WHY YOU SHOULD VISIT CEMETERIES – Survivorship Bias

Posted on November 29, 2020 by Jimit Zaveri under Behavioral Finance

In life, we focus more on winning, surviving rather than failure. This illusion kills our ability to calculate the probability of surviving, success. We cannot see that probability of success can be very small. We always taught about success and not taught about failure. This is known as a survivorship bias.

Many authors write a book but a few will achieve success. Thomas Edison failed many times before inventing of the bulb but today, we only remember with their success, survivor.

“I’ve missed more than 9000 shots in my career. I’ve lost almost 300 games. 26 times I’ve been trusted to take the game-winning shot … and missed. I’ve failed over and over and over again in my life. That is why I succeed.” ~ Michael Jordan

Investment – Similarly, very few have achieved success in the investment world but we overestimate the probability of success and ignore to look that many have spoiled their life. We focus on successful companies which have created a lot of wealth. When we visit any seminar or marketing people or media, they only talk about the successful companies which have created wealth but never talk about companies which have eroded wealth. Wealth creators are very few compared to wealth eroded. But we ignore the probability of losing and never try to learn from others mistakes. We all come to the stock market for becoming a next Mr Buffett but does not focus on developing ability and insights as similar to Mr Buffett & Mr Munger.

There are ~7000+ companies got listed on Indian bourse from that ~4294 companies are down almost 80%+ (many companies got unlisted or close) whereas we know that few companies which have generated wealth over a period. So ~60% of wealth destroyers are there compared to hardly ~3% wealth creators (maximum- if we see actual wealth creators for long term then that is ~1% only).

We can see that there are huge wealth destroyers companies available compared to few wealth creators. So that while investing don’t try to catch every opportunity available but prepare investment philosophy suitable to us, swing bat only when the suitable opportunity arrives. We need to prepare investment philosophy, process, circle of competence and investment style so that we can swing bat when things fall under our zone.

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

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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)

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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.

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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.

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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.

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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

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Competitive business turns out to be good (Footwear)

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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

Bill Ackman Get of Your Soapbox

Posted on April 14, 2019 by Jimit Zaveri under Bibliophile, Bibliophile: Big Mistakes

When we have a view on something in the world then we are getting attached to that view. So that when we get any dis-confirming evidence against our view then also many a time, we hesitant to accept it. We are overconfident on their own view that we do not accept any opposing view.

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Majority of people love to share their success but not their failure. People intend to hide their failure. We love to share our success because it gives us a social recognition and self-esteem. We feel guilty for our failure and stop ourselves from sharing it with people. Also, we feel fearful about the mistake or meeting the failure.

Bill Ackman had started a hedge fund with the name of Gotham in the year 1993 and he turnouts the $3 million to the $568 million at the peak of the year 2000. He becomes more confident and started taking positions to the illiquid investment as concentrated bets at a wrong time; such behavior has affected him with the closure of Gotham hedge fund.

In the year 2004, Mr.Ackman has started another fund with the name of Pershing Square Capital Management and become one of the most activist investors. He acquires large enough shares of the company and asks to the management to become more shareholder-friendly and if management fails then Mr.Ackman get on to the board.

Few of the companies where of Mr.Ackman was done an activist investment such as Wendy, McDonald, MBIA Inc., Target, Sears, Valeant, J. C. Penney, and Herbalife.

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Above mentioned companies earn a gross margin of around 42-46% whereas Herbalife earns around 80%. Mr.Ackman shows that top-selling product of Herbalife is Formula 1 shake which is not much known. And they sell this product 10-20 times compared to the competitor brand such as Oreos, Charmin, Crest, Gerber, Palmolive, Betty Crocker, Listerine, and Clorox which is manufactured by GNC, Unilever, and Abbot Labs. Herbalife is not selling products to the consumer but they sell products to the distributors, their distributor is all over the globe.

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Mr.Ackman has read all available information, he gets into the science of products, R&D for the product, read annual reports, SEC filing, etc.

Mr.Ackman has given a three-hour presentation to people, interview to CNBC, CNN, and Bloomberg, etc. Now, how Mr.Ackman can admit defeat after telling everybody about the Herbalife. And also stock had declined by around 35% after his presentation. But during that panic selling movement, Dan Loeb, founder of the hedge fund Third Point LLC has bought 8.24% of the Herbalife and becomes a second largest shareholder. Herbalife stock price rose by 20% in five days. After that filing shows that activist investor Carl Icahn took a 12.98% stake in Herbalife.

Mr.Ackman has made a public commitment regarding his investment idea which has mentally created pressure on him and this pressure has to stop him by making a proper decision.

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Due to the public commitment and also a fear of losing a reputation, he faced difficult to cover his wrong position. If we keep on making our moves commitment to the public then we may face difficult to change moves when we may go wrong. We should focus on not making a commitment in public which helps us to change our move and saved our capital. When our odds go against us, it will cost us mentally, emotionally and financially. Mr.Ackman was on short after three years also. We will go wrong, we can meet failure but such kind of public commitment can stop us from accepting our failure and saved our remaining capital to restart again.

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