Michael Steinhardt Stay in Your Lane

Posted on March 9, 2019 by Jimit Zaveri under Bibliophile, Bibliophile: Big Mistakes

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.

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.

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

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.

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

Jack Bogle Find What Works for You

Posted on March 2, 2019 by Jimit Zaveri under Bibliophile, Bibliophile: Big Mistakes

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Wellington fund was founded in the year 1928 who invest with the balanced portfolio of common and preferred stocks and high‐grade bonds, with the objective of providing investors with stability, income, and a little low‐risk growth to keep pace with inflation. During the year 1966, the company has made an acquisition of the Ivest fund. Ivest fund invests more to the common stocks which invite more fluctuations whereas Wellington fund minimizes fluctuations. Wellington fund was one of the few funds who has survived during a great depression of the year 1929.

After the acquisition of Ivest, Wellington’s equity average increased from 55% to 80% and fast turnover also get started.

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Their new strategy does not suit them and their fund fall by 55% compared to 31% of fall by the S&P 500. After that, they started a new strategy based on technical analysis. It’s shocking that Mr. Bogle who has formed an index-based strategy and fund into the leadership of him use technical analysis based fund. They lost 40% during the year 1972 and which recovered during the year 1983, after the 11 long years. Their strong offense proven wrong for the defense. And they lost reputation also.

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We need to identify the method which is comfortable for us. If we adopt the method which is not comfortable for us then we have to face difficulties. If we adopt the method of others then those borrowed method does not provide us a conviction and create a problem with our investment. Additionally, if we have an investment methodology but we go out of that methodology then it will also affect our wealth.

There is more than one method for creating wealth but if any method of creating wealth is not suitable with our temperament then we should avoid it rather stick with it. Every person is different in risk-taking capability, emotional characteristics, and the different purpose of making an investment so that if one method is suitable to a particular person then it might be possible that the same method is not suitable to the other one. No method is right or wrong but what suits us is right for us.

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

John Meriwether Genius’s Limits

Posted on February 23, 2019 by Jimit Zaveri under Bibliophile, Bibliophile: Big Mistakes

We always have a dilemma to our mind that we need to be intelligent to become a wise investor. But does it a reality? Do we really require to be an immense intelligence for the decision making to investing field? We have an example of a few highly intelligent person who has intelligence but lack of the real skill which needed to become a wise investor. I am going to explain it to the current article. Isaac Newton also cannot be saved from emotional biases such as greed and fear, though he has a brilliant mind.

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We should understand that a higher IQ, intelligence does not protect us from the emotional biases. We need to be a master of emotional biases for earning money through investment. If we do not have mastery on our own emotion then we incur losses into the investment.

Few emotional biases –BIBLIOPHILE: THE MOST IMPORTANT THING BY HOWARD MARKS “COMBATING NEGATIVE INFLUENCES”

We have seen that the winner of the Nobel prize in economic of Long Term Capital Management (LTCM) also failed terrifically. They count as a genius mind during an era. During a tough time, their leverage position reaches the 100:1 which has killed the entire business.

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No model is perfect which can capture behavioral aspects of human. But we keep focusing on the same that our constructed model is going to capture all the madness and which make us mad. LTCM failure teaches us that we should not be overconfident to our model, we should focus on the risk management and we cannot capture the behavioral aspects of human. So that we should have control on own behavioral aspects that can help us for a longer period of time. Our intelligence should not be getting converted to the overconfidence, and if getting converted then it will definitely going to harmful for our investment career. Rather if we have a control on to our emotion then it will be going to help to our investment career though we have a little intelligence.

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

Mark Twain Don’t Get Attached

Posted on February 10, 2019 by Jimit Zaveri under Bibliophile, Bibliophile: Big Mistakes

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When we have an expectation from anything then it will start creating an attachment towards it. Such attachment can affect us while our expectation does not meet in real. Attachment ties us with particular things and we cannot able to go away from those particular things. So that we should be reasonably expected from our investment and never ever get attached to any of the investment made by us. When our assumptions got wrong then we should exit from the particular investment. But due to ego, attachment towards an investment, we keep on holding a wrong investment also. Many a time, Initial small losses can be transformed to the huge losses due to our attachment towards our investment.

Many a time, we all have experienced our thought – “I will exit my investment when it comes to a break-even” when we are in loss, we keep on thinking that how much more it will go down; let me add more money to the same idea. Such thoughts can kill us without informing us.

We need to focus on capital protection because –

Percentage Fall	Percentage to make up for the capital to 100%
10%	11%
25%	33%
40%	67%
50%	100%
60%	150%
80%	400%
90%	900%
95%	1900%

If we fall by 10% then we need to rise by 11% to reach a break-even point. And similarly, 100% require when we fall by 50%.

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When we come to know that we are wrong then we should exit from a particular investment rather put more money to it. Many of us make such mistakes where we keep on averaging our losing ideas. We should have a stringent process where we should have a clear exit criterion also so that we should not be affected by emotion. Having a clear process is to work as a blessing for us during the worst time of our investment journey.

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Mr. Twain has declined to make an investment which was suggested by Mr. Bell. Mr. Twain considers himself as well informed and well experience but in reality, he has an experience of failure to the investment field. We have to analyze ourselves whether we are really well experienced or not. And we only can perform such own analysis when we do not have an arrogance, overconfidence and ignorant into our mind.

I have seen many investors/analyst who has made plenty of mistakes and wrong investment decision but they consider themselves as a well experienced and more knowledgeable investor compare to others. They are not ready to accept that they have a history of failed investment, they do not realize it and learn from it. They keep on repeating those mistakes again and again. We should come out of from the behavior and work on what we know and what we do not know our strength and weaknesses, in-short self-analysis, knowing ourselves better than others. When we come to know about our strength and weaknesses then we can have a chance to perform to overcome our weaknesses and stronger our strength.

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We need to identify that we are wrong and for that, we have to be self-analytic. As we come to know that we are wrong then we must have to admit it and work on come out of it. If we found that our investment was wrong then we should book it without looking to loss or profit. I know it is difficult to do. I also got attached to one of the newspaper business at the initial days of my career and it took one year to admit my mistake and booked losses. But that investment has taught me that when you realized regarding the wrong decision than first go and close the position. Otherwise, it will stop us from focusing on the right decision also.

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This is the best way to manage our risk. I can give one example of the same. If I have a one investment idea where I want to make an investment and I am ready to take a loss of Rs.30 per unit of investment. Now, I count 1% of my portfolio (Let’s say as an example, it’s an Rs.1000000) so 1% of Rs.10,00,000 I.e. Rs.10,000. So that I should buy 333 units of particular investment (Rs.10,000 / Rs.30 loss I am ready to take). Here, if I go wrong then also I have taken a risk of 1% on my entire portfolio which helps me to stand for a longer period of time. Percentage of risk is different by person to person and probability of winning and losing from the particular odds.

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