has been resolved, there’ll be no great bargains left. When buying something has become comfortable again, its price will no longer be so low that it’s a great bargain. Thus, a hugely profitable investment that doesn’t begin with discomfort is usually an oxymoron.
It’s our job as contrarians to catch falling knives, hopefully with care and skill. That’s why the concept of intrinsic value is so important. If we hold a view of value that enables us to buy when everyone else is selling— and if our view turns out to be right— that’s the route to the greatest rewards earned with the least risk.
Finding Bargains
Howard Marks used the tech-stock mania as an example of the reliable process through which a good fundamental idea can be turned into an overpriced bubble. It usually starts with an objectively attractive asset. As people raise their opinion of it, they increasingly want to own it. That makes capital flow to it, and the price rises. People take the rising price as a sign of the investment’s merit, so they buy still more. Others hear about it for the first time and join in, and the upward trend takes on the appearance of an unstoppable virtuous cycle.
bargains are created is largely the opposite. Thus to be able to find them, it’s essential that we understand what causes an asset to be out of favor. This isn’t necessarily the result of an analytical process. In fact, much of the process is anti-analytical, meaning it’s important to think about the psychological forces behind it and the changes in popularity that drive it.
Bargains are often created when investors either fail to consider an asset fairly or fail to look beneath the surface to understand it thoroughly or fail to overcome some non-value-based tradition, bias, or stricture. A bargain asset tends to be one that’s highly unpopular. Capital stays away from it or flees, and no one can think of a reason to own it.
The necessary condition for the existence of bargains is that perception has to be considerably worse than reality. That means the best opportunities are usually found among things most others won’t do. After all, if everyone feels good about something and is glad to join in, it won’t be bargain-priced.
Patient Opportunism
There aren’t always great things to do, and sometimes we maximize our contribution by being discerning and relatively inactive. Patient opportunism— waiting for bargains— is often your best strategy.
. . . What’s past is past and can’t be undone. It has led to the circumstances we now face. All we can do is recognize our circumstances for what they are and make the best decisions we can, given the givens.
Investing is the greatest business in the world because you never have to swing. You stand at the plate; the pitcher throws you General Motors at 47! U.S. Steel at 39! And nobody calls a strike on you. There’s no penalty except opportunity. All-day you wait for the pitch you like; then, when the fielders are asleep, you step up and hit it.
One of the great things about investing is that the only real penalty is for making losing investments And even for missing a few winners, the penalty is bearable. (Missing a profitable opportunity is of less significance than investing in a loser.)
You simply cannot create investment opportunities when they’re not there. If it’s not there, hoping won’t make it so. “The market’s not a very accommodating machine; it won’t provide high returns just because you need them.”
When prices are high, it’s inescapable that prospective returns are low
Investment environment greatly influences outcomes.
The absolute best buying opportunities come when asset holders are forced to sell, and in those crises, they were present in large numbers.
The beauty of forced sellers is that they have no choice. They have a gun at their heads and have to sell regardless of price. Those last three words— regardless of price—are the most beautiful in the world if you’re on the other side of the transaction.
The key during a crisis is to be (a) insulated from the forces that require selling and (b) positioned to be a buyer instead. To satisfy those criteria, an investor needs the following things: staunch reliance on value, little or no use of leverage, long-term capital, and a strong stomach. Patient opportunism, buttressed by a contrarian attitude and a strong balance sheet, can yield amazing profits during meltdowns.
Knowing What You Don’t Know
It’s hard to know what the macro future holds and few people possess superior knowledge of these matters that can regularly be turned into an investing advantage.
Were the forecasts generally accurate? The answer was clearly no.
Were the forecasts valuable? Predictions are most useful when they correctly anticipate change. If you predict that something won’t change and it doesn’t change, that prediction is unlikely to earn you much money. But accurately predicting change can be very profitable.
One way to get to be right sometimes is to always be bullish or always be bearish; if you hold a fixed view long enough, you may be right sooner or later.
We have a dilemma: investment results will be determined entirely by what happens in the future, and while we may know what will happen much of the time when things are “normal,” we can’t know much about what will happen at those moments when knowing would make the biggest difference.
Most of the time, people predict a future that is a lot like the recent past. They’re not necessarily wrong: most of the time the future largely is a rerun of the recent past.
Join the “I don’t know” school and the results are more mixed. You’ll soon tire of saying“ I don’t know” to friends and strangers alike. After a while, even relatives will stop asking where you think the market’s going. You’ll never get to enjoy that one-in-a-thousand moment when your forecast comes true and the Wall Street Journal runs your picture. On the other hand, you’ll be spared all those times when forecasts miss the mark, as well as the losses that can result from investing based on overrated knowledge of the future.
The biggest problems tend to arise when investors forget about the difference between probability and outcome— that is, when they forget about the limits on foreknowledge:
• when they believe the shape of the probability distribution is knowable with certainty (and that they know it),
• when they assume the most likely outcome is the one that will happen,
• when they assume the expected result accurately represents the actual result, or
• perhaps most important when they ignore the possibility of improbable outcomes.
Investors who feel they know what the future holds will act assertively: making directional bets, concentrating positions, levering holdings, and counting on future growth
Those who feel they don’t know what the future holds will act quite differently: diversifying, hedging, levering less (or not at all), emphasizing value today over growth tomorrow, staying high in the capital structure, and generally girding for a variety of possible outcomes. The first group of investors did much better in the years leading up to the crash. But the second group was better prepared when the crash unfolded
If you know the future, it’s silly to play defense. You should behave aggressively and target the greatest winners; there can be no loss to fear.
“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” - Mark Twain
Excerpts and Learning from Articles/Blogs
Wonderful Article about why fees matter over the long run
He’s made billions for his shareholders & himself by increasing Berkshire’s value by more than 10,000x — but had he run a hedge fund & charged 2/20 fees, he’d end up pocketing more than 90% of these gains in fees
If you invested $10,000 in Berkshire in 1965, it would be worth $109m by 2017.
However, if Buffett charged a 2/20 fee structure, that $10,000 would be worth $8.9m.
Fear And Greed
Whenever somebody asks me why the stock market fell in value, I have a simple response. On that day, there were more sellers than buyers. If they ask why there were more sellers than buyers, I respond that there was more fear than greed.
Uncertainty, whether economic, political, or stock market, has always been with us and always will be as the future is unknown.
nobody rings a bell when it is the right time to invest and missing out on even a few days when the market rises sharply can have a material impact on the ability to grow their wealth over the long term.
Prices can be high relative to their previous levels but there is no automatic obligation for them to fall to a more ‘reasonable’ or ‘correct’ level. They may stay at those levels (or even go higher) for a prolonged period. Future earnings may support the high valuations assigned to assets by current investors. Staying in cash in such circumstances could be as damaging for your long term security as piling in just because everyone else is
Valuation Inflation (Do remember when to pay higher multiples to any company you going to buy)
"The best investments come from the best businesses"
Wealth is what you don’t spend
You could say higher spending is the goal. But all new luxuries become necessities in due time as expectations reset. I suspect part of the reason people don’t feel better off is that financial progress is better measured by wealth, not income.
Spending more when your income rises is as tempting as eating more after you exercise. It feels earned and justified. People’s lifestyle expectations are driven by their peers, so when everyone spends more you feel entitled to do the same.
Some perspectives on temperament, decision making, risk factoring in individual investing shared by Leading Nowhere are worth to read (Curated from thread)
Small Video Clips
Nithin Kamath: Risk Management for Investor and Traders (23:06 to 26:10)
Samir Arora on Specialty chemicals and Autos (9:58 to 11:09)
Samir Arora’s View on Fintech who collecting data, Is it helpful or not? (11:11 to 14:12)
Why PSU trades at a low valuation (20:00 to 21:57)
Sumit Nagar on Consumer Fintech (16:50 to 19:42)
Sumeet Nagar on Aptus holding (23:56 to 25:46)
XPro Proxy of Electronic Manufacturing Company? (35:45 to 36:50)
Shared some clips which also contain specific company details. Our purpose is to show you how Great Investors and Fund Managers look at it and how they analyze it so you can learn from it. Don’t treat it as a buy recommendation
(This video is only meant for educational purposes and nothing constitutes investment advice)
Thank you for reading! see you at the next one.
As usual , a brilliant capture of the article. Thank you for taking time to compile this and post it. Adds lot of value to retail investors like me