John Maynard Keynes The Most Addictive Game

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Every minute market is putting new information, fun, clues, etc. which can be excited and addictive to us. It is a game which always excites us with its nature and it is never ending game so that slowly, we become addictive of it.

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In investing, odds are decided by the human, investor’s expectation. Odds cannot be quantifiable. We all have information but users of that information are human so that human sets prices for the odds which have emotional biases also.

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Mr. Keynes has started managing fund of family and friends with $30,000 in the year 1920 which was turned out to be $80,000 in April 1920. But after that, he made a huge loss which has wiped out entire capital and his father has to help him. Mr. Keynes has started speculating and build the capital worth of $120000 till the end of the year 1922. This success has encouraged him to make speculation into the commodities. Here also, Mr. Keynes lost 80% of his net worth.

Mr. Keynes has worked on to the evolving his investment style.

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He stops focusing on the macroeconomic, currencies, interest rate forecasting, etc. and made the transition of his focus to the cash flow, earning the power of the companies which are selling below the intrinsic value. He put aside his ego and created fortune with the bottom-up approach rather than a top-down approach.

As we have seen in my article on Howard Marks that no investment strategy works forever. It’s cyclical, sometimes growth works, sometimes value works and sometimes momentum works, etc. Mr. Keynes was successful as a value investor but during the year 1936 to 1938, his strategy was failed and he lost around 2/3rd of his wealth.

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Mr. Keynes has explained his strategy to his clients – we need to look at the discount from the probable and potential intrinsic value, need to hold large quantity for a longer period of time.

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Mr. Keynes has shifted from macro to company-specific matrix and short-term to the long-term focused investor. During the year 1928 to 1931, the value of his assets fall by 50% v/s US market fall by 30% but during the year 1932 to 1945, the value of his assets grew by 869% v/s US market rise by 23%. Additionally, his portfolio turnover reduced from 56% to 14%. He has truly focused on the long term investing and due to his long-term thinking, he has delivered a remarkable result during the 1929 great depression and also during World War II.

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We always need to focus on the investing strategy which is suitable to us rather focusing on identifying a perfect strategy and following it. No strategy is perfect in all the market cycle. I like to build a portfolio of bargain stocks which badly fail during the last 2 year were no huge bargain available into the broader market level. But staying with the pre-decided strategy has helped a lot and I can able to outperformed benchmark with decent margins. So we need to select a strategy which suits our temperament and need to stick on it.

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

Sequoia The Risks of Concentrated Investing

One of the wise advice given on risk management is we don’t have put all your money into one basket. If we have 100 stocks of a portfolio and equal 1% allocation to each company then erosion into any company will affect the entire portfolio by 1%. Whereas if we have a 10% allocation to the 10 companies then erosion to any one company will affect the entire portfolio by 10%.

When we have concentrated our portfolio to the winning businesses then we will be a winner and if we have concentrated our portfolio to the losers then we also are losers.

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Sequoia fund which has done a concentrated investing, they are not interested in the short term profit making, also not interested in the low allocation to the portfolio and which is known as –

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Mr. Buffett has closed his partnership in the year 1969 and suggested Mr. Bill Ruane manage the capital of partners so that Mr. Bill Ruane has set up the Sequoia fund. During the dot-com bubble, Sequoia fund has lost ~16.50% whereas the S&P 500 gained 21% and NASDAQ gained 86%. But after the dot-com bubble in the year 2002-2002, Sequoia fund has gained by 29% whereas the S&P 500 lost value by 38%.

In the year 2010, Sequoia fund has started acquiring a position to the Valeant Pharmaceuticals which becomes the second largest position. And in the year 2011, it becomes the largest position of the fund which has overtaken Berkshire Hathway which was the largest position in the 20 years.

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In the year 2015, many consider Valeant business practice as an unethical and after that, it caught under accounting fraud. As Valeant was the largest position of the Sequoia fund, the fund lost 9.03% whereas S&P500 gained by 8.44%. Sequoia fund has bought again when Valeant fall by 50% and Sequoia fund becomes the largest shareholder of Valeant. But Valeant fall by 90% and Sequoia fund has to sell the entire position of the Valeant. Sequoia fund’s assets have fallen from around $9million+ to $5million. A single stock becomes a reason for the fall of their asset massively.

For avoiding such impact, we need to write down our assumption for buying a business so that we can take an exit when our assumption started getting wrong. This practice helps us to reduce the effect of endowment bias towards the stock which we hold. This also reduces the emotional bias towards the stock and help us to protect our capital. I always make a write up of the entry and exit reasons for the investment which help me for making a better decision and reduce my emotional bias. After all such activities, we need to be thankful for the role of luck which can support us. Concentration is good till we stay within our predefined process, assumptions, rules, etc. When we go out of any of the mentioned, we need to pay huge tuition fees for the concentration.

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

Stanley Druckenmiller Hard Lessons Can Be Necessary

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Mr. Charlie Ellis has explained to the book Winning the Loser’s Game – professional players force others to make an error which helps the professional player to win whereas amateur players play a faulty shot. This is similar to the investing field. And the main difference between an amateur and a professional investor. We have to keep on defending ourselves and wait for others to make errors. We need to stay on the pitch and wait for the loose ball for hitting it outside of the boundary.

Return of the investment instruments and our return having a gap which is known as a behavioral gap, which tells that investors’ behavior affects their own returns.

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Amateur investors do not focus on risk management. Generally, they focus on the risk after they meet to the risk. It is similar to wearing a helmet after facing a road accident as a precaution. Whereas professional investors do things in a different manner, they buy things which others do not want to buy and they sell things which everyone wants to buy. Mr. Howard Marks are given this technique as a second level thinking.

Howard Marks – Second Level Thinking

During the year 2015, Stanley Druckenmiller was getting an introduction as –

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During the year 1981, a 28 years old Mr. Druckenmiller has started with Duquesne Capital Management. During the year 1987, Mr. Druckenmiller had buildup long position as he felt that 2200 level supported zone for the Dow Jones but on Monday, Dow goes down to 1738 level which known for “Black Monday”. On Monday, after lunchtime, Stocks got to bounce back and Mr. Druckenmiller has covered all his position. Mr.Drukenmiller has left his job to join George Soros. In the year 1989, Mr.Drukenmiller has shorted Japan Index Nikkei which is still down from the top of the year 1989.

In the year 1992, Mr.Drukenmiller has shorted the pound currency and he turns out to be a winner. Mr.Drukermiller has a track record of generating a return of 31.50%, 29.60%, 53.40%, 68.80% and 63.20% in the year 1989, 1990, 1991, 1992 and 1993 respectively.

But during the year 1994, Fund lost in a bet against the yen and 1998, Quantum fund had lost $2 billion in Russia. The worst is about to come. Mr.Drukenmiller has invested in the IT stocks and he was uncomfortable with his positions so that he booked and took gained. But he had hired new young employees in the year 1999 and they kept on making money by investing in the IT stocks.

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He had double his position at the top to the tech stocks and when IT bubble got burst, Quantum fund had lost 21% or $7.60 billion since their peak value.

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Mr.Drukenmiller cannot able to see others making money and he can’t. So that he also makes an emotional error. Mr.Drukenmiller was known that what he is doing but he cannot able to stop his emotion and he has occurred an error. Sometimes it is important to see others making money. And we need to stay with not making money.

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

Bill Ackman Get of Your Soapbox

When we have a view on something in the world then we are getting attached to that view. So that when we get any dis-confirming evidence against our view then also many a time, we hesitant to accept it. We are overconfident on their own view that we do not accept any opposing view.

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Majority of people love to share their success but not their failure. People intend to hide their failure. We love to share our success because it gives us a social recognition and self-esteem. We feel guilty for our failure and stop ourselves from sharing it with people. Also, we feel fearful about the mistake or meeting the failure.

Bill Ackman had started a hedge fund with the name of Gotham in the year 1993 and he turnouts the $3 million to the $568 million at the peak of the year 2000. He becomes more confident and started taking positions to the illiquid investment as concentrated bets at a wrong time; such behavior has affected him with the closure of Gotham hedge fund.

In the year 2004, Mr.Ackman has started another fund with the name of Pershing Square Capital Management and become one of the most activist investors. He acquires large enough shares of the company and asks to the management to become more shareholder-friendly and if management fails then Mr.Ackman get on to the board.

Few of the companies where of Mr.Ackman was done an activist investment such as Wendy, McDonald, MBIA Inc., Target, Sears, Valeant, J. C. Penney, and Herbalife.

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Above mentioned companies earn a gross margin of around 42-46% whereas Herbalife earns around 80%. Mr.Ackman shows that top-selling product of Herbalife is Formula 1 shake which is not much known. And they sell this product 10-20 times compared to the competitor brand such as Oreos, Charmin, Crest, Gerber, Palmolive, Betty Crocker, Listerine, and Clorox which is manufactured by GNC, Unilever, and Abbot Labs. Herbalife is not selling products to the consumer but they sell products to the distributors, their distributor is all over the globe.

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Mr.Ackman has read all available information, he gets into the science of products, R&D for the product, read annual reports, SEC filing, etc.

Mr.Ackman has given a three-hour presentation to people, interview to CNBC, CNN, and Bloomberg, etc. Now, how Mr.Ackman can admit defeat after telling everybody about the Herbalife. And also stock had declined by around 35% after his presentation. But during that panic selling movement, Dan Loeb, founder of the hedge fund Third Point LLC has bought 8.24% of the Herbalife and becomes a second largest shareholder. Herbalife stock price rose by 20% in five days. After that filing shows that activist investor Carl Icahn took a 12.98% stake in Herbalife.

Mr.Ackman has made a public commitment regarding his investment idea which has mentally created pressure on him and this pressure has to stop him by making a proper decision.

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Due to the public commitment and also a fear of losing a reputation, he faced difficult to cover his wrong position. If we keep on making our moves commitment to the public then we may face difficult to change moves when we may go wrong. We should focus on not making a commitment in public which helps us to change our move and saved our capital. When our odds go against us, it will cost us mentally, emotionally and financially. Mr.Ackman was on short after three years also. We will go wrong, we can meet failure but such kind of public commitment can stop us from accepting our failure and saved our remaining capital to restart again.

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

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