DON’T TAKE NEWS ANCHORS SERIOUSLY – Chauffeur Knowledge

There are two types of knowledge. First, we have real knowledge. We see it in people who have committed a large amount of time and effort to understand a topic.

The second type is chauffeur knowledge – knowledge from people who have learned to put on a show. These people just make show that they know everything but they just speak what they have heard from the source. They speak as per the predefined script ready for them.

Any fool can know. The point is to understand. – A. Einstein




Source – Vivify

Investment – It is difficult to judge who is an expert and who has just a bird view of knowledge.

In 1998 Wesco meeting, Charlie Munger Quoted –

I try to get rid of people who always confidently answer questions about which they don’t have any real knowledge. To me, they are like the bee dancing its incoherent dance. They are just screwing up the hive.

Mr Warren Buffett suggests us to decide what we know and stay with it, what he calls a circle of competence. Mr Munger suggests that the size of the circle is not important but important is, we stay within its limit well. If we do not know anything, we should simply say we don’t know rather act as an expert. I also faced such problems during the initial days of my career. I considered people with Chauffeur knowledge as an expert until I do not meet real experts.

In the stock market, we meet many people who act as an expert but the majority of them not. We have to carefully check their knowledge before trust on them. We have to understand their investment philosophy and process before making a judgement of them. True experts recognize the limits of what they know and what they do not know. If they find themselves outside their circle of competence, they keep quiet or simply say, ‘I don’t know.’ We also have to perform the same for becoming an expert in our field.

This entire series will be review with various examples from books which are Thinking, Fast and Slow and The Art of Thinking Clearly.

IF 50 MILLION PEOPLE SAY SOMETHING FOOLISH, IT IS STILL FOOLISH – Social Proof

We generally accept something as right when others are also performing it and we also start following the same. When one starts clapping at Drama show, all other starts clapping and join that fellow.

Social proof is the evil behind bubbles and stock market panic. It exists in fashion, management techniques, hobbies, religion and diets. It can paralyze whole cultures, such as when sects commit collective suicide.

It has been seen in students, they select particular stream as their career because their friends or others in their family has select it. They do not focus on what they like, whether that stream is suitable to them or not.

We have seen that when a few streams are in fashion; the majority of students chase that same stream rather focus on their skill or interest. We are a human animal so that human emotions affect our decisions.

Every time social proof does not create trouble. When we decide to go out for dinner and found 2 restaurant from which one has a crowd but other is vacant. Here, we should generally prefer a restaurant with a crowd. Herding becomes particularly useful in ambiguous situations because it simplifies the decision-making process. We should follow the crowd when the decision does not have a huge impact on our financial or in life.

Investment – When few start talking about buying a few equity investments than others also start following it and by seeing them succeed more will join their party. That will result in a bubble or burst.

We follow others without thinking about anything. When we see a few others are doing something then our mind stops giving us logical reasoning. I have met a few people before Covid-19 market panic. They were telling me that I should make the large investment as many mutual funds and PMSs have generated good returns in past. If you will not invest then you will miss out an opportunity. We should not follow what others doing rather should focus on their process. Equity investment has created wealth for people and beats inflation so everyone starts herd towards it without thinking about anything and any level. All the assets class has its merits-demerits so that we need to choose an assets class according to our temperaments rather chasing what others are doing.

Majority of the fund managers also follow social proof. If we see the various scheme of the same categories then the majority of the fund has a similar kind of portfolio. They focus on matching their benchmark return. We can see below portfolio of four different schemes of different AMCs, all those have many common stocks in their top-5 holdings.

For overcoming social proof bias, we need to create our circle of competence and investment process. We need to stick with it and let others do whatever they want to do. For example, if pure cyclical businesses do not fall under our circle of competence then we should avoid it though anyone has bought it. Also, the famous quote of Mr Buffett tells us a lot about overcoming social proof bias.

This entire series will be review with various examples from books which are Thinking, Fast and Slow and The Art of Thinking Clearly.

Michael Steinhardt Stay in Your Lane

BM C06 01

We can create wealth from trading and investing to equities, commodity, currency, real estate etc. but we should do what is comfortable for us. Each and everything is not comfortable for us which is not comfortable for us, we should not do it at all. A performing task which is out of our comfort zone can prove as expensive for us. If Sachin Tendulkar starts singing and Legendary Lata Mangeshkar start playing cricket than both might meet failure.

We have to follow Mr. Buffett’s advice of circle of competence. Mr. Buffett did not buy any IT stocks during an IT bubble though he under-performed. We can prepare a circle of incompetence for not doing anything which falls into that circle.

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Consider fool among others is better than losing capital to demonstrate as a smart.

Michael Steinhardt has a decent performance over the S&P500. If anyone has invested $10000 in the year 1967 then those funds turn out to be $4.8 million and $190000 in the year 1995 from Michael firm and S&P500 respectively.

During the year 1993, Hedge fund has shown a bull run where every investor wants to give their fund to hedge fund manager to make an investment. Here, Mr. Michael also got a huge fund to manage which is around 200 times more than the amount with he has started a fund. But due to huge fund size, he faced difficulties to deploy fund to small & midcap companies so that he has started roaming around the world and started deploying fund to the area which is out of his competence. His major fortune was made through trading to the US stocks but out of US, he was little aware with the economy of businesses and political systems. He has started deploying fund across the world which is out of his expertise.

BM C06 03

This mistake has broken him badly psychologically and he could not able to retrieve himself again.

BM C06 04

We always have to focus on to the eliminate errors because that is only into our control, everything else we cannot control. If we keep on eliminating errors, then we have a better chance to win the game. During the FY14-18, the majority of the equity fund manager at India got a huge fund inflow due to the huge liquidity and not enough return from other assets class. Hence, many of them have occurred mistakes due to overconfidence and started to go outside their expertise.

BM C06 05

BM C06 06

I was a deep discount and bargain hunter investor. My investment career gets to evolve with the time and my investment philosophy slowly transform from great bargain to quality businesses. But I have always take care of not losing capital so that I have invested with a lower percentage of my portfolio to the evolving area. Such a way I have made an experiment with my investment decision. (Still, my attraction towards bargain is with me).

Read for more detail: Big Mistakes: The Best Investors and Their Worst Investments by Michael Batnick

WARREN BUFFETT’S LETTER – 1997 – 1998

Warren Buffett’s Letter 1997

We need to wait for the opportunity which falls under our Circle of Competence and we are comfortable with it, rather catch each opportunity.

WB 1997 01

We do not have to try to capture each and every single opportunity available rather we should focus on the opportunity which falls under our Circle of Competence and our philosophy. Till the time, we need to wait for the appropriate opportunity. Those who try to capture every opportunity, they do not get a better investment result.

As we have discussed investment into the cyclical industries in one of the articles of the same series (WARREN BUFFETT’S LETTER – 1987), we further get insights from Mr. Buffett –

WB 1997 02

When higher the supply of a particular commodity then prices of that particular commodity starts falling and vice-versa with the lower supply of the commodity. We should build a position into commodity companies during an excess supply of a particular commodity and we get insights for dry out excess supply.

Repurchase of Shares

WB 1997 03

WB 1997 04

We have seen in the current market fall that many people lose their investment, many have made an investment by bringing borrowing. But those who are careful and defensive investors, those get an opportunity to acquire position into the businesses at an attractive valuation. Many of the investors, I know who was holding a good liquidity position in their portfolio. They got saved from market fall. I also have experienced similar because of having good liquidity positions into my portfolio.

Acquisitions

Berkshire has made an acquisition into Star Furniture and International Dairy Queen (Company has a 5792 dairy stores in 23 countries)

Warren Buffett’s Letter 1998

When the company spends any money than Mr. Buffett always analyze that whether company able to create more than one dollar for anyone dollar spend or not. If the company can able to create more than one dollar for every dollar spend then they are happy to spend money. If the company is incurring a capital expenditure and consistently company is not able to earn higher returns than the company is facing capital allocation problem. We do not have to check it for 1, 2 or 3 years but we need to check it for a longer horizon.

Indian Company examples

One of the textile machinery manufacturing company

SI

One of the tyres manufacturing company

BI

One of the largest IT Company

TCS

Berkshire help to the CEOs of companies in which they have made an investment –

WB 1998 01

They also focus on the long-term benefits from the business rather focus on the shorter term perspective. Additionally, Mr. Buffett and Mr. Charlie provide an environment to the CEOs where CEOs can show their talent.

WB 1998 02

When CEOs does not have such kind of pressure and time freedom then they can able to perform well with the value creation among the business. Unnecessary and excess of meetings also reduces the performance. Also, those who do not have a pressure, get the freedom to work then they will produce a better result.

General Re

Berkshire has made a 100% ownership acquisition of General Re which is operated into the reinsurance business. The company is the largest U.S. property-casualty reinsurer, the company also owns 82% of the oldest reinsurance company in the world, Cologne Re. The two companies together reinsure all lines of insurance and operate in 124 countries.

Warren Buffett’s Letters 1957 – 2012

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