What will not change?

“Everything material is changing all the time and is temporary, so for lasting happiness, we should change our focus from what is temporary to what is eternal” said our broker friend Jigneshbhai as we met for our weekend coffee yesterday.

Swami and I were stumped seeing him in such a philosophical, almost spiritual mood, specially coming from someone from the world of investing. He went on to explain that he had returned from a spiritual retreat where his teacher had made such a statement, and he was reading from his notes from that retreat.

“Of course everything is changing” said Swami, but it didn’t look like he was on the same plane of ‘consciousness’ (isn’t that the word used by spiritual leaders?) as our broker friend seemed to be.

The difference in their ‘planes of consciousness’ was evident as Swami continued.

“A few months back everyone was saying NDA is out, and now everyone is saying Modi will be back. Last year they said don’t go near small caps and midcaps, and now they are saying the next bull market rally will be led by them. The ‘Mahagathbandhan’ seemed like the in-thing then, and now it seems to have changed.”

This probably brought Jigneshbhai back to the ‘mundane plane of consciousness’ as he looked up from his spiritual notes on hearing Swami, and smiled.

“My investments are changing everyday based on all these material changes, so how can I not focus on them?” revolted Swami, having got Jigneshbhai’s attention.

There was a slight silence as usual while Swami and I waited for our broker friend to speak.

“Well – even in investments, it is better to focus not on the temporary but on the eternal – not exactly eternal, but at least things that are a bit more permanent” Jigneshbhai started explaining, though it wasn’t quite still at our ‘plane of consciousness’.

Looking at our blank faces, he rightly thought this needed more explanation.

“Who is in power is temporary, what people feel about markets keeps changing, political alignments are temporary and so are changes in people’s tastes and moods, and hence prices of businesses. Better not to focus on the temporary but on the permanent.” our broker friend continued, now talking things that made some sense.

“But what is permanent?” Swami was ready with his question.

After a silent pause, Jigneshbhai said, “Well, 10 years from now, young Indians will still aspire for a better life. That won’t change. There will still be Indian businessmen who will identify markets and build profitable businesses – for India and the world. That won’t change. And these entrepreneurs and their shareholders won’t settle for bank interest rate kind of returns. That also won’t change.”

He looked at us and saw that Swami and I had started getting what he was saying.

“So, while not quite permanent – even that is temporary – but irrespective of who is in power or what happens across the border or in the world, these probably won’t change.”

Jigneshbhai said with a deep sense of confidence and faith. The need for human progress is built-in, Swami and I thought. That need is unlikely to change, and human enterprise for progress more or less guarantees a set of new and old profitable businesses being built over time.

Even though they may be temporary at our broker friend’s new found ‘higher plane of consciousness’, Swami and I thought, looking at each other, that they will work at our plane.

As we were further musing on the temporary and permanent (nah – eternal as per Jigneshbhai) things in investments, the wealthy man in the sprawling bungalow who had been listening to our conversation walked to our table. And today we were pleasantly surprised as he wasn’t as cryptic as he normally is, when he gave us some direct advice.

“Focusing on the unchanging over a few decades is as eternal as you can get in the world of business. Jeff Bezos built Amazon based on what he thought will not change. You must also build your investments based on what you think will not change.”

Four Legs and a टेढ़ी Tail

“Abraham Lincoln once posed the question: ‘If you call a dog’s tail a leg, how many legs does it have?’ and then answered his own query: ‘Four, because calling a tail a leg doesn’t make it one,'” Buffett writes.

Our broker friend Jigneshbhai was reading from Warren Buffett’s latest annual letter to his shareholders. He continued as he read further.

“Buffett then sarcastically adds: “Abe would have felt lonely on Wall Street.””

The lazy skeptic in our broker friend seemed to have loved this. I saw that he had a wide grin on his face as he looked up at us after reading this.

Swami and I were just digesting this leg-tail business when our broker friend continued.

“Not just on Wall Street, Lincoln would have felt lonely at so many places, with so many bent on calling a tail a leg, isn’t it?” Jigneshbhai asked, with, maybe, a slight sense of resignation.

“No wonder Lincoln is said to be one of their greatest Presidents. While everyone saw their version of reality, he saw reality as it was,” our broker continued, still excited about what he had read.

Swami and I were wondering which tails and legs and their ‘mis-calling’ was our broker friend referring to.

Swami was the first to ask, as usual.

“Buffett is probably referring to the accounting shenanigans that so many companies indulge in – when they don’t call some expenses as expenses. I read his latest letter” he remarked proudly.

Jigneshbhai was pleasantly surprised with Swami’s comment.

“Indeed. Reality doesn’t change when you call it something else” he said, and then after a few moments of silence, added, “All that you manage is an illusion.”

Swami looked at me and wondered if our broker friend was talking about expenses or something else.

Swami was definitely thinking about only accounting. “You need to be careful about such companies and such managements. The ones who regularly indulge in calling a tail a leg. Expenses need to be represented correctly to shareholders,” he proclaimed confidently.

He was probably right about being careful of managements that do such misrepresentation. But Jigneshbhai was probably talking about misrepresentations of reality by some other entities.

“If you don’t see and accept reality as it is, and keep calling it something else, reality itself doesn’t change, isn’t it?” he continued again.

“And that’s true of not just companies and managements, but also of people, political parties and even countries, of late, isn’t it? If you repeatedly call a tail, a leg, it doesn’t become a leg.”

“It is better to maintain some distance from them – because anyone who repeatedly calls a tail a leg will hardly change that habit. And actually start believing it.”

“After a while, even you can forget that what you call a leg is actually a tail.”

Jigneshbhai stopped and looked at us with a sigh. Swami and I started thinking about what our broker friend had just said – perhaps Lincoln’s statement applied not just to accounting, we thought.

But Swami was still not sure what to do and how to deal with those who call a tail a leg, repeatedly (though our broker friend had advised a safe distance!)

Just as we were thinking about it, the wealthy man in the sprawling bungalow, who had been listening to our conversation, came across to our table. Jigneshbhai smiled at him as he saw him coming.

And as we finished our coffee, the wealthy man looked at Swami and said “कुत्ते की दुम टेढ़ी की टेढ़ी – कभी सीधी नहीं होती. You must deal with them assuming this!”

Nonstop Nonsense

“Charlie Chaplin once said ‘I remain just one thing, and one thing only — and that is a clown. It places me on a far higher plane than any politician'” said Jigneshbhai, my broker friend as we met for our weekend coffee. He was musing over the happenings of the past few days apparently.

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“But it’s getting increasingly difficult to differentiate between a clown and a politician nowadays” he smiled, looking at Swami and me. For a change this week, he had started talking and we were the ones silently sipping our coffee.

But Swami was least interested in the political circus and was waiting with his questions.

“I love Charlie Chaplin. But honestly, there’s been so much happening over the past few months, that there’s been more to worry than talking about comedy” he said, quite satirically unlike his regular style.

“Oil prices have been fluctuating, the populist budget is done, the RBI has reduced interest rates a bit as inflation is down but then maybe so is growth. And now we have the worst terror attack on our paramilitary and talks of war. Plus there is a US-China trade war. And there are elections coming up in a few weeks, and we aren’t even sure if the current government will be back!!” Swami was clearly exasperated by the set of events over the last few months and understandably, perturbed about what seemed like a fairly uncertain time for an investor.

He paused for some breath, and I looked towards our broker friend to say something.

“After Charlie Chaplin, there was another clown who made me laugh. Do you remember that slapstick guy in Didi’s comedy show?” Jigneshbhai asked, still stuck in his comic musings. Almost on second thought, he added, “But our new age clowns and Didi’s can’t be matched” he continued, looking at us with a wink in his eye and a wide smile.

But his smile quickly went away when he saw Swami stare at him, clearly not amused.

Here he was talking about all the important happenings impacting his investments, and Jigneshbhai was smiling thinking about his comic stars, old and new.

Realizing the mood difference, our broker friend acknowledged Swami’s concern, but didn’t take it seriously. There was a slight longish silence as usual, while we waited.

“Of course, there’s been a lot happening. But eventually all of this won’t matter – for your investments. You will hardly remember this after a decade or two,” Jigneshbhai assured us, always talking in time frames which put Swami off.

“Who knows who will be alive at that time? I want to know what I should do now, or the next few months at best?” Swami revolted, despite our broker friend’s long-term assurance.

“Well – that’s true, but then on that, I don’t have any answers for you” said Jigneshbhai, his mood turning from a cheerful one to slightly pensive. Thinking about Chaplin and Didi surely got him more laughter than this talk of recent happenings for sure.

While Swami, I and our broker friend were sitting silently sipping our coffee, the wealthy man in the sprawling bungalow came across to our table. Apparently, he had been listening to our conversation.

Though admittedly, our conversation today was more like Jigneshbhai’s monologue on his comic heroes and Swami’s rambling on unsettling happenings of recent times.

So the wealthy man quietly sat with us for a few seconds, and just as we were getting ready to leave, he left us thinking with what he said. “Charlie Chaplin said that life is a tragedy when seen in close-up, but a comedy in long-shot. For your investments, all of this, after a few years, will seem like Nonstop Nonsense!”

Of Artificial Intelligence, Natural Stupidity and a Higher Wisdom

“Artificial Intelligence is going to completely change investing” said Swami excitedly as we met for our coffee. Jigneshbhai did not react, and continued sipping his black coffee, as usual. Swami was not the one to be discouraged by that, at least immediately. So he continued with even more enthusiasm.

“Machines will be reading through stock prices and market movements and predicting what’s going to happen next!” he proclaimed.

Still seeing no response from our broker friend, Swami turned to me and said “With Artificial Intelligence technology, humans are going to be redundant.”

I gave him a polite nod, while trying not to take sides. He quickly realized I had no idea about this AI and investing stuff, so he turned impatiently back to Jigneshbhai.

“So are you going to say something or just stay silent?” Swami asked, with a tinge of protest.

Jigneshbhai looked up and finally said, “Yeah, machines are getting smarter.”

Happy that he had finally got some response, Swami slowly got ready for what he thought was going to be a long argument with Jigneshbhai.

“I read that AI programs will read through earnings reports and identify trends. And AI will also track social media and measure sentiment about a company.” Swami happily boasted of his new-found knowledge.

He wasn’t done yet though. “And so many news reports on a company or a sector come out every day. AI will go through all these things and predict how it will impact prices in real-time.”

I nodded at Swami in appreciation, making him feel good about his knowledge and that he had a receptive audience, though I was a relatively easy audience to impress.

Jigneshbhai though didn’t seem too impressed. Turning to him, Swami confidently said, “So with all this analysis and real-time prediction, this artificial intelligence is going to change the face of investing!”

Swami seemed done with his side of the argument, now expecting Jigneshbhai to start. But all that our broker friend nonchalantly said was “Maybe, but more likely not.”

Obviously this wasn’t acceptable for Swami, and even I expected a more elaborate response. So we waited for Jigneshbhai to say more.

After a longish period of silence waiting for him to speak, our broker friend finally said, “Investors don’t need to increase artificial intelligence. All they need is to reduce natural stupidity.”

Swami and I looked at each other confused. Swami had read so much on AI, and the whole world was gung-ho on how AI was going to impact everything, and here was our broker friend more worried about natural stupidity! Before I could say anything, Swami was ready with his question.

“What do you mean? AI is not going to change investing?” he asked.

Again he got a smile from Jigneshbhai. Again we waited for him to speak. Again there was a longish silence.

Jigneshbhai finally spoke.

“Well, it may change trading. They anyway look for so many variables like MACD and moving averages and global cues and what not! Now they can add trends from news and earnings reports and social media sentiments to that mix if it suits them. Someone I am sure will come up with software to do it and sell it.”

He said this with a sense of wry despair. Swami and I were thinking about what he said, and thought perhaps he wasn’t wrong. It looked like Swami was also beginning to question his recently acquired knowledge.

Meanwhile, our broker friend continued.

“But for investing, all you need is to avoid natural stupidity. I hope they come up with some AI technology to detect that!” he said, and laughed loudly.

Just as he was laughing, Swami and I saw the wealthy man from the sprawling bungalow sitting at the table next to us. It looked like he had been listening to our talk on AI and investing all along.

As we were getting ready to leave, he tapped Jigneshbhai on his shoulder and said, “To avoid natural stupidity in investing, no AI can help. You need a higher wisdom!”

Where have you been?

“Where have you been?” asked my friend Swami to Jigneshbhai, as we met for our weekend coffee after a really, really long time.

Indeed when I checked, it was over a year since we had last met, and some of our coffee house friends had also started asking me why we had stopped meeting.

“I was on some quests. I was climbing mountains and diving deep into the seas” said my broker friend to Swami.

Swami and I looked at each other wondering whether Jigneshbhai was serious about what he was saying or pulling a fast one, with some cryptic clues on his whereabouts over the past year. Be that as it may, with no further clarification forthcoming from our broker friend even after the usual confused looks on our faces, we just let things be without delving further.

But then Swami, as usual, could not control his curiosity and was the first to ask. “So what kind of mountains and quests? Have you left investing in the markets?”

Swami and I waited for an answer. It drew a blank, for a while at least. After a rather long silence, finally Jigneshbhai said, “A lot of famous people go away on these kind of retreats and come back refreshed. They climb mountains or go to foreign lands and come back with new perspectives, I hear. So I thought let me try that too.”

Swami was quickly ready with his next question. “So did you come up with some solutions to the falling markets? Or just had fun?” he asked rather bluntly.

Jigneshbhai had a wry smile on his face and replied, “When you come back from such retreats, you generally see problems, not solutions. Everything looks better in the places you have been too, and worse where you come back.” And he further asked, “and the problems you see around you when you are back can spark off a chain of frustrating thoughts, isn’t it?”

Swami and I listened to our broker friend, and couldn’t quite get what he was saying. Seeing our confused faces, he explained, “Don’t you come back from a foreign trip and then everything in India seems so bad for the first few days? And then that sparks a chain of complaints on our airports, roads and traffic for a few days, isn’t it?”

“Yes – so?” asked Swami indignantly, “So you are also finding problems after your retreat from wherever – mountains and deep seas – you went on a quest to?”

“Hmm” said Jigneshbhai. “Well, they are not real problems, mostly imaginations.”

“And when your mind imagines problems, it starts looking around for data or some aspects of reality to justify it, and that sparks a wildfire of thoughts. And then you think the problem is real.”

Swami and I were starting to understand a little bit of what Jigneshbhai was trying to say now, but not yet quite fully. As we were musing about it, he further continued.

“So if I am corporate employee back from such trips, I imagine problems with my job, my boss and commute. If I am an investor, I imagine problems with my shares, my mutual funds and markets. And if I am a politician, specially an opposition one, I imagine problems with the government. And yes, as these sparks ignite thoughts, some parts of reality do surface to justify them, and it can become quite a wildfire.”

Swami and I now understood what our broker friend was referring to. We smiled at each other happy that, for once, we had some clue of his tacit talk. Meanwhile, he continued.

“And then there are so many ‘amplifiers’ to spread the wildfire – maybe your thoughts or other people in your company, or other market participants and all the media especially, which is always looking for sparks with a potential.”

“But then, after a while, I always wonder – what started the wildfire? Did the imagination come first or did the aspect of reality come first? Or did the imagination and some aspect of reality combine on a fertile ground to start it?”

Swami and I found ourselves nodding in agreement with Jigneshbhai. So often in investing had we found that a rumor causes prices to drop and then some other news comes, and then there is further fact-driven amplification, and then it becomes a wildfire. But what came first? It is hard to say.

And then in politics too, so many allegations start and then some news comes, and then some data to fuel the imagination by the amplifiers, till it becomes a wildfire. But did the imagination come first or the data and amplification? Tough to say.

While Swami and I were thinking about this, Jigneshbhai confidently remarked, “But one thing is certain – whatever started it, there’s always someone taking advantage of these sparks, specially if they are in politics.”

This broke Swami’s and my chain of thought. While we were still thinking whether imagination or aspects of reality cause these sparks, our broker friend was almost suggesting that it doesn’t matter eventually.

Swami asked, “So you mean that someone engineers these fires?”

With a wry smile, Jigneshbhai, seemingly happy that we were asking the right question, said, “Well, it may or may not be true. But what is true almost always is that after it is sparked, someone, who is the same or different, is definitely taking advantage of it.”

Finally he confidently asserted, “For someone, these sparks or wildfires, fuelled by imagination or some aspects of reality, are always an opportunity – self-made or godsent.”

Just as he was saying this, I saw the wealthy man in the sprawling bungalow (who always speaks cryptically) at the table next to us.

He had been listening to this coffee talk between us. Before Swami and I could ask him where he had been, he looked at our broker friend Jigneshbhai, and, like Thakur from Sholay, in a solid baritone voice, said “लोहा गरम है मार दो हथौड़ा!”

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The exact same thing

The problem with bull markets is there is nothing much to do for the intelligent investor but there is everyone wanting to do something. Like the other day, even my father and my father-in-law now wants to invest in equity mutual funds. Which is not such a bad thing actually – but the timing suggests that it is time to repeat the same old stuff.

So as many times in the past, I went to the ‘Gita’ of value investing “The Intelligent Investor”, and again read some of the underlined writings that need to be repeated at times of such excitement in the markets.

So here goes – some excerpts that are especially to be remembered now. Nothing new, the same old stuff or “the exact same thing” as Jason Zweig says, again:

  1. No statement is more true and better applicable to Wall Street than the famous warning of Santayana: “Those who do not remember the past are condemned to repeat it”.
  2. We have not known a single person who has consistently or lastingly made money by thus “following the market”. We do not hesitate to declare this approach is as fallacious as it is popular.
  3. Observation over many years has taught us that the chief losses to investors come from the purchase of low-quality securities at times of good business conditions. The purchasers view the good current earnings as equivalent to “earning power” and assume that prosperity is equivalent to safety.
  4. The investor’s chief problem – and even his worst enemy – is likely to be himself
  5. Speculative stock movements are carried too far in both directions, frequently in the general market and at all times in at least some of the individual issues.
  6. The beauty of periodic re-balancing is that it forces you to base your investing decisions on a simple, objective standard.
  7. A great company is not a great investment if you pay too much for the stock.
  8. Even the intelligent investor is likely to need considerable will power to keep from following the crowd.
  9. The intelligent investor shouldn’t ignore Mr. Market entirely. Instead, you should do business with him- but only to the extent that it serves your interests.
  10. The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.
  11. High valuations entail high risks.
  12. Investment is most intelligent when it is most businesslike.
  13. Successful investing is about managing risk, not avoiding it. Without a saving faith in the future, no one would ever invest at all. To be an investor, you must be a believer in a better tomorrow.

And finally, this one which is right at the beginning of the book in the foreword by Buffett.

“By developing your discipline and courage, you can refuse to let other people’s mood swings govern your financial destiny. In the end, how your investments behave is much less important than how you behave.”

 

And there they go again!

..and again!!

That’s the title of a memo sent by the famous investor Howard Marks of Oaktree Capital to his clients recently. And it refers to how he is happiest writing when bull markets start going far, risk aversion disappears and there’s money all around inflating potential bubbles.

It is quite a long memo listing and describing various indicators that seem to be currently aligning together suggesting the prevalence of such a bubble type situation. For those interested in reading it, you can download it here.

But for those who don’t have the inclination or the time to go through the indicators, the what to do section at the end is what is most relevant. And honestly speaking it is nothing new, but it is well worth repeating.

There is no one size fits all action for all – so his answers are more like an essay on the one hand, and philosophy on the other. But the message is clear: There is a time to chase returns and there is a time to assess risk. And the time for caution is here, and the time for assessing low risk options is here.

So for individual intelligent investors, it is nothing new really. Dhirendra Kumar of Value Research Online in his well meaning article here says that it is well worth repeating the old stuff now.

The steps stay the same. They still constitute sticking to your asset allocation, re-balancing your portfolio if it has gone a bit out of whack, continuing to make investments as per your plan, and neglect the markets with a long term orientation.

The problem with this is that there is nothing new. But it still needs repetition, because it is tough to follow in practice.

Jason Zweig – the famous columnist and editor of the book “The Intelligent Investor” once wrote in a column titled “Saving Investors from themselves” (Please make it a point to read it here) that when asked how he defined his job, he said “My job is to write the exact same thing between 50 and 100 times a year in such a way that neither my editors nor my readers will ever think I am repeating myself.”

In my case, fortunately I don’t have to write so often, there is no editor, and readers shouldn’t mind repetition for their own sake. It will save them from themselves.

This is clearly the time to repeat the same old stuff.

As Howard Marks said in his memo, this approach of taking low risk options will not necessarily give you the highest returns, but what it will ensure is that you survive.

Here is what he says towards the ending sections of his memo which are well worth remembering:

“If you refuse to fall into line in carefree markets like today’s, it’s likely that, for a while, you will (a) lag in terms of return (b) look like a old fogey. But neither of those is much of a price to pay if it means keeping your head (and capital)  when others eventually lose theirs.” “They will also make you a long term survivor. I can’t help thinking that’s a prerequisite for investment success.”

So there they go again. And hence it is indeed time to stick to the old stuff, even more so.

 

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