Tag Archives: Warren Buffett

WHY WATCHING AND WAITING IS TORTURE Action Bias

Posted on by under Behavioral Finance

This is the action bias: look active, even if it achieves nothing. There are many situations where we do not know what will happen but we just act to show our active behavior in eyes of others.

When penalty kick in football kicked to goal. The goalkeeper just has 0.30 seconds to think where the ball will fall right, left, or center. It is difficult to guess in much less time so they jump either side which creates an illusion of doing something to stop the goal.

Investment – Similarly, when a fund manager knows that he cannot beat the market, then many fund manager keeps on churning stocks in a portfolio or they keep on buying one and other stocks which creates an illusion among their clients of doing something to beat the market and create wealth. Also, I have seen many fund manager who keeps many books with them so that when clients meet them, they can just create an illusion of avid reader.

‘All of humanity’s problems stem from man’s inability to sit quietly in a room alone,’. We need to learn the skill of patience because we cannot produce a child in a month by doing sex with nine women or with the same woman nine times a month. When the situation is not suitable with our philosophy and process then we have to keep patience to wait for the loose ball to hit a home run. We do not need to hit a home run on every ball and if we try to do that then remember, we cannot survive till a loose ball comes for a homerun.

This entire series will be reviewed with various examples from books which are “Thinking, Fast and Slow” and “The Art of Thinking Clearly“.

Step 3: Know the Difference Between risk and risky

Posted on by under Bibliophile: Cashflow Quadrant

Business and investing are not risky, but being under-educated is.

We are always taught in our school, family that business and investments are riskier so that we should stay far from it. But no one taught to build wealth, manage risk, and financial literacy.

Proper cash flow management can help us to go out of the rat race and debt trap. People not going for investment by considering it risky but when we are financially uneducated then that creates more risk to us. We have to understand what actual risk is. After the proper education, we can generate income from our assets as well as build more assets from income also. This will help us to attract fortune and financial freedom in our life.

When we write down our fears and work on overcoming them, then it will help us to grow fearlessly. Knowledge is the only option to grow substantially from any of the situations. We should start with scratch, learn about the various assets class, experiment small portion in all of them to find out which assets class suits our temperaments. After that start learning about mistakes made by others which helps us to stay one step ahead. Be ready to make mistakes and learn further from them.

Kindly check out mistakes and learn from well-known investors.

Bibliophile: Big Mistakes

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

Wish you all a happy and prosperous new year. Have a healthy and wealthy new year.

YOU CONTROL LESS THAN YOU THINK -Illusion of Control

Posted on by under Behavioral Finance

Many of us have different superstition about our acts. We believe that if we perform a few tasks in some pattern or after performing some other task then we will gain. The illusion of control is the tendency to believe that we can influence something over which we have absolutely no sway.

Government, central banks and the world’s largest authorities believe that they have many tools by which they can control things the way they should be. And they use one tool after another. Few things might get control for that particular period but cannot be guaranteed for the future. We should rather focus on everything and try to control it; we should learn what we can influence and should perform.

Investment – Many participants in the stock market think that they can have tools by which they can catch every market movements and reap profits from them. Yup, they maybe can do it for some time, for some short period but is it possible for them to do it again and again? We cannot control the majority of things which we have to understand and perform the task according to it. The majority of the time, we live in an illusion of control but should understand that we cannot control the majority of things in the world. Many market participants focus on capturing each movement of the market and try to catch all gaining stocks. But should have understood that, it is not possible to do. So that rather than running behind each strategy to operate in the market, we should define a strategy that can be suitable to us and have to do it tested for longer periods. We only can control our own behaviour so we should focus on that part.

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 TAKE NEWS ANCHORS SERIOUSLY – Chauffeur Knowledge

Posted on by 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




Source – Vivify

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“.