Hi, Welcome to the 12th Special Edition
Brief Overview of What We will cover in this Issue
Detailed Key Takeaways from the book I am reading Currently
3-4 Decent Articles to read and Key Takeaways from them.
Interesting view on High-Quality Business and its Moat
Is Buy and Hold is good Strategy, What if there is a great depression ahead like 1929, or other major bear markets?
I Publish only 4-5 quality Posts per month (2 Free, 2 Paid) so be assured that I take care in adding value to my free subscribers as well as paid ones. Do not unsubscribe in anticipation of the only paid newsletter :), will send a Free post Next Saturday
If you want to read the full issue, Do Subscribe to Paid Plan (If there is any error do subscribe it by paying Here and send a mail id and Payment screenshot on Twitter DM)
(Note: Gmail will truncate emails that are more than 102KB so please prefer to read a direct post from Our Blog to avoid missing some of the last section of content)
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Investing: The Last Liberal Art (Part-1)
This is not a how-to book on investing. You won’t find a new set of step-by-step instructions on how to pick stocks or manage your portfolio. However, after reading this book, what you will have if you are willing to spend some time with challenging ideas, is a new way to think about investing and a clearer understanding of how markets and economies work. It is an understanding derived not from the economics and finance textbooks, but from the basic truths embedded in a number of seemingly unrelated disciplines, the same disciplines you would find in a classical liberal arts education.
Reading this book requires, then, both an intellectual curiosity and a significant measure of patience. In a world that increasingly seeks to solve our needs in the shortest amount of time, this book may be an anomaly. However, I have always believed there are no shortcuts to greater understanding. You simply have to work through the basics.
It is no longer enough to just acquire and master the basics in accounting, economics, and finance To generate good investment returns, I believe, requires much more. It is driven by a keen mental appetite to discover and use new insights regardless of what Dewey decimal number they bear or how unrelated they may at first appear.
Mistakes in investing most often occur because of investor confusion. In my opinion, the basic investment lessons we have learned thus far have not given us a complete view of how markets work or how investors operate within markets. No wonder we’re confused. No wonder we make mistakes. When we don’t understand something, there is always a fifty-fifty chance we will make the wrong decision. If this book improves, even slightly, your understanding of investing and how markets work, then the odds of success will tilt in your favor.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
A Latticework of Mental Models
Charlie’s attention to other disciplines is purposeful. He operates in the firm belief that uniting the mental models from separate disciplines to create a latticework of understanding is a powerful way to achieve superior investment results. Investment decisions are more likely to be correct when ideas from other disciplines lead to the same conclusions. That is the topmost payoff— a broader understanding makes us better investors.
How does one achieve worldly wisdom?
How does one achieve worldly wisdom? To state the matter concisely, it is an ongoing process of, first, acquiring significant concepts— the models— from many areas of knowledge and then, second, learning to recognize patterns of similarity among them. The first is a matter of educating yourself; the second is a matter of learning to think and see differently.
Acquiring the knowledge of many disciplines may seem a daunting task. Fortunately, you don’t have to become an expert in every field. You merely have to learn the fundamental principles— what Charlie calls the big ideas— and learn them so well that they are always with you.
We do not learn new subjects because we have somehow become better learners but because we have become better at recognizing patterns.
One thing we understand about the human mind is the variability with which it receives and processes information. Any educator knows that the best way to teach a new idea to one student may have no effect whatsoever with another; the best educators, therefore, carry with them a virtual key ring with many different keys for unlocking individual minds.
Extraordinary rewards are possible for those who are willing to undertake the discovery of combinations between mental models. When that happens, what Charlie calls “especially big forces” take over. This is more than one plus one; it’s the explosive power of critical mass, what Charlie—the master of colorful language—calls “The lollapalooza effect.”
This is the heart of the investing philosophy that is presented in this book: developing the ability to think of finance and investing as one piece of a unified whole, one segment of a body of knowledge. Done right, it produces nothing short of a lollapalooza effect. I believe it is our best hope for long-term investment success.
Let’s give Charlie the final word on the subject. In response to questions from Stanford students concerned about the process of uncovering the models, he remarked: “Worldly wisdom is mostly very, very simple. There are a relatively small number of disciplines and a relatively small number of truly big ideas.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Physics: Theory of evolution
→ In 1932, Alfred Cowles established the Cowles Commission for Research and Economics. Having subscribed to several investment services, none of which predicted the 1929 stock market crash, Cowles set about to determine whether market forecasters could actually predict the future direction of the market. In one of the most detailed studies ever conducted, the commission analyzed 6,904 forecasts from 1929 through 1944; according to Cowles, “the results failed to disclose evidence of ability to predict successfully the future course of the stock market.”
→ If price is oscillating, it is because there is a temporary imbalance between supply and demand, but this is ultimately corrected by the marketplace.
→ The market crash of 1987 caught most scholars, economists, and investment professionals by surprise. Nowhere in the classical, equilibrium-based view of the market so long considered inviolate was there anything that would predict or even describe the events of 1987. Then, some thirty years later, we learned this hard lesson all over again.
→ Change occurs very rapidly and then settles down again for a period of steady, slow, but continuous alteration.
→ But no matter its pace, we must remember there is always change. And this is why we must leave Newton’s world and embrace Darwin’s. In Newton’s world, there is no change. You can run his physics experiments thousands of times for thousands of years and always get the same result. But not so with Darwin and not so with economics.
Companies, industries, and economies may mark time with no discernible changes, but inevitably they do change. Whether gradually or suddenly, the familiar paradigm crumbles.
→ Will the market ever become efficient? If you accept the idea that evolution plays a role in financial markets the answer would have to be no. Each strategy that eliminates an inefficiency will soon be replaced in turn by a new strategy. The market will always maintain some level of diversity, and this we know is a principal cause of evolution.
→ Andrew Lo sees the two different interpretations of the market in the same manner. “I realized that the behavioral finance folks and the efficient-market folks were both right,” he says. “They were both observing the same phenomenon, but from different angles.”
“I can calculate the movement of the heavenly bodies,” said Sir Isaac Newton, “but not the madness of men”— a humbling confession for a man universally considered the greatest mind of his generation.
Joseph de la Vega, a successful Jewish merchant, and philanthropist who had written the first book on the stock market titled Confusion of Confusions
Vega’s Confusion of Confusions is easily summarized. In the Second Dialogue, Vega lists four basic principles of trading— as relevant today as they were 325 years ago:
Never advise anyone to buy or sell shares.
Take every gain without showing remorse about missed profits. It is wise to enjoy what is possible without hoping for the continuance of a favorable conjuncture and the persistence of good luck.
Profits on the exchange are the treasures of goblins. At one time they may be carbuncle stones, then coals, then diamonds, then flint stones, then morning dew, then tears.
Whoever wishes to win in this game must have patience and money, since values are so little constant and the rumors so little founded on truth. He who knows how to endure blows without being terrified by the misfortune resembles the lion who answers the thunder with a roar and is unlike the hind who, stunned by the thunder, tries to flee.
When we stop to consider that all the participants in a market constitute a group, it is obvious that until we understand group behavior, we can never fully understand why markets and economies behave as they do.
we are quick to blame the amateur behavior of uninformed individual investors and day traders for the volatile nature of the market. But if Johnson is correct, the diverse participation of all investors, traders, and speculators— smart and dumb alike— should make the markets stronger, not weaker.
Daniel Kahneman and Amos Tversky on Human Psychology
In 1968, Kahneman invited Amos Tversky to give a guest lecture at one of his seminars. Tversky was a mathematical psychologist and considered, at the time, to be a pioneer in cognitive science. It was the beginning of a deep working relationship between the two that lasted for almost thirty years and ultimately led to the Nobel Prize. What made their research approach unique was the joint decision to not study any specific errors in human judgment unless they first detected the idiocy in themselves. “People thought we were studying stupidity,” said Kahneman. “But we were not. We were studying ourselves.” Kahneman has a memorable phrase to describe what they did:“ Ironic research.”
In essence, Kahneman and Tversky had discovered that people are generally risk-averse when making a decision that offers hope of a gain but risk-seeking when making a decision that will lead to a certain loss.
Kahneman and Tversky were able to prove that people do not look just at the final level of wealth but rather at the incremental gains and losses that contribute to this wealth.
Kahneman and Tversky were able to prove mathematically that individuals regret losses more than they welcome gains of the exact same size— two to two and one-half times more.
Richard Thaler: Equity Risk Premium
However, Thaler is perhaps best known among investors for his 1995 article titled“ Myopic Loss Aversion and the Equity Risk PremiumPuzzle”
The equity risk premium is a term many investors have heard but few actually understand. It refers to the potential for higher returns represented by the inherently risky stock market compared to the risk-free rate,
Whatever return an individual stock or the overall stock market earns beyond that rate is the investor’s compensation for taking on the higher risk of the stock market— the equity risk.
For example, if the return on a stock is 10 percent and the risk-free rate is 5 percent over the same period, the equity risk premium would be 5 percent. The size of the risk premium will vary based on the perceived riskiness of a particular stock or the stock market as a whole.
________________________________________________________________________
Myopic loss aversion
If you don’t check your portfolio every day, you will be spared the angst of watching daily price gyrations; the longer you hold off, the less you will be confronted with volatility and therefore the more attractive your choices seem.
Put differently, the two factors that contribute to an investor’s unwillingness to bear the risks of holding stocks are loss aversion and a frequent evaluation period.
Perhaps it is not surprising that the one individual who has mastered myopic loss aversion is also the world’s greatest investor—Warren Buffett. Buffett has benefited greatly from this unique perspective. Paraphrasing his teacher and mentor Benjamin Graham, Buffett has claimed he is “a better investor because he is a businessperson and a better businessperson because he is an investor.
By way of example, Buffett the businessperson understands that so long as the economics of his companies continue to advance in a steady manner, the value of his investment will continue to march upward. He does not need the market’s affirmation to convince him of this. As he often states, “I don’t need a stock price to tell me what I already know about value.”
In 1988, Buffett invested $ 1 billion in The Coca-Cola Company (KO). At the time it was the single largest investment Berkshire had ever made in stock. Over the next ten years, the stock price of KO went up ten times while the S& P 500 Index went up three times. However, it wasn’t a consistent pattern. During that ten-year period, KO outperformed the market for six years and underperformed for four years. By the mathematics of loss aversion, investing in KO over the ten-year period was a negative emotional utility (six emotional positive units– four emotional negative units × 2).
Benjamin Graham, through two classic texts—Security Analysis (1934) and The Intelligent Investor ([ 1949] 1973— has taught three generations of investors how to navigate the stock market. His value-investing approach has helped, without exaggeration, hundreds of thousands of people pick stocks. But often overlooked are his ideas on the psychology of investing.
“The investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage,” said Graham.
“That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by another person’s mistakes of judgment.”
The Secret Observation :)
In 1997, Terence Odean, a behavioral economist at the University of California, published a paper titled Why Do Investors Trade Too Much? To answer his question, he reviewed the performance of 10,000 anonymous investors. Over a seven-year period (1987–1993), Odean tracked 97,483 trades among ten thousand randomly selected accounts of a major discount brokerage. The first thing he learned was that the investors sold and repurchased almost 80 percent of their portfolio each year (78 percent turnover ratio). Then he compared the portfolios to the market average over three different time periods (4 months, 1 year, and 2 years). In every case, he found two amazing trends: (1) the stocks that the investors bought consistently trailed the market, and (2) the stocks that they sold actually beat the market.
Odean wanted to look deeper, so he next examined the trading behavior and performance results of 66,465 households. In a paper titled “Trading Is Hazardous to Your Wealth” (2000), Odean, along with Brad Barber, professor of finance at the University of California, Davis, compared the records of people who traded frequently versus people who traded less often. They found that, on average, the most active traders had the poorest results, while those who traded the least earned the highest returns. The implication here is that people who might have suffered the most from myopic loss aversion and acted upon it by selling stocks did less well— much less well— than those who were able to resist the natural impulse and instead hold their ground.
Think back to the 1995 study conducted by Thaler and Benartzi, which gave us the term “myopic loss aversion.” They found that measuring stock performance in one-hour increments generated the worse negative utility for investors. I can only imagine the myopic loss aversion penalty for investors who measure their portfolio every sixty seconds. 🤣
Risk tolerance measurement will be wrong more times than it will be right.
Through a series of interviews and questionnaires, advisors would ask their clients how they would feel about their portfolio under different scenarios. For example, if the stock market went down 20 percent and half the portfolio was invested in stocks, how would you feel if there was a temporary loss of 10 percent of your capital? Then they would pose another hypothetical scenario, and then another. The theory is that, by studying different market scenarios and adjusting the asset allocation, we can perfectly construct a portfolio that matches the client’s risk profile.
The problem with this approach is no matter how many different scenarios are examined, the estimation of a client’s risk tolerance will be wrong more times than it will be right.
Working with Dr. Justin Green at Villanova University, I was able to develop a risk analysis tool that focused on an individual’s personality rather than asking about risk directly. We identified important demographic factors and personality orientations that, taken together, might help people measure their risk tolerance more accurately. Comfort with risk, we found, is connected to two demographic factors: age and gender. Older people are more cautious than younger people, and women are more than men. Personal wealth does not seem to be a factor; having more money or less money does not seem to affect one’s level of risk tolerance.
What drives people to accept and act on questionable information? Why, for instance, when it is clear no one has the ability to predict what is going to happen in the stock market in the short run, are investors mesmerized by the predictions of market forecasters? Otherwise intelligent people stop dead in their tracks to hear what forecasters have to say about the market and sometimes even make investment decisions based on these prognostications. What makes these people so gullible? The answer, according to Michael Shermer in How We Believe (2000), lies in the power of the belief system.
Even though we know in the rational part of our minds that market forecasters cannot predict what will happen tomorrow or next week, we want to believe they can, because the alternative (not knowing) is too uncomfortable.
Nothing is more complex than the human brain, nothing messier than the actions of human beings. We think we are investing, but we continue to act speculatively. We have a clear plan for what to do with our money, but let us read just one magazine article and we decide to scuttle that plan and do what everyone else is doing instead.
We do serious and prolonged research into specific stocks, and we listen to specious advice from so-called market forecasters. And all this is going on at the same time.
Noise and Information Overload
This chaotic environment, with so much rumor, miscalculation, and bad information swirling around with the good, has been dubbed“ noise” by Fischer Black, a man consider an extraordinary investment professional.
Black believed that most of what is heard in the market is noise, leading to nothing but confusion. Investor confusion, in turn, further escalates the noise level.“ Noise,” said Black,“ is what makes our observations imperfect.” The net effect of noise that builds in the system, he explained, makes prices less informative for the producers and consumers who use them to guide their economic decisions.
It is easy to say we should ignore the noise in the market but quite another thing to master the psychological effects of that noise. What investors need is a process that allows them to reduce the noise, which then makes it easier to make rational decisions. That process is nothing more— and nothing less— than the accurate communication of information.
What is the communication system of investing? Our information source is the stock market or the economy; both continually produce messages or sequencing of messages. The transmitters of the information include writers, reporters, company management, brokers, money managers, analysts, and anyone else who is moved to convey information: taxicab drivers, doctors, and next-door neighbors. The channel might be television, radio, newspapers, magazines, journals, Web sites, analysts’ reports, and all manner of casual conversations. The receiver is a person’s mind, the place where the information is processed and reconstructed. The final destination is the investor who takes the reconstructed information and acts on it.
Shannon cautioned that there are several points at which information from the source can be degraded before it reaches its destination. The biggest danger, he warned, is noise in the system, whether during delivery over the channel or at either the transmitting or receiving terminal. We should not automatically assume that the transmitters have correctly assembled the information from the source (the market) before the information is placed in the channel. Similarly, the receiver can incorrectly process the information, which can lead to errors at the final destination. We also know that the simultaneous delivery of multiple bits of information over the same channel can raise the noise level.
Shannon’s correction system is a perfect metaphor for how investors should process information. We must mentally place a correcting device in our information channel. The first task for this correcting device is to maintain the integrity of the information coming from the source. The device must filter out incorrect source information and reconfigure the signal if it has become garbled. The process for doing this is within our control. To do so means improving our ability to gather and analyze information and use it to further our understanding.
Psychology
We must make ourselves aware of all the ways that emotion-based errors and errors of thinking can interfere with good investing decisions, as described in this chapter, and we must constantly be on guard against our own psychological missteps.
But he believes one of the most important fields is psychology, especially what he calls the psychology of misjudgment.
Charlie warns us against taking mental shortcuts. He thinks we jump too easily to conclusions, we are easily misled and prone to manipulation. “Personally, I’ve gotten so that I now use a kind of two-track analysis,” says Charlie. “First, what are the factors that really govern the interests involved, rationally considered? And second, what are the subconscious influences where the brain at a subconscious level is automatically doing these things— which by and large are useful, but often misfunction.” In his own way, Charlie has developed the kind of “correcting device”
When making investment decisions, our behavior is sometimes erratic, often contradictory, and occasionally goofy. Sometimes our illogical decisions are consistently illogical, and sometimes no pattern is discernible. We make good decisions for inexplicable reasons and bad decisions for no good reason at all.
To fully understand the markets and investing, we now know we have to understand our own irrationalities. The study of the psychology of misjudgment is every bit as valuable as the thoughtful analysis of a balance sheet. Possibly more so.
That is not to say we cannot study philosophy. Learning the ideas of the world’s greatest philosophers is the best way— some would say the only way— to achieve clarity about what we ourselves believe. But philosophy, by its very nature, cannot be transferred intact from one person’s mind to another’s. No matter who first said it, a tenet of philosophy does not exist for us until it passes through the cognitive filter of our interpretation, experience, and beliefs.
The word philosophy is derived from two Greek words, usually translated as “love” and“ wisdom.” A philosopher, then, is a person who loves wisdom and is dedicated to the search for meaning. The pursuit of wisdom is an active, unending process of discovery. The true philosopher is filled with the passion to understand, a process that never ends.
Thinking is much more than just acquiring knowledge, and the process of thinking can be done badly or well. By learning to think well, we can better avoid confusion, noise, and ambiguities. Not only will we become more aware of possible alternatives, but we will also be more capable of making reliable arguments.
How we think about investing ultimately determines how we do it. If we can consciously adopt an epistemological framework, always considering at some level whether our thinking process is rigorous and cohesive, we can go a long way toward improving our investment results.
One of the underlying themes that run throughout this book is the idea that the market is a complex adaptive system, which reflects all the characteristics of such a system. Thus far, our study of complex adaptive systems has had a mostly scientific orientation.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Excerpts and Learning from Articles/Blogs
Great Investor Track Records
Munger, Buffett and Glenn Greenberg, used the following equation to determine forever value: Free cash flow yield + growth rate = return.”
“Bill Stewart, for instance, was a growth investor. His returns came entirely from each portfolio company’s earnings growth. He, like Buffett, only wanted firms whose growth was assured to the point of being inevitable.”
By far, the most common type of investor in the database(investors who'd outperformed over at least 20 years) are value investors. Two-thirds of the most successful investors in history were value investors, which is astonishing when you consider that only 5-10% of financial assets are managed by true value managers. This tells us something very important: Value doesn't just put up significant outperformance, it's the highest-percentage way to outperform.
“Many of the greats were obsessed with financial history. Actually there’s probably no one else more obsessed with financial history than they are. Why does the past interest them so much? Because they believed it was destined to repeat.”
In Investing, Simple Beats Complex
“simplicity leads to better investor outcomes not because simplicity in and of itself produces better investment returns, but because a simple strategy encourages investors to own their decisions and to less frequently overreact to short-term noise.”
Different Kinds of BS (Must Read)
The saying, “Never meet your heroes” is true because the way we imagine people we admire, or the successes we desire, tends to be a bullshit construction that emphasizes advantages while discounting the associated costs.
Kanye West once responded to criticism that despite his skills, he’s a bit of a jerk: “If you want these crazy ideas and these crazy stages, this crazy music, and this crazy way of thinking, there’s a chance might come from a crazy person.”
Paul Graham put it this way: “Half the distinguishing qualities of the eminent are actually disadvantages.”
Andrew Wilkinson says: “Most successful people are just a walking anxiety disorder harnessed for productivity.”
Patrick O’Shaughnessy writes: “In my experience, many of the most talented people I’ve met couldn’t be described as happy. In fact, there are probably more that could be described as ‘tortured.’”
Compounding in the Stock Market is Messy
One of the worst parts about compounding is you have to be patient to see the greatest benefits.
Let’s say you save $10,000 a year at the start of every year for 30 years and earn 10% on your money:.
In this example, your investment earnings don’t pass the amount you save until after year 14:
The total investment dollars earned here would be just shy of $1.4 million. But nearly 60% of those profits come in the last 6 years of the investment earnings.
This is why compounding only works through a combination of discipline and patience. You have to think in terms of decades to see the best results.
The problem with the real world is life does not work like an Excel spreadsheet. Compounding in the stock market is messy and lumpy.
Sometimes you get terrible returns at the end of your investing lifecycle instead of the beginning. The sequence of returns along with your start and end dates can play a large role in determining your real-world outcomes.
A long time horizon can help smooth out any poor timing you may have through either mistakes or bad luck.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Small Video Clips
This time is different? What changed in the market? (12:46 to 14:56)
Key Learning from Kuntal Shah (16:26 to 17:33)
Lessons from Financial History (25:14 to 28:42)
Which parameters do you have to focus on while selecting a company, Which parameters drive business value (48:39 to 52:50)
Investing mistakes and Learning from Kuntal Shah (53:45 to 57:10)
Inflation: How is bad for stocks?
Sanjay Bakshi (Professor)'s view on Investors who buy only High-Quality businesses (0:52 to 08:06 )
Buy Good Company, Don't Overpay, Do Nothing (Simple Investing Strategy) (04:39 to 8:11)
If one wants to understand various points regarding the last RBI Repo rate increases and policy update, Then this is for you (0:00 To 36:00)