Tag Archives: Dividend

Step 5: Seek Mentors

Posted on by under Bibliophile: Cashflow Quadrant

Before starting the article, let’s know about mentors, who is a mentor in our life, then we try to understand why we require a mentor in our life?

Who is a mentor?

A mentor is a person who can support, advise and guide you. – Guider

Why do we require a mentor in our life?

They typically take the time to get to know you and the challenges you’re facing and then use their understanding and personal experience to help you improve. – Guider

So, from the above definition, we can understand that we need a mentor in each area of our life from starting learning to walk in childhood to the end of life. Our first mentors are our parents then we learn from outside of the world.

Similarly, financial education and growth in it require having a mentor. Mentors tell us what is right and what is wrong for us. They support us to learn about the B and I quadrant which helps us to become wiser and help us to make a rational decisions. He can guide us on building an asset column and generate more passive income in form of a dividend, rent, interest, etc.

As of now, we know that having a mentor in our life is important so that we have to be very careful with the selection of a mentor. The mentor should have already walked on the same path where we want to walk. “Professionals have coaches. Amateurs do not.” When we see a coach in cricket then coaches are those who have played cricket in their life, not those who have didn’t visited cricket ground even.

With having a mentor, we should have a reverse role model. These people teach us what not to do in life. They got broken down, stuck with debt traps, etc. so we should learn from them about what not to do. I have met both kinds of people. I have learned many things in my life from people who got broken in the investment field. I have prepared a checklist of what should avoid while investing.

The people with whom we are spending the majority of our time, are our future. If we want to change our future then we have to change that person with whom we are spending the majority of our time. Our surroundings have an impact on our thoughts processes and our decision-making abilities.

When we come to know about the person category, and we know our goal then we can change the group for our betterment. Also, we can join those who are similar to our goals.

If all person falls under the same quadrant where we want to go then we should be happy that we are surrounded by like-minded people. But if not then should think for change for the betterment of our journey towards financial nirvana.

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

05 – Illusion

Posted on by under Behavioral Finance

Illusions of Remembering

The illusion is not only of visual but it’s also of memory.

If we have seen any words or something for even a millisecond then also when we see it again we feel it familiar. Something which is in contrast to others that also give us a feeling of familiars. This creates a memory illusion.

Illusions of Truth

When things seem familiar, we generally tend to accept it as truth. But when things seem unfamiliar or extreme then we tend to reject it.

The impression of familiarity is produced by System 1, and System 2 relies on that impression for a true/false judgment.

When we wanted something to accept by people as truth then we keep on repeating the same. Because familiar things are easy to accept as truth.

When we listen frequently that equity investment or real estate investment can help us to create wealth then we become familiar to it and we start believing it as a truth. When we see people surrounding us making money through trading then we also believe it as a truth. We also start doing it without thinking about it as a truth or not. It keeps getting repeatedly visible in front of us and we believe it as a truth.

How to Write a Persuasive Message

When we write something truth but it is not necessary that people also believe it as a truth. For that, we need to use a true illusion. We need to draft our writing in a good manner, with proper colour combination and do not make it very complex, make it memorable.

Strain and Effort

The performance was better with the bad font. Cognitive strain, whatever its source, mobilizes System 2, which is more likely to reject the intuitive answer suggested by System 1.

The Pleasure of Cognitive Ease

Companies with pronounceable names correctly better than others for the first week after the stock is issued, though the effect disappears over time. Stocks with pronounceable trading symbols (like KAR or LUNMOO) outperform those with tongue-twisting tickers like PXG or RDO —and they appear to retain a small advantage over some time.

Ease, Mood, and Intuition

Our mood has an impact on system 1 and intuition. When we are uncomfortable, suspicious and unhappy, we lose touch with our intuition. And our system 2 take control. Reversely when we are happy, comfortable then system 1 take control.

So that we need to understand our mood while making any investment decision. If we are in good mood then our system 1 will take charge and we might not be getting involved in the proper analysis of our own decisions.

Norms, Surprises, and Causes

Assessing Normality

The main function of System 1 is to maintain and update a model of your personal world, which represents what is normal in it. The model is constructed by associations that link ideas of circumstances, events, actions, and outcomes that co-occur with some regularity, either at the same time or within a relatively short interval. As these links are formed and strengthened, the pattern of associated ideas comes to represent the structure of events in your life, and it determines your interpretation of the present as well as your expectations of the future.

When something happens or surprise our first time, when similar happens again, we will get lessor surprise or treat it as a normal. Our system 2 suggest that this is not a normal but system 1 made it. Whenever we met any surprises for the first time, our mind expects similar to happens again while a similar situation arises. That previous incident becomes normal for us and if that similar incident will not occur then we get more surprised.

It has been previously happening that market falls and get recover from that fall within 1-2 years. So that when the market falls everyone thinks that it will recover easily and we should invest. But there is a possibility that it may take a longer time to recover then what it used to be in past. So that we should not believe blindly that what has happened in past can happen in future also. It can have a higher probability to happen similar but also should not ignore the probability to not happen the same again or in the same time period.

Seeing Causes and Intentions

We generally use casual intuition frequently. For example, if someone says that he lost his wallet, then first thought comes of pickpocket rather than put somewhere, forget at restaurants, etc.

A Machine for Jumping to Conclusions

Jumping to conclusions is efficient if the conclusions are likely to be correct and the costs of an occasional mistake acceptable, and if the jump saves much time and effort. Jumping to conclusions is risky when the situation is unfamiliar, the stakes are high, and there is no time to collect more information. We should not jump to the conclusion where we know that involvement of system 2 is essential. It has a higher probability to meet error if we jump to the conclusion without taking the help of system 2.

02 – Conflict, Illusions and Useful Fictions

Posted on by under Behavioral Finance

Conflict

System 2 is an in-charge of self-control. It helps us while we are losing our control, focus, emotions. While we are reading a book and found something boring in it and start losing focus towards continuing with a book then system 2 bring back our focus to the point. When System 1 indicates that it’s boring then system 2 brings back our focus.

When we have invested in business and stock price of that company not moving then we start getting boring with time. But system 2 help us to guide that business has improved in performance and there are not any fundamental issues. Focus on our process and sticking with it is the work of system 2.

Illusions

At the first instance, we have reached the conclusion that the second line is larger in size compared to the first one. But when we measured both the horizontal lines, we found that both are identical in size.

Here, system 1 has accepted view of the second line is larger than the first one and when we have measured, system 2 took control. But system 1 prevents us from believing that both lines are equal, it’s illusions. Though we have measured and know the size of both the line, we cannot stop system 1 from performing. When we can work on accepting that both lines are identical, we will not again get fooled by multilayer illusions.

There are illusions of thoughts along with visual illusions and that called as a cognitive illusion.

Many times, a person does not accept the reality and try to stay in the illusion, means their system 1 only works and they do not accept what system 2 indicates. System 1 has intuitive errors and biases which system 2 is not aware of. Errors can be prevented only by the enhanced monitoring and effortful activity of System 2. But it seems impractical to continue monitoring of thoughts and go slow on routine works. It will be inefficient if we replaced system 1 by system 2. We have to identify where mistakes are likely to happen and then have to give control to system 2. It’s difficult to identify your own mistakes compared to others.

Example – when we analyse the company and see a few characteristics which we like about the company then we stop focusing on others which can have a negative impact on the future prospects of the company. Dividend-paying companies are good which is stored in system 1 so that when we look at the company which is continuously paying out a dividend. We do not focus on other aspects and make an investment. But when system 2 take control, it will analyses whether the company has the ability to keep dividend continue in future, does company paying dividend from free cash flow or from raising external funding. 

We should use system 1 where rules are predefined such as we are not eligible to get a dividend if we purchase shares on or after ex-date. But analyzing the longevity of dividend, we need to use system 2. 

Useful Fictions

System 2 required a mental calculation so that we should not use it with other tasks.

When we are driving on a similar road frequently since long, our system 1 works automatically. It will suggest that when to take turns, at which area have slowdown speed, etc. It will not be going to ask for system 2 helps. We can drive on a known road while making a conversation. But the same does not happen when we drive on an unknown road. Our system 2 take control and if we make conversation while driving on an unknown road, we may meet accidents or miss with target place.

Anything that occupies our working memory reduces our ability to think. So that we have to be careful to perform multitasking. When people get involved in both trading and investment than both require the involvement of system 2 so that it will become difficult for the human brain to make a wise decision to cover all aspects. And that can result in missing out of something at both the area.

The Intelligent Investor – 13 – A Comparison of Four Listed Companies

Posted on by under Bibliophile: The Intelligent Investor

When we have decided to make an investment then we need to perform an analysis work so that we do not be stuck with the wrong investment avenues or at the wrong time. For making an analysis, we must need to focus on a few points.

Profitability – how the company performs? Return on invested capital, margins, growth in sales-profits, earning per book value, etc. If the profitability of the company gets hampered then we need to check whether it is permanent or temporary.

Stability – earning of the company decline in any of the years from the past ten years? Do the earnings of the company get fluctuations? Does a company involve in a seasonal or cyclical business?

Growth – companies with higher growth command for the high multiples and lower growth with low multiples. The growth of the company can help us to grow our wealth also. The growth provides an opportunity for the company to use capital appropriately.

Financial position – liquidity ratio, the position of a balance sheet, debt, preference share, etc. Tree does not grow in the sky. If financials are not strong then the business will not be surviving for a longer period. So that we need to put emphasis on the financial. How does a company utilizing assets? Company is capital intensive or asset-light? Working capital intensive or negative cash conversion cycle?

Also, we need to check what the company is doing with the capital generated. What is the capital allocation decisions of the management? Long dividend track record, increment into the dividend, buyback, buyback at higher than intrinsic value or lower than intrinsic value and if a company requires fund for growth then reinvest profits for growth rather pay dividend or buyback.

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: The Intelligent Investor by Benjamin Graham, Jason Zweig