DON’T ACCEPT FREE DRINKS – Reciprocity

Posted on January 3, 2021 by Jimit Zaveri under Behavioral Finance

Many NGOs, philanthropic institutions give us a gift and welcome us. After that when they feel that we have fallen under the softcore for them due to gift, they ask for the donation. Reciprocity is a very useful survival strategy, a form of risk management.

It is at the core of cooperation between people who are not related to each other and a necessary ingredient for economic growth and wealth creation. Reciprocity rule said that we try to repay what we get from someone. At last, we all are social animals. And when we give something to someone, we expect something in return. This is how our social life has been designed. This bias is so strong that by this, we can influence thinking and decision making of other people.

Business – This method is best used by marketing fellow who comes to us with some exciting advice free of cost and in return, we will buy what they are selling. When sales personnel put lots of efforts on us then we try to buy something from them. When any company keeps taking care of their customers such as sending wishes on their birthday, anniversary, sending gifts, etc. then those happy customers will buy services from that company on a repeated basis.

Investment – when we like the products or services of a particular company, we try to put our money into it. It is a good decision at some extend but without digging in detail putting money is an unwise decision.

Many a time, our advisors also get some benefits from the company or they like the products or services of the company so that they issue buy recommendations. Opposite of it that sometimes, any unsatisfied with the product or service of any company to any of our advisors then they might start advising to stay away from that company to put money.

We should not blindly follow anyone rather doing their homework. For overcoming this bias, we need to give us a time, we need to dig deeper on each aspect of the company. We need to write down a thesis which contains the opposite side of our decision. It’s difficult to kill your idea but its necessary.

One of the power generation and transmission business – very lower return to no return in the last 14 years

One of the telecom company of India- also low return in the last 14 years

Dialogue from Mr Salman Khan best suitable to this bias – Do me a favour, that doesn’t do me any favours. (Idea taken from SafalNiveshak)

Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation.

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

Don’t confuse brains with a bull market – 16 – MASTERING THE MARKET CYCLE

Posted on May 17, 2020 by Jimit Zaveri under Bibliophile: Mastering The Market Cycle

When there is unusual profitability, higher return ratios command by a business then such businesses attract the incremental capital from others. This incremental capital results into the stiff competition and particular business become crowded where such unusual profitability and higher return ratio gone for a toss.

Reversely, businesses which are not able to generate huge profitability, higher return ratios, huge capital requirements etc. then such businesses fail to attract the attention of the new capital so that fewer players remain in the industry and due to challenging business environment, those few also reduces. This consolidation results in moving a cycle of profitability and return ratios to the improvement level.

Examples – high profitability and return ratios become lower (Telecom) and

Airtel-min

Merely 2-3 telecom operators to ~14 telecom operators and then again reach to strong 2 telecom operators. This journey suggests the rise and fall of companies.

lower profitability and return ratios become higher (Paint)

Asian Paints-min

So that we need to understand that business does not grow to the sky. They all have a cycle. Also, we need to keep in mind that best investors do not get successful all the time. Our human nature makes our success and that also moves in a cycle.

MMC16 01-min

Success changes the people and they start thinking that they are smarter. Success has a negative consequence also where people become richer and motivation level of them started reducing. Unconventional thinking transforms into conventional thinking. Rather we should know our limitations and also, need to understand that we can fail though we become successful investors.

Successful investors believe that they are mastered in the investing and they have less self-doubt, the worry about being wrong and risk of losses. This invites the risky situations.

We have to keep in mind that – “Don’t confuse brains with a bull market.”

Success teaches us to make money and failure teaches us an important of the risk aversion. We always have to focus on risk while balancing between the aggressiveness and defensiveness. When there is a bull market, everyone gives us a piece of advice. But the quality of advice getting checked during the bear market only.

Making money in the market is always an easy task but keeping secured that earned money is a difficult task.

MMC16 02-min

We keep doing hard work and keep learning for achieving success in the investing journey. One success does not make us a successful investor.

If we have earned an Rs.100 cr but we do not have the skill to keep it secure then it will not take time to again reach at zero.

We have seen that when the asset is not accepted by the crowd and all are uncomfortable to hold then the particular asset will be available at a bargain. Similar to us, when we start getting popular, everyone wants to make contact with us, everyone accepts our thoughts then we will not be available at a bargain. We also become crowded. We have to keep ourselves grounded and keep reminding ourselves that no rule, no strategy will work forever.

MMC16 03-min

When risky assets are penalized by the market and due to that, it will be available at the valuation where it will be no riskier.

When there is a monopoly of the business, business generating good return ratios, decent profitability etc. These invites a competition, these plants a seed of failure. Reversely, when everything seems to be worst, then seeds for success getting planted.

Examples – monopoly kind of business worsening due to competition (Auto OEM) and

HeroMoto good to bad-min

Competitive business turns out to be good (Footwear)

Bata-min

We believe that a good time will follow more good times but actually, we forget the cyclical nature of everything especially success. So that good time itself having a seed for the bad time and bad time itself having a seed for the good time.

Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation.

Read for more detail: Mastering The Market Cycle: Getting the odds on your side by Mr.Howard Marks

Pat Dorsey Moats

Posted on March 1, 2016 by Jimit Zaveri under Investment Philosophy

On 17th January 2016, I got an opportunity to address one group of investors. I am so thankful to all my friends who provided me such an opportunity.

Investor Philosophy – Pat Dorsey

This presentation (Click here Pat Dorsey) based on what I learned from Pat Dorsey and about his philosophy.

Company A earns High profit / High Return on Capital that attracts many players to the same industry; which resulted in a higher level of competitions. Higher competitions affect to the margins of the company A and continuously increasing competition affects to the earnings of the company A. and if company A doesn’t have any Competitive Advantage then the business of company A can be in problem.

So the question is what is the competitive advantage?

Now, let me explain with a simple example that how USP helps.

Above all are benefits of having a strong USP of Rajinikanth. Now, compare these benefits to the business class.

So before understanding, what is the competitive advantage? I explain what can not be a competitive advantage?

If a company cannot able to raise the price of the products/services then we should understand that there is an absence of competitive advantage. (Eg.: – ITC Ltd. – Budget imposes the duty on cigarette but company easily able to pass those costs to the customers and that’s the reason for the survival of the company in adverse situations.)

We can easily able to recall brands. Meggie is becoming synonyms for noodles, Fevicol becomes synonyms for adhesive, and Colgate is becoming synonyms for toothpaste.

Also, the company which has the ability to change consumer behavior that Amazon has done (From traditional bookstore to online bookstore).

Patents & Licenses can be useful for protecting the interest of business (not considering strong moats because after the expiry of patents other companies also can able to register it and licenses can fall in the compliance risk).

Any psychological barrier or any cost associated with a switch from using current product/service to other product/service.

S10

As the addition of new users make the network more and more strong and replicating such model becomes very difficult.

S11

Low-cost producer compares to other players in the same industry.

S12

Wide and strong moat resulted in the long-term Return on Capital generation and if absent of moat not able to provide long-term Return on Capital to the business.

S13

S14

S15

Bad managers destroy business for own enjoyment and ambitions.

S16

Now, what to select and what to avoid is up to us. If we able to select good business with the good manager then wealth creation become more effective. That is like the good horse with the good jockey that can able to win a race.

For more details, Kindly check — Part 1 , Part 2

Inspired by — Pat Dorsey Moats

Disclaimer: This is not a recommendation to Buy-Sell-Hold. And I am not a SEBI registered analyst.

I am really grateful to – Mr. Neeraj Marathe Sir, Prof. Sanjay Bakshi Sir, and Mr. Vishal Khandelwal Sir.