Big Mistakes – Page 4

We cannot make a rule of thumb for the investing world because there are lots of parameters which can affect the price of a business. If today some parameters driving prices of businesses then tomorrow there will be some another parameter which drives the prices of businesses.

We need to focus on to be on the right side. If we cannot short the overvalued businesses then also we can book the position of overvalued businesses, we hold into our portfolio.

When Mr. Livermore was learning about the market, he kept records of his trades to the journal. Keeps journal of our trades helps us to overcome many emotional biases and help us to stick with our predecided process. I am keeping a journal for my investment studies and decision since the last 2+ years which has helped me to build strong decisions.

In May 1901, Mr. Livermore has experienced first larger loss as a professional speculator. He put an order of short sale of US Steel and Santa Fe Railroad at $100 and $80 respectively before the market got opened. He had also taken leverage for this trade. But his US steel and Santa got executed at $85 and $65 respectively, it is a price where he intended to cover his position.

When we are engaged in the trading or into the investment, we need to spend the time to learn. We have to train ourselves as we get training in any other field. We cannot able to survive and win without getting thorough education, knowledge, experience, and temperament. If we are making an investment without spending time on above points then we have depends on the luck which we do not know that favor us or not. Rather being dependent on luck, we should work for developing our skills and temperament. If luck wants to favor us then it will add additional advantages to us.

He has a conviction on his position with the proper logic and he did not change his conviction into the worst period which has made him a rich man.

Many times, we get influenced by the other person or information overload (noise) which affect our decision. We should work on evolving our process but should not make a decision by just getting influenced by others. We should increase our position to the odds which are into our favors, not to the odds which are not into our favors. While we keep on accumulating our winners then we can have a huge probability to win. And when we keep on accumulating our losers then we can have a huge probability to lose.

We need to do our homework before making an investment, we cannot bet our money on the decision of others. If we see the past track record of so-called professionals then we can realize the importance of own homework.

Mr. Livermore had been cheated by people many times which also teach us that we should not trust others easily. We should work on what we know, not what others want us to do. If someone knows much then lets them take benefits. Because staying on the pitch is much important rather than getting wiped out. I have already implemented such learning into my investing career but still struggling with my personal life.

After the few snake and ladder game, Mr. Livermore has started to short from the year 1927 and the great recession of the year 1929 has created fortune of him.

The year 1932 was set for the bottom of Dow Jones but Mr. Livermore was on the wrong side. He had made the biggest mistake ever, he covers his shorts and goes for long on the top of the Dow Jones. After this failure, he declared bankruptcy for the second time.

One of the biggest lesson from Mr. Livermore –

We also need to prepare a list of “Don’ts” and which can be through our own experience or through the experience of others, such as learning from the mistakes of others.

He was also failed in his last attempts in the year 1939 and after that, he took his own life.

As Mr. Livermore quoted that there are a huge amount of mistakes available to the investing filed. We cannot avoid all of them but we can definitely avoid repeating those mistakes again and again.

The main lesson from the mistake of Mr. Livermore is to manage risk. He has not properly managed risk and he blows up. Investing itself as an uncertain and we cannot control our return, we cannot control uncertainty but we only can manage risk which is only into our hand. We need to construct our investment process in a way which can help us to manage risk and avoiding a few of the mistakes which can increase the probability of our winning. We need to work on the checklist, process, do’s and don’ts etc. I have work on the same and still making my checklist and process stronger which has to help me well.

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

During my course at Flame University “Art of Investing with Neeraj Marathe”, Mr.Durgesh Shah Sir has suggested me to read a book which is “Big Mistakes”. So that I am hereby starting to write my learning from the book.

We make many mistakes in life and learn from those mistakes. We keep focus on does not repeat the same mistakes again and again.

My Guru always quotes that “If we focus on avoiding mistakes then we won half of the battle.” We always cannot keep on making mistakes and learning from it but also we can learn from others mistakes which we can avoid during our journey.

Learning from others mistakes and experience is the easiest way to learn and grow.

I am hereby starting my learning from mistakes made by well know investors. Upcoming series will be going to include learning from the book “Big Mistakes”. I am grateful to Michael Batnick – author of the book.

The first article of the series, I start with Mr. Benjamin Graham who is a father of a value investing. He has given a new direction to the investing field.

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Mr. Graham is a guru of Mr. Buffett and we cannot imagine investing field without Mr. Graham. Few biggest gift from Ben Graham to the investing field are Margin of safety, the difference between price & value, calculation of value to the business, etc.

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Many a time, we think that stocks fall ~40-50% from the high price, we should start trying to catch “falling knives” (Such terminology is widely used by so-called professionals). But we should focus on the value of the particular business rather focus on the high price and current price. During recent fall to the stock market, many of the people started picking stocks just because they fall much from the high price.

Indian companies examples

One of the media & Entertainment Company which is falling by ~51% from its high price but the company is making losses, negative CFO, management is taking a higher salary and also giving a loan to the subsidiary companies.

One of the companies which are into the DTH services and that company fall by ~79% from its high price. The company is making very little profit, very little FCF, huge debt, negative ROE% and where value can be still very less.

Such a fall in price does not make it attractive to buy which has very little or no value.

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The market always works in a pendulum and people generally forget the nature of the pendulum. The pendulum always moves towards both extreme directions.

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Whenever pendulum moves towards the bullish extreme, many of us forget that such situations will not stay forever. Many of us forget about the risk which involves during the bull phase. And start taking higher risk for generating higher returns; which invites a further huge amount of risk. At bullish sentiment, people generally buy assets at the highest valuations multiple and that invites the risk to the particular asset class. This scenario has a very high chance of getting damage to our wealth compared to generating a higher return.

Reverse to such scenario, whenever the pendulum moves towards extreme bearish phase, then generally people start recognizing the risk and start avoiding to invest in the particular asset class; which take out the risk from that particular asset class. Such a scenario is the appropriate time for capturing the opportunities because in such scenario we have very less chance to lose.

When people warmly accept any securities then the price will go far from the value and when people avoid or hate any securities then the security will fall in its value.

Mr. Graham has a strategy to purchase undervalued securities and shorted overvalued securities which have made him successful. Mr. Graham has started with $450000 and which he turns to be $2500000 in just three years.

During the last month of the year 1929, Dow Jones has started going down and Mr. Graham has started to cover his short positions and shifted to preferred stocks by considering prices are low. But the calculation of Mr. Graham went wrong and he lost 20% while Dow Jones down by 17%. After this Mr. Graham has considered that market has made the bottom and he used to leverage money to boost profit but again his calculation went wrong and he lost 50%. During the year 1929 to the year 1932, Mr. Graham has lost 70% of his money.

My learning

We should not take leverage to boost up our profits from the market, we cannot measure the madness of the market. I have implemented this learning from the mid time of my investment career and I have parked my money where I am convinced to park. I have never taken a leverage position rather I have to keep liquidity with my portfolio (I was holding ~73% liquidity in my portfolio during January – 2018 and currently having ~65% liquidity position). I have always focused on capital protection over the missing out of opportunity.

An example of one the biggest wealth creator company of the Indian stock market—

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