Be the Bank, not the Banker

Posted on October 31, 2021 by Jimit Zaveri under Bibliophile: Cashflow Quadrant

When a panic situation is everywhere people got trapped with fear emotion. We cannot see the cheaply available investment avenue if we cannot think with rational thinking. During such a period, a person who has control over emotions has financial intelligence then he can establish a business and expand it with little effort.

If we have read, having financial intelligence, control over emotions then we can say that time will change but history repeats itself.

Every bull phase has many financial heroes and when it burst, the majority of heroes becomes a villain. So, we have to put lots of care before admiring any of the heroes of a particular time.

An employee has to first pay tax from income that is income – tax then remaining for spending. While for businesses income – spending then remaining for tax.

While governments would like to take more money from corporate bodies, they realize that if they pass abusive tax laws, the corporate bodies will take both their money and their jobs to some other country.

We need to focus on increasing an asset on the balance sheet. This we cannot do in one go. We can slowly and steadily acquire assets without getting over-leverage and without taking additional risk.

Start small, and take your time. Experience is more important than money.

We need to transfer our thoughts process from “I can’t” to “how I can do it”. Then we can see that the results get started. But it’s not an easy and short process. It will take time and effort to change the thoughts. Another point is when we are working for being “B” and “I” then we need to focus on understanding laws and take benefits from them.

We should focus on reading history and try to learn from it. So that we can understand the cyclical nature of any market. And we can take benefits of those nature.

We have two choices, either we can choose security or freedom. If we go for security then we have to pay a huge price and taxation. If we go for freedom then we can learn to play this game and can play it wisely.

Read for more detail: Rich Dad’s Cashflow Quadrant: Guide to Financial Freedom

DON’T TAKE NEWS ANCHORS SERIOUSLY – Chauffeur Knowledge

Posted on March 21, 2021 by Jimit Zaveri under Behavioral Finance

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

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“.

Charlie Munger Handling Big Losses

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

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Majority of the big winners’ companies have also seen the worst period during their journey. It is not necessary that if the company has delivered a 25%+ CAGR then it will get into the smooth way. There always be a huge up and downs to it. Many storms such companies have experience but as investors, we need to stay during those storms if we have made an investment into the great companies then only we can able to earn good returns from it.

Mr. Munger has established a hedge fund company, Wheeler, Munger & Company in the year 1962 which has a pre-fees return of 37.10% during the year 1962 to 1969. And 14-years of partnership, Mr. Munger has delivered around 19.82% CAGR compared to 5.20% CAGR with the dividend of S&P500.

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If we love when stocks moving into the upward direction then we must have to be ready to accept its downward journey also. It is a part of the game and without accepting the losses, we cannot become a seasoned investor. Even Mr. Sachin Tendulkar cannot hit a century into the each of the match, some of the match having a ZERO score also. If he only focuses on the century then it might be possible that he cannot able to play well. Similarly, if we keep focussing on the scoreboard then we may not able to create a good investment fortune.

Mr. Munger has an investment of 61% of his portfolio to the Bluechip stamp and original business of the bluechip stamps has started getting deteriorate from the peak revenue of $12.42 crore in 1982. Bluechip has made an investment into the See’s Candies, the Buffalo Evening News, and Wesco Financial before getting merged into the Berkshire Hathway in the year 1983.

The firm of Mr. Munger has lost 31.90% in the year 1973 and 31.50% in the year 1974 v/s 13.10% and 23.10% decline of Dow Jones respectively. And he bounces back by 73.20% of the gain to the year 1975 but few of the large investors have left him which break him mentally and emotionally. He decided to liquidate the partnership. But after the worst performance during the year 1973-1974, Mr. Munger has delivered a 24.30% CAGR before fees.

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We need to be mentally ready for the big losses during our investment journey if we want to earn a decent return for the long term. If we are not mentally and emotionally ready we will not able to survive to the investment journey.

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We should not sell stocks just due to a fall in the price of the stocks. If we keep on doing such practices then we will not survive for the long term to the stock market. If we know that stock can fall by 50% after we bought it, then we will make a position which is comfortable for us during the decline.

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We need to make a balance between equity and debt as per own comfort. So that we can able to play an investment game in a good manner. Also, get the strength of absorbing such shock.

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

Warren Buffett Beware of Overconfidence

Posted on April 7, 2019 by Jimit Zaveri under Bibliophile, Bibliophile: Big Mistakes

When we own something, we value it more preciously. If we purchase any stocks than it becomes a value for us. We value more which we are holding, which is known as an endowment bias. Due to the higher value for us, we cannot able sold out or go away from our holding.

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Mr. Buffett has always mentioned that not to become too much confidence.

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We can see that Mr. Buffett does not get overconfidence on his own holding, but especially he mentioned that he can have poor performance for his investment. And when he felt that he could not able to manage fund then he has discontinued his partnership approach.

Mr. Buffett has made much successful investment such as see’s candy, Coca-Cola, GEICO, Nebraska Furniture Mart, etc. But he has also made a mistake to make an investment to the Salomon Brothers, US Air, and Dexter Shoes, etc.

When Berkshire had purchased Dexter shoes than they have issued shares of Berkshire for acquiring a Dexter. Dexter got bought by Berkshire for the worth of $433 million which turnouts to be a ZERO a few years later. Mr. Buffett has mentioned into his letter to shareholders that one of the biggest mistakes he had made was to acquire Dexter shoes and that is by issuing a share of Berkshire. Berkshire share was quoted at $16765 at the time of Dexter acquisition which is currently quoted at $304057, which has grown by 13% CAGR for the same period and at the same time Dexter becomes zero. Mr. Buffett had bought H.H.Brown and Lowell Shoe in the year 1991 and 1992 respectively before the acquisition of Dexter.

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In the year 2000, Mr. Buffett has recognized his mistake and write of remaining accounting goodwill. The overconfidence of Mr. Buffett has hampered a huge value to the Berkshire which teaches us that we should not be overconfident for any of the trade. When we are overconfident, we cannot able to see the negative part of our trade. We have to be neutral with our holding. I always mentioned that there is not a favorite stock of mine when people asked me for my favorite holding. I would like to hold the stock until it remains within my criteria of holding. As and when it goes out of it, I put a sell order into it. If we consider any of our investment as a favorite, then we get attached towards it and we cannot able to sell it when it is going out of our criteria.

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