We have heard No Pain No Gain concept everywhere but it is not always suitable for all situation. When we do a workout then we keep getting pain due to training of different muscles. But if we do a workout in a wrong posture then we get pain without gain for a lifetime.
When we go for so-called advisors then they do not have any knowledge of problem or solutions but also they suggest a solution for a particular problem. They also suggest that things can worsen before it will get better. Without the availability of proper solution, things will be going to worst and we believe that it has happened as an advisor has warned. And if things get better suddenly, advisors say that it’s because of my solution. So, both the side he will win.
Investment – I have met many people who used to predict market direction, they always quote that market seems dicey and can fall but also seems little chance to go up. So, either market fall or rise, the prediction proved right. We have to be careful while asking for a piece of advice. We should check the process, experience, knowledge first before the implementation of their bits of advice.
When any company making huge Capex then management tell us that we have to take short-term pain for getting better in a longer-term. It is true and management must have to take such a bet. But we have to check that does the company has the potential to grow in future? Does it have a strong balance sheet to take short-term pain? (If not then that short-term pain can become a disease for a lifetime.) So that we always have to make proper study before reaching to any of the conclusion. We have to develop a proper checklist which can tell us if we are missing any part to study or filter out a distraction from us.
We create a picture of the world using the examples that most easily come to mind. This is absurd, of course, because in reality, things don’t happen more frequently just because we can conceive of them more easily.
Unusual events (such as botulism) attract disproportionate attention and are consequently perceived as less unusual than they are. The world in our heads is not a precise replica of reality; our expectations about the frequency of events are distorted by the prevalence and emotional intensity of the messages to which we are exposed.
Our views for the world get changed as per available information, media news, etc. We create an expectation about events based on messages which can be distorted and can be far from reality. Media also uses these as exaggerate the news to enhance our viewership.
We majority focus on what is easily available or happens frequently in front of us rather than what can happen rarely or difficult to think. We have fear of death by car, plane or other accident rather than due to medical conditions. Because we have seen and read about many death through an accident.
Availability of the information will alter our decision and act. For example, 9/11 attack or COVID-19 will temporarily create a negative impact on the mind of travelers.
Protective actions, whether by individuals or governments, are usually designed to be adequate to the worst disaster experienced. We as a human being never accept the worst scenario can come. We get anchors with ongoing good period and keep thinking that this will remain forever until a disaster happens.
We all know that we should take healthy food, focus on diet, workout but we did not focus on it until COVID-19 has arrived. So now, the majority of people think about health and diet but still, few who are like dog tail, continue with junk.
Business – “The CEO has had several successes in a row, so failure doesn’t come easily to his mind. The availability bias is making him overconfident.”
Businesses also just not focus on what happens frequently but what can happen. So that they have to prepare for worst-case scenario also.
Investment – We attracted to invest in the stocks, sector which having an easy availability of information and that will lead to the bubble into particular stock or sector. We tend to avoid stock or sector which does not have enough information available though that stock or sector can be good.
When we have received continuous success then we will not generally think of meeting failure. Similarly, with investment, when people getting good returns from their investment, they forget about the inherent risk of equity investment.
When we have performed something recently, then the availability of those experiences goes everywhere with us and that mould our decisions. For example, when we have watched all parts of Sherlock Holmes in a few days, then we have the effect of it on our mind which attracts us to think suspiciously.
Rather on belief in instances, we should focus on statistics which can help us to make a wise decision.
We never prepare ourselves for the worst disaster until it arrives. This is the worst risk management example. When the market keeps rising, we think it will keep going to the upward direction, never fall. This anchoring effect of recently available information ties us to avoid risk. And we focus on risk after it comes to us. We need to focus on what can happen rather than what information is thrown to us. We have to think optimistic as well as pessimistic scenario when investing with all statistics. So that we can make a wise decision.
From today, I am going to start a series on Book “The Intelligent Investor” under the Bibliophile category. Mr.Buffett has always mentioned that he keeps on reading this book every year. This book helps us with the developing an investment philosophy and also, help us to recognize ourselves as an investor or a speculator. I am grateful to the readers by which I am getting motivated to keep writing more and sharing more pearls of wisdom.
Mr.Graham has started the book with the definition of an investor which is very essential for us to understand to becoming a wise investor.
Many of the people call themselves as an investor but they are not meeting criterion mentioned by Mr. Graham. If a person does not meet any of the criterion mentioned above then we need to consider him as a speculator rather consider as an investor. We have to check to introspect and need to check whether we are meeting above criterion or not. If not then we are doing speculation though we called ourselves as an investor. I have seen many of the people focuses on the adequate return but not meet up other two criteria, or they meet safety and return but not meet up with thorough analysis so that we need to consider those as a speculator, not an investor. People get more involves speculation because they get excitement into it and investing is a boring & lonely game. But over a longer period of time, excitement does not reward us. The stock market is not a place for getting excitement or thrill but it is a place where we need to stay calm, cool with a balance of emotion and balance of activities with hyper activities. When we do speculation, we get an immediate result but not happens the same with the investment. We can earn through making an investment in the long term only if we play this game with the rules.
People call themselves as an investor though they are just buying and selling shares at the stock exchange. They do meet the criteria of being an investor or not. Investor word commands a good reputation among the people so we feel the pride to call ourselves as an investor but rather to just get feeling, we need to work on logic and accept the reality. Though we perform a thorough analysis of investment opportunities or not, we consider ourselves as an investor but we need to understand that it is easy to call ourselves as an investor but it is difficult to act as an investor.
A thorough analysis of companies means we need to analyze the soundness of the company, long term survival of the business, pricing power with the company, etc.
Our major focus should be on capital protection. When we work on capital protection, we have already won half of the battle. I always emphasis on my philosophy which is “Return of Capital” is more important rather than “Return on Capital”.
We need to focus on adequate return rather than earning an extraordinary return. We run behind getting rich within a short period of time so that we desire to earn an extraordinary return.
People can do speculation also but many a time, speculation becomes dangerous –
If we cannot stop ourselves from doing speculation then put some fund aside for making speculation and we never put the fund into the same account for making speculation and for making an investment. Also, we should not increase a fund to the speculation account just because the market has gone up or we have a good profit into it, but we should bring out the fund from it and transfer it to the investment account. 10% limit of our overall wealth is permissible for the speculative bets and we should not violate this rule. When our speculative account goes above 10% then those amounts need to shift to the investment account and if it goes below 10% then we should not transfer fund from investment account to speculative account.
Mr.Graham has advised to the defensive investors to keep their portfolio into the high-grade bond and into the common stocks. We should have a range of bond should be into the 25-75%, not less than 25%, and not more than 75%. Similar to the common stock also.
We need to make a selection of stocks and bond on the basis of inflation, interest rate, the future expected return from stocks, etc. Which can help us to earn above inflation return. As a defensive investor, we should make an investment to the company which has a good business with a strong track record of financial. We should avoid buying hot stocks which can be harmful to our wealth during the long term. Mr.Graham also has mentioned the concept of Systematic Investment Plan (SIP) for the defensive investors.
Mr.Graham has explained methods for aggressive investors such as 1) buying a security which is doing better than market average, and those not doing better which are candidate for short selling a security 2) Buying a companies which are expected to post a good earning or other favorable development expected 3) Buying a companies which have given a good earnings growth in the past and expected to deliver similar to the future or companies does not have a good past earning but expected to post a good earning to the future.
Here, uncertainty associated with the investment is human error and wrongly estimation of future or estimated future is already into the current market price. When we buy stocks on the basis of current year good result with the similar will happens to the next year then it is highly possible that other participants also think in the same manner.
If we buy popular stocks on the street then we end up with the result what everyone else is expecting. We are not able to get above average return. We have other ways to make a return without taking a huge risk is a special situation such as a merger, demerger, buyback, liquidation, delisting, etc.
One of the bargains is given by Mr.Graham was Net of Current Asset (I.e. Working Capital) after adjusting all the liabilities. That means the stock price is well below working capital – all the liabilities. Here, we are not taking a plant and other fixed assets into consideration. Such issues consider as a bargain to its value.
One of the Indian air cooler company was available below the net of current asset
Company has a current asset of Rs.74.24 crore and total borrowing was Rs.29 crore so that the net of the current asset was Rs.46 crore, whereas Market Capitalization of the company was Rs.35 crore at the end of FY2009.
Many of the investors do not take rest when odds are not in our favors. They keep on doing something though things are not into their favor. Such hyperactivity is also dangerous to the long term return of investors.
We have seen that many strategies and stories for the stock is getting popularized over a period of time and also erased as time get passes. We always need to focus that stocks only will perform well or poorly in the long run when business behind that stocks will do well or poorly. So that we need to focus on the performance of the business rather than focus on the different kind of strategy to becoming wealthy in the long run.
Disclosure – Companies mentioned in the article is just for an example purpose. It is not a buy/sell/ hold recommendation.