Review

Common Sense Investing

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Common Sense Investing: Sharing an excellent set of simple videos (less than 60 minutes) by Rick Van Ness. All that an average individual investor needs to know and follow.

This is what the site http://www.financinglife.org/ says about these videos:

“These short videos teach basic financial concepts to make it more likely that you’ll achieve common life goals such as owning a home, providing for yourself or your family, taking fun vacations, and retiring in comfort–all free from financial stress.”

“These videos are inspired by the friendly and unselfish help given to individuals at Bogleheads.org, now the largest not-for-profit investment site on the Internet.”

Book Synopsis: The Black Swan by Nassim Nicholas Taleb

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The_Black_SwanI recently finished reading ‘The Black Swan: The Impact of the Highly Improbable’ by Nassim Nicholas Taleb, the Lebanese essayist, writer, philosopher.

I had read his ‘Fooled by Randomness’ a few years back, and the essential message of this book is, more or less, similar. The basic premise of both the books is this: The past is always only clear in hindsight, and it is not a good predictor of the future. The additional elaboration in this book (and a lot of it!) is that not only is the past random, but the future is not predictable based on the past simply because, most of the times, the future happens due to a ‘Black Swan’ event that nobody can predict in advance, but ends up shaping the future.

While this is the core concept, the book is relentless in providing multiple examples through history, culture and markets to prove the point. While the book is not in the same category as some of the legendary ‘Guru Books’, it is still reasonably decent reading with some good takeaways once you get this basic point of the futility of predicting the future. It tends to get a bit self obsessed at times, and keeps on rambling in a sense – often forcing the reader to, kind of, turn to the next page after getting the point. One of the disappointments of the book is that eventually it ends without any clear thoughts on how to handle ‘black swan’ events, except saying that ‘get it into your mindset and prepare for it’.

Now, whether one agrees or not with the basic proposition based on which this book is written, it contains a number of nice quotes that make you stop and wonder whether it is humor or wisdom or both. So if one can have the patience to finish the book, it does contain a number of such snippets which provide for entertaining reading.

Here are a few of those excerpts from ‘The Black Swan’ that are worth remembering:

1. ‘Black swans’ are highly consequential but unlikely events that are easily explainable – but only in retrospect. Black swans have shaped the history of technology, science, business and culture. As the world gets more connected, black swans are becoming more consequential.

2. When you develop your opinions on the basis of weak evidence, you will have difficulty interpreting subsequent information that contradicts these opinions, even if this new information is obviously more accurate.

3. If you hear a “prominent” economist using the word ‘equilibrium,’ or ‘normal distribution,’ do not argue with him; just ignore him, or try to put a rat down his shirt.

4. In developing treatment theories, doctors most commonly get mixed up between absence of evidence and evidence of absence. So do statisticians.

5. The inability to predict outliers implies the inability to predict the course of history.

6. If the past, by bringing surprises, did not resemble the past previous to it (what I call the past’s past), then why should our future resemble our current past?

7. Things always become obvious after the fact.

8. Missing a train is only painful if you run after it! Likewise, not matching the idea of success others expect from you is only painful if that’s what you are seeking.

9. Cumulative errors depend largely on the big surprises, the big opportunities. Not only do economic, financial, and political predictors miss them, but they are quite ashamed to say anything outlandish to their clients — and yet events, it turns out, are almost always outlandish.

10. The same past data can confirm a theory and its exact opposite! If you survive until tomorrow, it could mean that either a) you are more likely to be immortal or b) that you are closer to death.

And finally, the book ends with this.

“I am sometimes taken aback by how people can have a miserable day or get angry because they feel cheated by a bad meal, cold coffee, a social rebuff, or a rude reception… We are quick to forget that just being alive is an extraordinary piece of good luck, a remote event, a chance occurrence of monstrous proportions.”

“Imagine a speck of dust next to a planet a billion times the size of the earth. The speck of dust represents the odds in favor of your being born; the huge planet would be the odds against it. Don’t be like the ingrate who got a castle as a present and worried about the mildew in the bathroom… remember that you are a Black Swan.”

The Dilbert One Page Summary: All that one really needs to know

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dilbertA couple of days back I was reading “Dilbert and The Way of the Weasels”. While this is a funny book, a small section has some amazing insight quietly embedded. In that book, the author claims, perhaps jokingly, that everything that a person really needs to know about personal finance and investing can be summarized in one page. Which actually, I thought, is quite true.

Exactly the kind of problem that I had been facing for a while, when a friend of mine asked me why I don’t write about specific stocks or do more frequent analysis. And all I could tell him is I felt it was not important, and also that I honestly did not have anything to write.

There is only so much you need to know about finance and investing, as an ordinary investor. If a reader reads the earliest few posts written in this blog about investing, and garnishes it with some of the book synopsis or guru speak posts, that’s all that any one needs to know. And that’s also an overkill in my view, and perhaps, even unnecessary. The truth is everything that one needs to really know does not take much writing. The tougher part is in following the simple things with discipline and without emotion.

As an individual investor, if you are interested in a really brief and simple summary, Dilbert’s summary is all that is necessary, honestly. Simple, but by no means, easy to follow.

So here are the 10 things mentioned in the ‘Dilbert One Page Summary’, adjusted a bit with my own inputs. The things that one really needs to know, and would work for most individuals in ordinary conditions:

1. Pay your credit card bill in full, and stop using credit cards. Use only debit cards – money that you already have.

2.  Get term life insurance as early as you can in your life, and keep adding cover every 5 yrs as your income increases. Don’t buy any other insurance, except health insurance every year.

3. Contribute to your employer’s PPF/ Retirement scheme by making mandatory as well as voluntary contributions if you can.

4. Buy a house, if you want to live in your house, and if you can afford it assuming you don’t take more than 60% of house value in loans, which should also be less than double your annual post tax income.

5. Put 6-9 months of your expenses in a liquid fund or cash equivalent that you can liquidate in a day or two.

6. Save at least 25% of your post tax income.

7. From your savings, put 65% in a stock index fund, 25% in a bond fund (or fixed deposits based on tax slab), and 10% in a gold fund. Make increments every couple of years. Do not touch it till retirement.

8. In case you are adventurous, replace the stock index fund with (or add) 3 actively managed diversified equity funds which are rated 4 or 5 currently on Morningstar (or Value research online or similar). Once you choose them, stick to them for at least 5 years, else replace them with the index fund.

9. If any of the above is confusing (specially step 7 and 8), hire a fee-only based financial planner (not someone who takes a fee based on percentage of assets or transaction size) for a two hour advice session and follow whatever he tells you.

10. Ignore everything else that any one tells you.

Anything else is likely to be a waste of time (and money perhaps) more often than not. Even if it does give you some incremental returns for some time, the costs and lack of sustainability are unlikely to make it worth it.

At the crux of it, honestly, that is all there is to it.

Book Synopsis: The Difficulty of Being Good by Gurcharan Das

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the-difficulty-ofbeinggood“What is here is found elsewhere. What is not here is nowhere.” – Mahabharata

With these words from the epic, Gurcharan Das starts the prelude to his book “The Difficulty of Being Good”, which I had the opportunity to read over the past few days. An output from what he terms as his ‘academic holiday’, this fairly scholarly piece of work by the former CEO of Procter and Gamble and columnist, is a thorough and in-depth examination into the main characters in the Mahabharata, their stories and their moral dilemmas, their relevance and application in today’s day and age, a search for the meaning of dharma, and the eventual conclusion that ‘Dharma is Subtle’.

The book is fairly heavy reading even for regular readers of non-fiction, but is worth the effort. It has loads of wisdom on every page, and content that will take time for even the most patient readers to absorb. Not exactly following the story line of the Mahabharata, the book takes one character at a time and analyzes the major events that happen with the character, and then tries to answer the age-old question “What is dharma?” In the process, it provides the reader a wonderful insight into the human traits of the key characters.

The author argues that while envy drives Duryodhana and he is largely an ‘evil’ character; for someone who is convinced that the throne belongs to him and whose goal is to win, Duryodhana’s singular drive and endless discontent may be something that one can learn from.

In his analysis of the ‘pravritti-oriented’ Draupadi and her courage, there are some really interesting insights from her conversations with the ‘nivritti-oriented’ Yudhishthira on ‘Why be Good?’ and the various explanations for it. A significant part of the book also focuses on the ‘un-hero’ Yudhishthira and his search for ‘dharma’, and how he undergoes a transformation from being a passive, non-violent, strictly moral prince to a more pragmatic, active and balanced righteous king, on realising the inherent conflicts between being a ruler and being good.

While noting that Bheeshma is perhaps the most ideal character in the Mahabharata and that his striking trait is selflessness, the author also questions whether selflessness is always good, especially if, like in Bheeshma’s case, it actually led to the Mahabharata. If his pledge were not taken, perhaps things would have been smooth with Bheeshma taking the throne.

The author also goes on to explain the status anxiety faced by Karna, its relevance in today’s society, and why he is the ‘most lamented’ character in the epic; as well as the despair faced by Arjuna when he refused to take arms. The author finally takes a detailed look at Krishna and his guile and how it was singularly responsible for the Pandava victory, specially due to its use in the death of all the Kaurava commanders-in-chief – namely Bheeshma, Drona, Karna and Duryodhana. He analyses the character of Krishna both as a human and as God, and eventually concludes that the only justification for his actions is that He is God.

All through the book the author constantly provides contemporary parallels to the epic’s events, and tries to answer the question on whether it is possible to be good and still achieve your goals, and why it is so difficult. These examples range from personal dilemmas in day to day life, positions that corporates and administrators are likely to find themselves in, decisions regarding law and policy makers as well as international issues.

Eventually the conclusion is a highly profound piece of writing some of which I quote below:

“Good behaviour is not rewarded generously in the epic; the virtuous suffer banishment and deprivation, while the wicked flourish in their palaces. Nor does the epic seem to explain why ‘good’ persons, who had a strong and persuasive case to make war, could win only by unfair means? And if so, how can we still call them ‘good’? It has told us that dharma is hidden in a cave, but even if it is found, it is so subtle that it slips from our grasp.”

“There is no single definition of dharma, it is matter of a fine balance  and dharma is subtle. Dharma is supposed to uphold a certain cosmic balance and it is expected to help us balance the plural ends of life – desire, material well being and righteousness – when they come into conflict. However, dharma does not do a very good job at it.”

Overall, a wonderful read, if one has the inclination and patience to absorb it.

Two Books: The Lazy Person’s Guide and The Coffeehouse Investor

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I had the opportunity to read two books over the past two weeks.

the-lazy-persons-guide-to-investingThe First One was ‘The Lazy Person’s Guide to Investing’ by Dr Paul Ferrell, a former investment banker with Morgan Stanley and a columnist later, with some really useful and simple advice for the individual investor.

Here are some excerpts:

“Investing really is very simple stuff. You can do it yourself.”

“Lazy portfolios are keep-it-simple, no-hassle, low-stress, time-saving, low-maintenance portfolios–so you can get on with the business of everyday life.”

“Believing that investing requires some kind of special or weird thinking that you don’t have will blind you to your own natural instincts.”

“The only solution is to be in the market all the time and stop jumping in and out.”

“The more I know, the more I know I just don’t know, and neither does anyone else.”

“Taxes, Time, and Psychology favor the laziest portfolios.”

“The market is totally random, irrational, and unpredictable. And it loves humbling the mighty. Try to beat it and you’ll lose money.”

“Perhaps the single most important lesson you’ll need on the road to becoming a millionaire is frugality.”

“A penny saved is a dollar earned, thanks to compounding.”

“Buy the whole market with index funds, and never sell.”

“Experience has taught me that the relentless noise from breaking news sources, like CNN and CNBC, easily distracts most investors from what really works in the long run.”

“The ideal hybrid fund acts like a whole portfolio, diversifying between stocks and bonds for you.”

“Keep it simple, very simple. Lazy investing works.”

thecoffeehouseinvestorAnd the other book was ‘The Coffeehouse Investor’ by Bill Schultheis, a former broker with Solomon Smith Barney.

Here are some excerpts from it:

“The first step in being a responsible investor is to calculate an approximate savings goal.”

“We have the misconception that dealing with something so far away means sorting through thousands of mutual funds, hundreds of advisors and dozens of financial magazines.”

“The three fundamental principles of investing: Asset allocation; approximating the stock market average; saving–and these three principles are in our control.”

“As long as Wall Street has a vested interest in lots of transactions and busy portfolios, investors will continue to latch on to the hype and hysteria of Wall Street, perpetuating the misconception that by carefully reviewing market trends, diligently studying mutual fund tables, religiously researching global economies and closely watching interest rates, anyone and everyone can own a successful portfolio.”

“Let go of the mistaken belief that the secret to a successful portfolio is to accurately forecast bull and bear markets.”

“I know of no other industry in which so many self-proclaimed experts try so hard to convince us that they are wildly successful at that which they so miserably fail.”

“The most important factor when diversifying is to adhere to your asset allocation strategy, because when you stick to your strategy and rebalance your asset at year-end, buy and sell decisions are no longer arbitrary.”

“Maybe if mutual fund companies sent a bill each month, more investors would take the time to see whether they were getting their money’s worth.”

“Somewhere along the line Wall Street has forgotten that we can retire and be happy on a little less than millions and millions of dollars.”

“Strike a balance.–It is not worth making our life miserable today so you can retire in style tomorrow.”

“When we simplify investing, we take another step toward discovering our contagious spirit and our unique energy in such a way that we impact our world, making this a better place for everyone. I suspect that’s what most of us would say life’s all about.”

Some wonderful, honest and wise words indeed!

The Talent Myth: What ‘Outliers’ and ‘Talent is Overrated’ found about Success

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Sehwag already held the record for the highest Test score of 319 by an Indian. Now he also holds the record for the highest ODI score of 219 by an Indian and by any cricketer.

That’s not bad going, especially for someone who started his career with a game in which he scored 1 and conceded 35 runs in 3 overs, and then was not picked for 20 months. Till he was promoted to open the innings seemingly by chance only because Sachin Tendulkar was injured. The success that Sehwag achieved after that is attributed, to a large extent, to his ‘innate hand-eye coordination talent’.

In the case of the legendary Sachin, people always talk of his exceptional talent from a young age which is apparently responsible for his success. Federer’s greatness was due to ‘exceptional talent and grace’.  Tiger Woods was always ‘a prodigy who was a gift to golf.’

We love talking about talent. And look for it in our achievers of the past and the present; as well as search for it in our children for the future. Even in fields other than sport, where people achieve success, it is attributed to talent. Therefore, apparently, Warren Buffett was ‘a born investor with a talent for spotting opportunities’, Bill Gates was ‘a child prodigy born to be a geek’, Mozart was ‘brilliance from the age of 5’. Even in business, Steve Jobs was  ‘a blessed engineer with the heart of an artist.’

I have often felt that while it may make good inspirational story telling, this is far from the truth. At some level, it is also an insult to the efforts put in by these individuals, and turns a blind eye to the role played by chance. If these individuals are asked the reasons for their success, I would be really surprised if even one of them said, “Well, I was born with the talent for this – so all I had to do was to go there and decide to be whatever I became.”

outliersI recently read a couple of books which completely debunk this theory of talent being the reason for success – either of the superlative kind, or even the reasonably common but consistent success. And I am reasonably convinced that, that is true.

The first one titled “Outliers: The Story of Success” by Malcolm Gladwell, through a lot of examples, highlights the “10,000-Hour Rule”, claiming that the key to superlative, outlier success in any field is, to a large extent, a matter of practicing a specific task or set of tasks for a total of around 10,000 hours. And the closer one gets to the 10,000 hours, the closer is one likely to get to what ‘looks like genius.’

TalentIsOverratedThe second one titled “Talent is Overrated” by Geoff Colvin gets a bit more specific and refines it further. It says that the best people in any field are those who devote the most hours to what is called “deliberate practice.” It means activities that are explicitly intended to improve performance, that reach for objectives just a bit beyond one’s current level of competence, provides feedback on results and involves high levels of repetition.

So the good news is that talent is not the reason for success, so forget the notion of being ‘gifted’ for being successful. The bad news is that it will still require a lot of hard work, and it is highly likely that chance smiles on you in that process of work. As a famous man said, “The harder I work, the luckier I get.”

For most people, work is hard enough even without pushing harder – without coming anywhere close to the ‘10,000 hours’ or to the ‘repetitive deliberate practice’. Those extra steps are so much harder that they almost never get done. And hence, great performance is hard and rare, not due to some innate gift.

But why do some people push themselves? The answer to that ‘why’ is not that simple – it is an existential one, a combination of individual motivation and commitment to whatever their area of work. It is likely to be made up of simple, normal reasons in most cases, at least during the initial phases. But beyond a particular point, it is a bit like what the famous mountaineer George Mallory’s response. When asked why he wants to climb Mount Everest, he said, “Because it is there.”

So try explaining the 319, 219 and may be many more such scores by Sehwag. Or the 100 hundreds of Sachin. Or a great achievement in any sphere of work. Talent is not the reason. At best, it may only be a starting point. The myth of talent being the reason needs to give way to the reality of hard work, the role of chance and the individual’s commitment. As Po learnt in Kung Fu Panda, “There is no secret ingredient. It’s just you.”

Book Synopsis: The Bogleheads’ Guide to Investing

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For regular investors for whom investing is not a full-time activity, the Bogleheads’ Guide to Investing is a wonderful book that asks the right questions and provides clear answers. In a single book, the authors (who also started an online forum bogleheads.org based on the investing principles of John Bogle) have explained, in a step by step, clear and authoritative manner, what a normal individual investor and his/her household needs to know about investing, and what steps they need to follow to reach their goals. It becomes clear that the authors have experienced and followed it themselves in their lives and now are keen to spread the message in their sunset years.

bogleheadsWritten by experienced individuals, this is a one-stop book for anyone who does not want investing to be a chore, wants credible advice once and for all in a single package, so that they can get it done and focus on the other things in life. Almost like grandpa’s advice, it is worth its weight in gold for new investors to learn, and for experienced investors to unlearn!

A quick summary of the Bogleheads’ Guide to Investing is presented below:

1. Choose and Live a sound financial lifestyle: “Decide whether you want to be a borrower, consumer or keeper. Graduate from a paycheck mentality to the net worth mentality. Most people fail to go beyond this step.”

2. Start to save early and invest regularly: “For most people, the most difficult part of the process is acquiring the habit of saving. Clear that one hurdle and the rest is easy. Adding time to investing is like adding fertilizer to a garden. It makes everything grow.”

3. For most investors, mutual funds offer great diversity in a single investment: “I have found that when the market is going down and you buy funds wisely, at some point in the future you will be happy. You won’t get there by saying, ‘Now is the time to buy.’ “

4. Figure out approximately how much you might need for your retirement.

5. Indexing via low-cost mutual funds is a strategy that will, over time, most likely outperform the vast majority of strategies. If you decide to own actively managed mutual funds, choose managed funds with low expenses.

“How investing is different from most of life: Through education and experience, most of us come to learn and practice certain life principles that serve us well. But the complete opposite is true in investing. For example:

a. Don’t settle for average

b. Listen to your gut

c. If you don’t know how to do something, ask the expert

d. You get what you pay for

e. If there is a crisis, take action

f. The best predictor of success is past performance

Well, guess what? Applying these principles to investing is destined to leave you poorer.”

6. An asset allocation plan based on your personal circumstances, goals, time horizons, and need and willingness to take risk is the cornerstone for reaching your goals.

7. Costs matter, specially in the long run.  “The shortest route to top quartile performance is to be in the bottom quartile of expenses.”

8. Taxes are your biggest expense. Invest in the most tax-efficient way.

9. Rebalancing is important. Rebalancing controls risk and may reward you with higher returns. Stick with your chosen rebalancing strategy.

10. Market timing and performance chasing are poor investment strategies. They can cause investors to underperform the market and jeopardize financial goals.

“The idea that a bell rings to signal when investors should get into or out of the stock market is simply not credible. After nearly 50 years in this business, I do not know of anybody who has done it successfully and consistently. I do not even know anybody who knows anybody who has done it successfully and consistently.” – John Bogle

11. Tune out the noise and do not get distracted by day-to-day events.

“A fake fortune teller can be tolerated. But an authentic soothsayer should be shot at sight.”

“It’s in the best interest of Wall Street that the public believes that they can beat the market.”

“The simplicity of sound investing creates a real problem for the investment media.”

12. Protect your assets and life with adequate types and amounts of insurance. Insurance is for protection, it is not an investment. Don’t confuse the two.

13. You need to master your emotions if you want to be a successful investor. Letting your emotions dictate your investment decisions can be hazardous to your wealth.

14. Finally, Stay the Course!

Book Synopsis: Benjamin Graham, Building a Profession

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benjamin-graham-building-a-professionAgain continuing on Benjamin Graham, this weekend I was privileged to have read a book by this title “Benjamin Graham, Building a Profession”. It is a collection of rare writings by and interviews with one of financial history’s most brilliant visionaries. The book presents Graham’s evolution of ideas on security analysis spanning five decades.

Particularly striking are the changes in thinking that occurred in Graham over time from the pre-1929 to the Great Depression era when security analysis as a profession was not even defined, and then later from the World War II to the post 1950’s to the late 1960’s and 70’s when stock market levels and the approach to security analysis had changed quite dramatically. While this set of writings are not in the nature of an investing bible, like ‘Security Analysis’ and ‘The Intelligent Investor’, there still are numerous nuggets and views specially provided to his own industry. They also reflect Graham’s lifelong effort to bring science into his own fraternity, his numerous attempts to bring integrity into the methods of Wall Street and the sheer difficulty of doing so due to the nature of the beast, and his honest effort to help ordinary individual investors. Here are a few excerpts from the writings:

1. On the Accountability of Security Analysts: We have no scoring system for security analysts, and hence no batting averages. Yet it would be anomalous indeed if we were to devote our lives to making concrete recommendations to clients without being able to prove, either to them or to ourselves, whether we were right in any given case. (1946)

2. On similarities between Medicine and Security Analysis: Both medicine and security analysis partake of the mixed nature of an art and a science; in both the outcome is strongly influenced by unknown and unpredictable factors; in both we may find “the concealment of ignorance, probably more or less unconsciously, with a show of knowledge.” (1946)

3. On the performance of security analysis: The greatest weakness of our profession is our failure to provide really comprehensive records of the results of investments initiated or carried on by us under various principles and techniques. We have asked for unlimited statistics from others covering the results of their operations, but we have been more than backward in compiling fair and adequate statistics relating the results of our own work. (1952)

4. On the change in valuation thinking from relying on past records to future expectations: A large part of the discrepancies between carefully calculated formula values based on the past and the market prices can be traced to the growth factor, not because the formulas underplay its importance, but rather because the market often has concepts of future earnings changes which cannot be derived from the companies’ past performance. (1957)

5. On the use of complex mathematical models in analysis: The combination of precise formulae with highly imprecise assumptions can be used to establish, or rather to justify, practically any value one wishes. Measuring imprecise variables with highly precise tools is not better than using crude tools. In fact, it may well be worse because over precise formulas tend to trigger overconfidence in those who wield them – creating the illusion of certainty in areas where no certainty is ever possible. (1958)

6. On the accumulation of equity using systematic plans like dollar cost averaging: The computations made of theoretical dollar averaging experience in the past embolden us to predict that such a policy will pay off ultimately, regardless of when it is begun, provided that it is adhered to conscientiously and courageously under all intervening conditions. This is by no means a minor proviso. It presupposes that the dollar-cost averager will be a different sort of person from the rest of us, that he will not be subject to the alternations of exhilaration and deep gloom that have accompanied the gyrations of the stock market for generations past. This, I greatly doubt. No technique or tool can ever impose complete external discipline on an investor who lacks internal discipline. (1962)

7. On market forecasts and their future: My views on the validity of stock market forecasting have been unfavorable for about half a century. Let me make a guarded prediction here. It is more than just possible that the investigations of Wall Street’s practices in the future will include a really comprehensive study of the claims and accomplishments of the leading approaches to market forecasting. The opposite possibility is merely that all such prognostications will be required to bear in large type the legend: “For entertainment purposes only. Do not take seriously.” (1963)

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