Worth Reading 16/06

Some articles that I found worth reading this week:

Pay Attention to Asset Allocation in this Bull Market  LINK

Active Value Investing: Is it really better?  LINK

Is the Product Attractive? Mental Models and Moats  LINK

The Seduction of Pessimism  LINK

Video Interview: The Contrarian Gene|Seth Klarman (~15 min)  LINK

Video Interview: Buffett, Jorge Paulo Lemann|Brazil Conference (~55 min)  LINK

“Take the probability of loss times the amount of possible loss from the probability of gain times the amount of possible gain. That is what we’re trying to do. It’s imperfect, but that’s what it’s all about.” -Warren Buffett

Importance of Rebalancing for the Defensive Investor

Often investors – specially those who call themselves defensive – can’t make up their mind on when to sell, as they have no particular reasons for doing so – except looking at market levels. A good answer to that comes from systematic and regular rebalancing (almost scheduled or using some similar discipline).

Came across a good article that explains rebalancing – more important with elevated market levels almost across the board. Should be a good reminder for defensive investors to take stock.

Read it here

Interesting conversation: Mohnish Pabrai with Steve Pomeranz

Came across an interesting conversation that the famous value investor Mohnish Pabrai had with Steve Pomeranz.

He talks about what value investing is, why individual companies matter to him more than broader markets (though not advised for normal passive or ‘defensive’ investors), the importance of temperament which should be a strange mix of patience and decisiveness, and contrary to popular perception – how entrepreneurs are actually looking for low risk opportunities with high potential returns.

You can listen to it at https://beta.prx.org/stories/207163

The audio has many other topics – the Pabrai talk is from minutes 9 to 18, and again from minutes 40 to 55 or so.

Some details of the talk are also at this link: http://www.stevepomeranz.com/mohnish-pabrai/

Known Knowns and Unknown Unknowns

“Swami uncle, how do you know that Ganpati Bappa goes to his home elsewhere after we immerse him?” asked Jigneshbhai’s son as we were returning after immersing the Swami’s Ganesh idol after this year’s festival.

It was Swami’s turn to be at the receiving end of questions this time from our broker friend’s son. Jigneshbhai was having a naughty smile as he was enjoying the reversal of fortune – from Swami’s questions to Swami being asked questions.

“How can all lakes and seas reach his home?” Jigneshbhai’s son continued. “Do you have proof that Ganpati Bappa reaches home?”

Swami was lucky that we soon reached our coffee-house, and our families left us alone with our weekly coffee routine, and so the questions stopped.

“Your son asks a lot of questions!” Swami finally said, after they were all gone.

“For once, I did not face your questions! Or his!” my broker friend laughed.

“So how would you answer them? Of course, we know the real Ganpati Bappa goes nowhere. But next he would ask me if there was any proof if Ganpati Bappa was real?” an exasperated, god-fearing Swami exclaimed.

Jigneshbhai stayed silent for a while. He was probably lost in some thought.

“Well if we don’t have conclusive proof that he exists, we also don’t have conclusive explanation to negate the theory that he does exist!” Jigneshbhai stated.

That left Swami and I a bit confused. But our broker friend continued.

“There are the known knowns – like oxygen is necessary for life, and then there are the known unknowns – like we don’t know how life originated or if God exists for sure. But there are also the unknown unknowns – like maybe we don’t even know what we don’t know about the possibilities in the endless universe or in the future!”

Swami and I looked at each other, wondering whether our broker friend was fine. He seemed in fine health a few moments back, but suddenly he had escaped into an unknown orbit.

Unlike our normal confused faces in such situations earlier when Jigneshbhai gave some profound theories, this time our faces indicated outright amusement. Perhaps that’s the reason our broker friend too broke into laughter.

“I am not joking!” he said. “Isn’t it right? Even Donald Rumsfeld when once asked if there was enough proof that Iraq had weapons of mass destruction used something like this. Maybe he meant it, or maybe he was justifying the war – who knows!”

Indeed that was true. I distinctly remembered that, and it became a topic of contention for a long time. But it actually demonstrated the realities of taking decisions at the highest centers of power with an understanding of what is known, what is unknown, and an appreciation of how little may be actually known.

While Swami and I were musing about the known knowns and unknowns unknowns in our life, our broker friend, in a jovial mood today, intercepted our thoughts cheekily. “Like whether the markets will oblige him is a big unknown for Swami!”

Obviously that little provocation was enough for Swami to get started. “Maybe” he said sarcastically, “but most else in your investing domain is based on numbers and metrics isn’t it? So it should fall into known knowns!”

“Well” said our broker friend. “Numbers give you a false sense of knowing.”

Swami and I were starting to understand what our broker friend was trying to get at, and why his answers are often in shades of black and white – specially to Swami’s questions on buy or sell. But it still wasn’t fully clear so we were lost in thought.

Jigneshbhai continued.

“There are many known knowns in investing – like high profitability is good, or low P/E is cheap. And then there are known unknowns – like what will the market do in the next month, or who will be the next RBI governor. But there are also the unknown unknowns – like we don’t know what technologies or trends will emerge and impact business.”

“The important thing is to collect as many knowns as you can, and build an appreciation of their limitations due to the possibilities of the unknowns. And then act with openness.”

While we were engaged in this discussion on knowns and unknowns, the wealthy old man in the sprawling bungalow walked over to our table. He had been quietly listening to our conversation, and as we were preparing to walk, he looked at Swami and I and left us with some words of wisdom, emerging from rock music, perhaps?

There are things known, and things unknown, and in between are the Doors.

Of Gardening and Investing Lessons

“To plant a garden is to believe in tomorrow” said Audrey Hepburn. I realized the truth in it over the past few months.

The wife has been venturing into gardening – a small beginner home garden – for the past few months, and as an observer, contributor and co-passenger, the ride has taught me a few things – about gardening of course, and also about how some of those lessons apply to the pet topic of this blog, investing. Here are the top 5 lessons:

A. Learn the rules, Experiment with what you can manage, and it starts working: Clearly there are a set of rules to learn to plant a garden, and it is important to learn them. Get good seeds, good soil and manure and water the plants are as basic as they can get. But the reality is that there are lots of experiments within this set of rules that are possible and can only be learned by doing. And that’s where your own decision on what type of plants, how many of them and how big a garden you can manage becomes important. Once you get through that and experiment with what you can manage within the overall realities of your life, it starts working. Very much like the rules of investing and how your own decision of what kind of investor you want to be will impact what works for you.

B. Plants grow slowly but there is a funny pleasure in it: You can learn the process, get the seeds and plant them. After that there is not much to do but to watch them grow. And plants grow slowly. Everyday we went to the balcony to watch if there are any sprouts, and for a while nothing happens. There is a unique kind of fun in that too, in watching the plants grow slowly, and unless one learns to enjoy that, you will feel it is way too much trouble. The fruits or the vegetables aren’t going to be seen soon, and unless one enjoys the process more than the outcome, patience will likely get the better of you. Very much like long term intelligent investing where as Graham said you buy something using your process, and hope something good will happen.

C. All types of plants and all seasons are important: Not all plants will grow with the same speed, nor will all of them grow in all seasons. There are seasons for planting, and there is a time for harvesting. Every single step in the growing process, every moment of those seasons must be respected. Nothing can be skipped. There are plants that will give vegetables every couple of weeks but then they run out after couple of harvests. And then there are plants that take a long time to bear its first fruit, but then will give you its fruit every season after that. Every type of plant and every season is important. Some plants and seasons are meant for producing great fruits. All others are meant for preparation. Very much like our own investing seasons and plants – where all types of assets and investments are important and bear fruit in different seasons.

smart-investment-garden-quote

D. The final result may not be perfect but who cares: Some plants died midway due to weeds, perhaps due to more or less water, perhaps due to reasons I don’t know. And some plants have grown beyond our wildest imagination. In some cases, all sown seeds sprouted to life, and in some, none came up. As a whole, the garden produced a good variety of vegetables, which though not perfect are good enough for me. Finally I realized that that’s what matters – the result will most likely not be perfect but it doesn’t matter really as long as it is good enough for you. It is difficult to over-engineer outputs in gardening, specially for beginners unless you reach a level of sophistication perhaps. Very much like investing results – it is difficult to predict the future, and with all the bull and bear markets over a lifetime, it is impossible for the result to be perfect. But as long as it meets your purpose, who cares?

E. You plant the seeds, provide the water and the soil, but someone else makes them grow: Now this is a philosophical one. I am sure there is a science to it which I don’t know yet. But despite the science to gardening, I am pretty sure everything is not being done only by the gardener. The gardener perhaps does the best possible to increase the probabilities of a fruitful result, but there are many factors that add up to create the result. You plant the seeds, lay the soil, water them and wait and watch with faith in tomorrow. And it is indeed a miracle that out of that sprouts a plant that not only springs to life and grows but has the ability to bear fruit. It is tough to predict which one will sprout to life, which will grow and which will bear fruit. Hence, leading to my hypothesis that like investing, you master the process to increase the odds, but perhaps someone else makes them grow.

It is no wonder that a learned man like George Bernard Shaw said that “The best place to find God is in a garden. You can dig for him there.”

The Madness of Crowds

Either I am a completely outdated, antique piece who doesn’t get it, or I may be a very calm composed person. I tend to give myself a positive spin with a benefit of doubt thinking it is the latter, but I suspect the former is perhaps closer to the truth.

The last week has seen me pose a dumb look on two seemingly obvious phenomena that I supposedly should have been lapping up and going crazy about. Both of them made me feel like that guy in the ‘Yeh PSPO nahi jaanta’ advertisement with the sheepish smile.

The first happened earlier this week when everyone was talking about a new game called Pokémon GO and I made the mistake of asking a colleague ‘is that a new cartoon series?’ And the second one, perhaps an even bigger faux pas yesterday, specially in Bangalore, was to ask a friend ‘What is this Kabali?’ I probably might have narrowly escaped a thrashing from the onlooking crowd.

I find myself in numerous such situations of late. Perhaps such situations are happening more often in this new age of social and mobile and trending or whatever – again my own benefit of doubt to myself.

Mark Twain said that a ‘Classic′ is a book which people praise and don’t read. In that era, it probably took a long time after a book is released for it to achieve this kind of status. A few of Twain’s own books achieved that kind of status.

It seems that this period has been drastically cut of late. And it applies to not just books, but probably to movies, new products, games, apps, mobile phones, electronic devices, and what have you. And it looks like most of them become classics before they are released. Things people praise, talk about but haven’t yet read or seen – because they are not yet released. And I am left wondering what to do every time such a phenomenon turns up with the ‘Yeh PSPO nahin jaanta’ sheepish look.

This phenomenon was probably started by the iPhone mania in the US. For apps, maybe Angry Birds started it. Harry Potter movies used to see these delusions before release. And lately every new mobile phone release is ‘highly awaited’. So the stampede surrounding Kabali is hardly a surprise.

madnessofcrowds

In the 1841 book, Extraordinary Popular Delusions and the Madness of Crowds, Charles MacKay wrote of the crowd psychology that drive numerous “National Delusions,” “Peculiar Follies,” and “Psychological Delusions.”

“We find that whole communities suddenly fix their minds upon one object, and go mad in its pursuit; that millions of people become simultaneously impressed with one delusion, and run after it, till their attention is caught by some new folly more captivating than the first.”

It does look like these delusions are more frequent of late – perhaps because there are so many objects attracting the attention of these minds (and their pockets) with easy channels of communication.

Many of these delusions are fleeting of course, and in all honesty, quite entertaining. All of them have the common result of getting some money out of your pocket. Some high, some low. A movie ticket here, or a book there, or some paid app, or at best a higher sum for a new electronic device maybe. So the harm is limited somewhat – for all the mania, it won’t leave a big hole in your pocket before, or even if it turns bad, a lasting one on your mind after.

But in the financial markets, these delusions are dime-a-dozen, and can be quite harmful. In fact, much of the day-to-day markets run on some delusion or the other – big or small. Many of them can also last quite long pulling even the most patient and experienced hands in. And with Love in the air (as in my last post), there are lots of new money-dwindling devices (like IPOs, new fund offers, expensive stocks, research reports, technical tips, stories of riches, business news, what have you!) waiting for your mind to get fixated on them. That’s where the madness of crowds can be not just entertaining, but positively harmful as well.

In such delusions, a dissenter from the crowd can look foolish, and despite all the patience, can eventually end up joining in for the fear of missing out. It is only later that one can learn whether one was sane or stupid. It is better to miss out on such madness of crowds – due to being outdated, lazy or composed, or some other reason.

It is worthwhile to remember what Charles Mackay rightly wrote in 1841.

“Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.”

Now let me go get my ticket for Kabali.

My Book Published and Available

It has been a while that I have posted to the blog, and one of the reasons has been editing my past writings in preparation for my book being published. So it is heartening to share on the auspicious occasion of Diwali that my book is published and is now available.

The title is ‘Path to Financial Independence: Simple Strategies for the Individual Investor’, and it is published by Wisdom Village Publications, New Delhi.

Printed copies are available online on Amazon, Flipkart.
Link for print copy on Amazon.in (domestic) is here
Link for print copy on Amazon.com (international) is here
Link for print copy on Flipkart.com is here
eBook for Kindle is available on Amazon and the link is here
The book is also displayed at the publisher’s website www.wisdomvillagepublications.com
Copies have reached the distributors and should be available next month provided the bookstores agree to display.
Please spread the word in your groups and networks to pass on the message of the book (and this blog!)

Thank you, and Wishing you and your families a very Happy Diwali.

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