WARREN BUFFETT’S LETTER – 1960 – 1961

I am really grateful to Riddhi for helping me with editing work.

WB Letter 1960

In 1959 letter, Mr. Buffett had made an investment of 35% of net assets in the company named Sanborn Map Co.

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Maps are immensely useful to the fire insurance companies. Business is operated in a monopolistic manner and without the need for strong sales efforts. Earlier, the insurance companies had feared for the profit of Sanborn Map and hence they placed a number of prominent insurance men to Sanborn’s Board Of Directors to act as a watch-dog.

In 1959, the ratio of PAT reduced to $100000 as compared to $500000 as in the year 1930. The company began to make investment portfolios since they did not need any further capital to run the business. Over a period of time, their investment was accumulated to $2.5 million; of which roughly half was in bond and half in stocks. These investment portfolios worked well but the map business lost its shine.

In the year 1938, the stock was traded at $110 but the value reduced to $45 in the year 1958; whereas their investment per share value increased from $20 to $65. Hence, their stock is available for negative $20 against the investment portfolio.

The company had sales volume of $2 million per year and they owned $7 million worth of marketable securities. Their income from investment portfolio was substantial enough to take care of their company’s finance. Regular dividends were paid to all the stockholders but there was a decrease seen in the dividend payout for a constant of 5 times in a period of 8 years. As against this; there was no reduction in the salary of the directors.

Board of directors held a minimal position in the Sanborn shares. Buffett proposed to separate the investment portfolio business from the map business. Hence, after the death of the president of Sanborn; his part of shares (around 15000) were bought by Warren Buffett and another 24000 from the open market. Apart from this; there were 2 large stockholders who held 10000 and 8000 shares respectively. They were unhappy with the current situation of the company and they desired to accept the proposed idea of Buffett of separating the business.

Mr. Buffett wanted to work on re-establishment of earning power of the map business. In the same instance, they got an opportunity of converting their physical goods to electronic goods which will multiply their profit for the map business.

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Indian company example – Before 2006, the company was involved in the manufacturing of scooters. But the company discontinued to manufacture in 2006 and became an investment company with the profit that they had made from the sales. At the end of FY2013, the market value of investment portfolio of the company was worth Rs.2034 crore; whereas stock was traded at the market capitalization of Rs.440 crore (stock price of Rs382). Currently, the company is trading at the market capitalization of Rs.3172 crore (stock price of Rs.2775). The company is also paying out healthy dividends.

MScooter

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Mr.Buffett also mentioned that no one should jump to conclusions by reviewing one-year performance. One needs to at least measure five years of performance in both strong and weak markets.

WB Letter 1961

Mr. Buffett had identified few mutual funds and done a comparative performance of mutual funds with the market and with his partnership.

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We can see that Mr. Buffett has outperformed in mutual funds with a heavy margin.

Mr. Buffett used 3 methods of operations as below –

1) Generals

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The general situation works with the market situation. The investment outperforms in the bull phase and declines sharply in the bear phase. These investments work well in a longer period of time.

2) Work-outs

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The work-out situation provides stable and safer earnings and due to that Mr.Buffett use borrowed money to take an advantage of work-out situations. In the bear phase; we get better results and in the bullish phase; we get bad performance.

3) Control

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During 1961, Mr. Buffett owned around 70% stake of the Dempster Mill, which was a fall into a control situation category. Initially, Dempster Mill was started as a value investment (General) category but as time passed, this investment came under control situation when an additional stake was purchased by Mr. Buffett.

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The detailed discussion of Dempster Mill investment will be done in the later series of Warren Buffett’s letter.

Few people who want to invest conservatively, have bought government bonds and few others bought blue-chip securities regardless of Price to Earning ratio, dividend yield, etc. with a belief of getting benefits by investing in the bonds.

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Mr. Buffett has always emphasized on better performance during a bear market and getting the similar return in a bull market.

Warren Buffett’s Letters 1957 – 2012

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Learning Investment Lessons from movie Chal Man Jeetva Jaiye

Jainam Share Consultants had organized a movie day on 6th January 2018 and the name of the movie was “Chal Man Jeetva Jaiye”. I am really thankful to Jainam Family for giving me the chance to watch a worthy movie. I am grateful to the entire cast & crew of the movie for the wonderful performance and script.

I am really grateful to Riddhi who helped me with editing and very effective ideas.

I always believe that we can learn many concepts from our surrounding environment. Similarly, this movie has some of the amazing concepts that I have learned and you can also which can be beneficial to our investment journey and as well as to our life.

  • Decide our process to get success in our life

Extract from the movie – The movie began where it was shown that a father is pressurizing his son, Dev, a lot for achieving victory. Dev, unknowingly started following his father’s dreams but he did not know how to get a victory.

Co-relation in real life – A similar situation happens with all of us when it comes to our investments. Investors’ starts investing in multi-bagger stocks whereas they don’t even have enough knowledge about the company. We need to gather knowledge first and then decide whether the company is worth investing. If we don’t do a thorough study about the company, then there are chances that we might lose our capital rather than achieving reasonable returns.

  • Pressure and stress can affect our decision-making ability

Extract from the movie – Dev was pressurized by his father to achieve victory and as a result, he lost his focus from all aspects and started losing in all the fields. He was often scolded and tortured by his father for not being able to earn medals and certificates.  Dev had always been forced upon the dreams that his father had for him. Dev was never given a chance to explore about his interests and that affected his decision making power.

Dev’s uncle, Vasant, had incurred a major loss in the family business and was highly stressed about it. He got pressurized by thinking about the materialistic and luxurious life of the family that he wanted to maintain and that led him in making a wrong decision. He chooses an unethical way: of leaving the country and doing fraud with the lives of the people by taking away all their money that they had invested in their company. He thinks of this way as ethical because Mr. Ajay Walia (whose company got bankrupt and he lost everything) had also done the same. Looking at someone else do it; made him think of the wrong way as the right way and he forgets about the moral values and ethics that he had learnt from his parents of not doing fraud or cheat with the lives of the people.

Co-relation in real life – Likewise, while there is a mad bull run in the market, when we see our fellow investors making money, we feel stressed and that pressure leads us to unethical thinking. We lose the capability of spotting the good investment companies; thus leading us to losses. Sometimes, such situations encourage us to compromise with our ethics & values for making an investment decision; hence forcing us to make faulty decisions. Rather than getting jealous of others making money, if we focus on our decisions and stick to our ethics; then there will be ample of opportunities coming up within our competence area that will lead us to good returns.

  • Remaining emotionally stable also during the worst period of our life

Extract from the movie – Viren, who is playing a character of Vasant’s son, saw his father being stressed and hence taking wrong decisions. So he keeps himself calm and stays emotionally stable and decides that he won’t let his father take the wrong decision. Vasant asks his family to support him and the whole family does that except Viren and Dev. Although knowing that this is the crucial time for the entire family and they will have to face the whole family; both the brothers decide to stick to the ethical and the correct path. The family often scolded them, tried to emotionally break them and also tried to prove them wrong but these brothers keeps fighting for what’s right and not bothering that it was their family on the other end.

Co-relation in real life – Market often shows us a challenging period during our investment journey but we need to remain emotionally stable and keep ourselves away from emotional diseases such as ego, envy, greed, fear etc. All such emotions influence our decision and lead us to get deviate from our process. Please refer to the article for further details of how does our emotion influence our investment decision BIBLIOPHILE: THE MOST IMPORTANT THING BY HOWARD MARKS “COMBATING NEGATIVE INFLUENCES”

  • Importance of different viewpoints

Extract from the movie – Vasant and Viren both have different perceptions of the same situation. Viren was enforcing for a different viewpoint which led the entire family re-think about their decision and yes they finally accepted the viewpoint that Viren and Dev has been explaining since the beginning, as it was a better and an ethical way of dealing with the problems. We should accept the viewpoint of the other and try to empathize from their angle. There is a possibility that we might get a new perspective to see a problem and that can be more useful to our decision making.

Co-relation in real life – When it comes to our investment journey; we face the same situation. There are ample of people who will give you too many companies to make investments in, as per their knowledge and their research. But it’s up to us whether to believe all of them or to believe some of them. People have different mindsets and there will be a situation where 1 person days good about the company whereas the other says bad. In such a situation; we get to know a different viewpoint and a different perspective from various people we trust on. But we should at times believe on people and re-think couple of times before investing as it is a matter of our earned money through hard work.

  • Acceptance of our mistake

Extract from the movie – Vasant accepted his mistake of taking a wrong decision due to stress and ego and he decides to change his decision. If he wouldn’t have accepted the viewpoint and changed his decision in time; then that would have led him to lose his brand value, his goodwill, his happiness, his inner peace, the trust that others had in him, his relationships, etc.

Co-relation in real life – We often make mistakes during our investment journey but we need to realize it at the earliest and accept our wrong decision by not getting influenced of other factors. We should think of recovering our losses and increasing our profits rather than feeling guilty on our wrong decision.

  • Have faith in yourself

Extract from the movie – Vasant in his past had grown the business and created a brand value. He had never lost his money. But when he faced such a situation; he had lost faith in his own self and he thought that he doesn’t have the courage to rebuild the empire. But Viren always showed trust in his father’s ability and he kept on saying that he knows that his father has the ability to build an empire again.

Co-relation in real life – During a sluggish market scenario, there are times that even our best investment cannot generate good money for us. But we have to have patience and trust on our decisions that sooner or later we will earn and gain good returns.

  • We are losers just because of ourselves and not because of others

Extract from the movie – Dev was unable to express his thoughts in front of his own family. His continuous failure due to his father pressure had restricted him to open up and talk about what he wanted to. When he was asked to faced his complexions and his fear; only then he fought with his own self and was able to realize that he failed because he had created a belief in his mind that he is unable to do anything in his life.He only can able to create an impression in front of his family after getting the realization of his weaknesses. It was then that he realized that it wasn’t his father that was the cause of his failure but it was his inner self that didn’t let him take a leap. But when he overcame his weaknesses; he achieved success.

Co-relation in real life – We also face similar situations during our investment journey. We might have made losses couple of times. But we should face those failures and try learning of overcoming them rather than withdrawing the money. One should think of recovering the losses and switching from the negative balance (loss) to the positive balance (profits). Because if we don’t think positive then those failures might affect our future decision for making an investment.

As it is rightly said “YOU MAY FIND THE WORST ENEMY OR BEST FRIEND IN YOURSELF”

  • Building brand value takes efforts for years but just a few minutes to ruin it

Extract from the movie – Vasant and his brothers had worked really hard for years to create a brand value for their company. But if he would have decided to take a wrong decision of declaring bankruptcy; then that would have ruined the brand image that they had build in for years. People would have cursed them for their decision as they would have cheated them. And this would have created a negative impact for the company and its image.

Co-relation in real life – Similarly, we should always be careful while taking a decision in life and not make any blunders. We should think with a peaceful mind and not atleast when we are stressed. If done so in stress; we can lose the trust that people have in us and we can harm our reputation which we have built with our hard work over the years. Remember, “DON’T LET ONE MISTAKE RUIN A BEAUTIFUL THING”.

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Kindly watch movie for more insights.

 

 

Warren Buffett’s Letter – 1957 – 1959

Since I am a fan of Mr. Warren Buffett and he was highly influenced by Mr. Charlie Munger in his life; so has my life been influenced by both the entities. Hence, today (1st January) on the birthdate of Mr. Charlie, I would like to pay a tribute to both the entities by extracting the core content from Mr. Buffett’s letters.

Warren Buffett’s Letter – 1957

In 1957, As per Mr. Buffett, the market was above intrinsic value. Even during optimistic situations, Mr.Buffett tried to focus on investing into the work-out situations rather than making an investment decision on general issues. If the market status seemed undervalued; Mr.Buffett would build a portfolio of general issues and make use of borrowed money in operations.

Mr.Buffett has explained work-out situations as an investment which is dependent on the specific corporate actions such as divestment, mergers, liquidation, demerger, tenders, etc. In such cases, risk depends on planned actions and not on the economic scenario or the general market.

Mr.Buffett has given weightage on “the better performance in the bear market than in the bull market.” During general or bull market, he was satisfied by matching his average returns.

We were able to see that everyone has generated good returns during the period of 2013-2017 by investing in the random stocks portfolio. But, we need to sustain our returns over a longer period of time with the risk under control. Doubled your Money in Last 3 Years ? Skill or Luck ?

Warren Buffett’s Letter – 1958

Mr. Buffett emphasizes on better performance in the bear market as compared to the bull market and matching the average returns during the bull market scenario.

In 1958, Mr.Buffett had made an investment into the stock name “Commonwealth Trust Co. of Union City, New Jersey”. The company earned $10 of EPS but did not pay any dividends. As a result of a dividend being unpaid; the stock price was depressed and was traded at $50 per share while the company held assets worth $50 million. 25.5% of the stock was held by the larger banks.

The stock was traded at 20% of earning yield ($10/$50*100). During 1958, US interest rate was 3.50% and Mr.Buffett counted intrinsic value of $125 in a conservative manner. Mr. Buffett had discounted EPS by 8% and made the intrinsic value of $125, while interest rate of US in year 1958 was 3.50%.

If the merger of Commonwealth got approved with larger banks, than, Mr.Buffett had estimated $250 per share value (i.e. discounted EPS by 4%). Mr.Buffett held 12% of the bank. Mr.Buffett got an opportunity to tender his holding at $80 which was higher by 20% of traded price of stock. Mr.Buffett was able to identify another attractive opportunity where he employed nearly 25% of the assets of his partnership.

He bought a higher stake in the Sanborn Map Co. and created his own work-out situations due to lack of availability of opportunities.

In Indian Market, We can also capture such situations for creating our wealth. End of FY13, one of the textile company was at an enterprise value of Rs.210 crore, whose price was Rs.207 and PBT Rs.40.66 crore. So, this stock was traded at 19.36% of earning yield (40.66/210*100). Currently this stock is traded at the price of Rs.1320. (8% Interest rate in India and stock was at 2.42x of AAA Bond rate)

Ambika

Warren Buffett’s Letter – 1959

Mr.Buffett analyzed the availability of a speculative component with the risk of loss into the blue-chip security prices. This situation occurred due to an evolution of new standard of valuation and people believed that new valuation standards will be able to replace the old standards.

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Mr.Buffett increased the weightage from 25% to 35% in Sanborn Map Co. and the remaining 65% was employed in undervalued and work-out operations.

Warren Buffett’s Letters 1957 – 2012

I am grateful to Mr. Vishal Khandelwal sir for the compilation of all letters for us.

I am really grateful to my friend who has helped me with the editing work.

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BIBLIOPHILE: THE MOST IMPORTANT THING BY HOWARD MARKS “ADDING VALUE”

AV 01

If our target is to achieve returns similar to the market returns with the similar risk & reward scenario then it’s not a difficult task. We just need to buy an index fund. But if we want to add a value to our targeted returns, different risk & reward scenario then we require a superior investment skill, superior insights which we have seen in second level thinking.

For the understanding, what actually mean for skillful investors to add value, we need to understand Beta – portfolio’s relative sensitivity to market movements. And Alpha – ability to generate performance unrelated to the movement of the market (I.e. personal skills).

While we are active investors then we have a number of options available to us.

1) We can decide that whether to build aggressive or defensive portfolio compared to the index, such characteristics of the portfolio is for temporary situations or for permanent. If we build an aggressive portfolio then it will increase a systematic risk of the portfolio that is beta.

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2) We can make a decision to get deviate from the index. We may buy few index stocks and exclude others or add stocks which are not the part of the index. As such portfolio gets diverted from the index so that return of portfolio also get deviate from the index. But in a long-term, the return of investors with superior insights will cover index return and can able to add value in terms of risk-reward scenario.

If we are managing our portfolio actively then we require having a second level thinking skill. If we do not have such superior insights then it is advisable to go with a passive investment. We need to shift a portfolio from aggressive or defensive as per the surrounding situation and need to avoid a frequent trades with the belief of generating a higher returns.

Different active investors hold different portfolios, some of those portfolios perform better than others portfolio, and some of the portfolios perform well during some particular time period. In a longer-term, active investors with superior insights can able to generate an above average risk-adjusted return. Combination of all different active portfolio reflects market behavior but in fact, all of those portfolios having different features.

Aggressive investor’s portfolio can able to generate a higher returns compared index in a good time and lose more compared to the market in a bad time. This volatility is measured by beta.

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If the Investors who generate higher returns with risky portfolio compared to other investors who generate average returns with low-risk portfolio then always we need to put more emphasis on the risk-adjusted return. But we cannot quantify each and every risk involves the portfolio. So that we need to accept that investment skills having an existence though everyone does not possess it.

If we don’t have any investment skill then we can able to achieve index return by making an investment in the index fund. Some of the investor’s portfolio fluctuates more compared to benchmark and few of the investor’s portfolio moves near to benchmark returns and few others can able to control risk and fall less. We get a different result at the different market scenario but our core focus should be on controlling risk and able to generate a risk-adjusted return.

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In bad years, defensive investor’s lossless and in good years, aggressive investors make more money. So can we say that they are adding value? We cannot able to say anything about the value added by just seeing to the one-year performance of any investor. We can able to see the value added in a long term only.

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Mr.Buffett, Mr.Howard Marks have mentioned that they like to increase average in good years and fall less in bad years. This provides them an advantage to adding value over a longer period of time. Protecting ourselves against the worst period is essential compared to the beat into the good period.

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Read for more detail: The Most Important Thing Illuminated by Howard Marks

BIBLIOPHILE: THE MOST IMPORTANT THING BY HOWARD MARKS “AVOIDING PITFALLS”

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We have seen in all article series of “The Most Important Thing” that Mr. Howard Marks is always keeping focusing on the avoiding losses. If we can able to avoid losses then our investment success will come to us.

When we are going to focus on the risk and avoidance of risk then there is a chance of under-performance of our investment portfolio during the bull phase of the market. But also we can able to get protected from the worst situations coming into the future. We can able to get survived into the market for a longer period of time.

For avoiding losses, we need to avoid the pitfalls which invite the losses. And sources of pitfalls can be analytical/intellectual or psychological/emotional.

Looking at the analytical/intellectual error – such error occurs while we collect too less information, uses wrong analytical methods, wrong approach, computational error, etc. Such errors wrongly direct the result and tend us to make a wrong decision.

One type of analytical error which is called by Mr. Howard Marks is “Failure of imagination”. This error means we cannot able to imagine or little in imagine full range of outcomes or not understanding consequences of occurrence of the extreme events.

“Failure of imagination” is the inability to understand the different range of outcomes in advance. In investing, we need to be dealing with the future and many a time, we try to assume that future will be similar to the recent past.

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Most of the time future looks like the past so assuming it does not harmful to us. But what happens while future will not repeat the scenario as similar as happens in the past, either we have to lose huge money or no money made by us.

Events might occur or might not occur or it take times to occur compared to what we have assumed.

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While we largely depend on the certain outcomes to happen in our investment then not occurrence of those events can kill our investment. So that we should always try to focus that if certain events do not occur then also we should not lose our huge money. We should focus on controlling our risk.

During sub-prime crisis also things do not work as it should work which resulted in a global meltdown. During sub-prime also investors believe that risky situations do not go to happens and securities are backed by assets based mortgage which encourages the risky behavior of investors. Majority of the investors did not expect that value of backed assets also can befall.

We should make an investment which can protect us against deflation and hyperinflation situations. We should not always a stick to the cash, treasury or gold to avoid pitfalls. But as a when requires, we should shift from defensive to offensive and offensive to defensive.

It is important to avoid pitfalls but there must be a limit which differs from each and every investor.

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Psychological factors are most interesting sources of investment error. These factors tend to extremely high or low prices of an asset, sometimes very irrational. (My Article on Psychological errors – BIBLIOPHILE: THE MOST IMPORTANT THING BY HOWARD MARKS “COMBATING NEGATIVE INFLUENCES”)

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One of the psychological factors is GREED. Excess of greed tends to be higher security prices. We want to make a more money and for that, we keep on buying an asset though it’s price trading at a higher range. We believe that assets will keep on appreciating into the future.

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The second psychological error can be an error of not noticing. Sometimes we have a plan to steadily invest in the stock market. And we ignore the undisciplined buying by others has created a boom.

The third error can be not consistent with doing a wrong thing but failing to do a right thing. Average investors just being a fortunate enough by avoiding pitfalls. While superior investors avoid it and also take an advantage of it.

Our psychology resists us from accepting novel rationale and keep believing that “It’s different this time.”

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The way pendulum swings, people forget to be skeptical every time rather believe that things keep on doing well.

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The combination of Greed and optimism lead us towards the adoption of strategies which provides a higher returns without taking a higher risk. Pay higher prices for the securities with the hope of still left with an appreciation.

Just knowing about the pitfalls provide helps to us to some extent but the implementation of it leads towards success.

We should always learn the lesson and remember it throughout our journey. Mr. Howard Marks pointed out eleven lessons such as –

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We should always be focusing on the things surrounding us. Excess supply of investment funds will lead to the situation called – “too much money chasing too few ideas”. Such situations can be dangerous for our financial health and we need to be careful during such situations.

When people become careless, investors not worried or skeptical about events, everyone becoming more bullish, increasing leverage. But we have to always keep in mind that such scenario will be going to reverse, it will never remain forever of the same magnitude.

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It is near to impossible to avoid downfall but we can able to reduce our pain.

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When we loss less than others then it provides a benefit to us such as we can able to maintain equanimity with others, able to avoid a psychological pressure and can able to generate higher profit by buying at a lower price.

Surviving during the declines provides us an opportunity to buying an asset at the low price. But for achieving success through this formula, we need to avoid pitfalls.

The way errors can appear to us is infinite but some of them are quoted by Mr. Howard Marks. Such as data or calculation error in the analytical process, ignoring the full range of outcomes or probability of occurrence of events, psychological factors (I.e. greed, fear, envy, ego, etc.), extreme risk-taking or risk avoidance behavior, etc. The second level thinkers can able to understand errors and also can able to detect over or underpriced assets. They can take a proper benefit of it and also take benefits of errors from others.

Errors are moves around us, sometimes assets prices reach a higher level or reach the lower level, sometimes such extreme scenario happens with entire market, sometimes to individual securities. Sometimes an error occurs while we do something and sometimes doing nothing leads to an error. So that error is around us and without any errors, there will be no occurrence of any events.

All above-discussed points don’t indicate rules for avoiding pitfalls but it provides us an awareness, flexibility, adaptability, and mindset to take the cue from our surrounding environment. There are times where few of our acts resulted in errors.

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And sometimes reverse to such acts.

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Read for more detail: The Most Important Thing Illuminated by Howard Marks

 

BIBLIOPHILE: THE MOST IMPORTANT THING BY HOWARD MARKS “INVESTING DEFENSIVELY”

ID 01

Whenever someone asks us for an investment advice, then our first step must be an understanding his attitude towards the risk and return. We need to ask a question to him that what his choice – making money or avoiding losses is.

We cannot able to do both the things simultaneously in each and every situation.

If we provide an advice or we make an own investment without knowing attitude towards risk and return then we will not able to provide a proper solution. This is as similar as an asking for a cure from a doctor without disclosing our diseases to him. Investing is a full of bad bounces, uncertainty and random events which challenge us every time. So that such uncertainty requires knowing our risk-reward attitude for long-term survival into the market.

While we hit fewer losers then our probability to win the game is much higher. We need to choose how to play the game of investment – Offensive or Defensive.

ID 02

We just need to do is to protect our wealth by not picking wrong opportunities. In investing, only avoiding losers is in our control, not everything else. We do not know what will happen in the future, our best investment can be turnout as the worst investment. But we have to be ready for it. We have to focus on missing wrong shots so that can protect game if our best turnouts as a worst.

ID 03

If we look at the sports, many a time we need to protect our wicket rather play aggressively to make scores. Staying on a pitch provide us an opportunity for making a score while we get a good hitting opportunity. Investing also having many points which are similar to the game either positive or negative. As in cricket, Dhoni, Sachin, Rahul Dravid, Virat all having a different style to play a game. Some play defensive, some play aggressive and some make the balance of it. We cannot able to judge any players by looking towards his one match. Successful players perform well over a longer period of time with consistency.

ID 04

Sometimes even a good players overestimate short-term success and forget to focus on the consistency of performance over a longer period of time.

ID 05

As all players cannot be a Sachin, Dhoni, Dravid. As similarly, all investors cannot be a Warren Buffett, Charlie Munger, Howard Marks, etc. We just need to focus on our game in our comfort zone.

We are not able to know what will the result of the game we played, any uncertainty can affect it. We cannot only focus on one single investment ideas, we need to work on a selective group of ideas.

Negative side – If we keep on playing an aggressive investment game then we might not able to stick for the longest period of time in the game. Many uncertain events work as bounces for us.

Many a time, short-term investment success can become a reason to ignore the durable and consistent track record of investors. And few get attracted towards shine without checking its durability.

When opponents try to keep on throwing bounces then referee blows the whistle to give warning sign to opponents but in investing, there is no one who blows the whistle, we cannot able to get protected. Also in sports, we get notifications for the change of turn from our to opponents. But in investing, there is no notifications are available to us. We have to decide ourselves for changing the game from offensive to defensive.

We need to focus on the outperform into the bad time rather focus on outperforming into the good & best time. In good time, everyone can able to generate a good return but skill comes when we can able to outperform into the bad time. Doubled your Money in Last 3 Years? Skill or Luck?

Every player can able to play well against a weak team but a good player who can able to play well against strong opponents.

ID 06

We should focus on either making more score or stay on the pitch for a longer period of time. We cannot say that only one way is the right way and we just need to select it. Selection of way can be based on our experience, learning, market environments in which we operate, etc.

ID 07

We require a different kind of mindset for doing a right thing and avoiding doing the wrong thing.

Defense is focused on avoiding bad outcomes. It can help us to generate a higher returns but more through avoiding bad outcomes, through missing bounces, through managing risk.

If we bought an asset at Rs.100 and it falls to Rs.50; it falls by 50% but for reaching to Rs.100, that asset has to rise by 100% to just reach break-even.

ID 08

When we play offensive and if it works then it will add additional returns to our investment. BUT if not works then it creates a damage to our investment and to our wealth.

Defensive game help us to stay in the game during a tough time also, it helps us to survive for a longer period of time.

Majority of a time, financial markets works in an average manner but it shows one abnormal day which has reason to destroy our financial health. We need to prepare for that worst day. We just can prepare for the worst day but cannot predict how worst it can be or when that worst day will come. But it’s sure that worst day will come.

ID 09

It is hard to say in investing that whether our investment becomes successful or not and it works in the future as we have expected, economy /industries / Companies moves in a certain way and we prove to be right every time. We need to take care of the unforeseen future events which can go against us and can meltdown us. Warren Buffett has given concept which can protect us from such unforeseen events that called “Margin of Safety”.

ID 10

When we buy Rs.100 worth of an investment for Rs.90 then we have a chance to gain. But when we buy that same thing at Rs.70 then we have very less chance of loss and if odds will be in our favor then we can able to make a good return. So that buying cheaper provide us a “Margin of Safety” when our assumptions go wrong.

In the over-optimistic scenario, people buy Rs.100 worth of investment avenue for more than its worth (I.e. Rs.150, Rs.160) and then find a greater fool who will buy at the higher price from him.

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When we need an above-fixed returns then we need to go for more uncertainty but how to balance the defensive game with the inclusion of offense is the key area to focus. We cannot get higher returns with the exclusion of offensive game. We cannot able to win the match by just keep on making a single run. We need to hit 4 & 6 but with also focus on not losing a wicket.

Our first focus is to play a defensive game for staying on the pitch and then the inclusion of offense to the game for generating higher returns. Such approach provides us a consistency for a longer period of time.

ID 13

If we take out a history of investment managers, investors then we will come to know that very few get survival for the longer period of time. Not due to their inability to make a 4 & 6 but to lose wickets in many matches. Many investors come and performed well in a good time but worst time make them disappears.

The managers who do not get survived for a longer period, the majority of them have built up their portfolio on based of favorable scenario and with the hope of likelihood of outcomes without keeping a room for the occurrence of an error.

ID 14

Aggressive investors require competitive technical skills with fortitude, patient mindset, and capital. The investment might have potential to work well in a long-term but above quality provides a support to stay in a game for a long term.

ID 15

We should focus on controlling risk, avoiding losses rather than try to focus on gaining again and again.

ID 16

Simply defensive investing means being scared while making an investment decision. Worrying about losses, bad luck, worrying about something we don’t know, bounces etc.

ID 17

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BIBLIOPHILE: THE MOST IMPORTANT THING BY HOWARD MARKS “APPRECIATING THE ROLE OF LUCK”

01

While we involve into any of the investment decisions then those decisions are having dependencies on the future. As we know that future is uncertain and it is difficult to predict it. In such uncertain investment environments, luck plays an important role and we have to recognize the role of luck in our investment journey.

02

When we get some result or looking at the result then we must have to think the role of randomness in that generated result.

03

Many outcomes are visible to us but we have to think those outcomes with different viewpoints. If someone has made a risky & uncertain investment and he gets a good outcome from it. We can say that such outcome happens due to luck not due to skill. But people take such outcome as their skill, not consider a role of luck.

For example, baller throw ball towards stump for capturing a wicket of the batsman and that becomes the wrong throw and ball has touch boundary line then it is not a skill of batsman but the role of luck.

Many times, people get the return on investment by just being in the right place at a right time. Not due to their skill.

If someone has invested his fund during the year 2013 with just making a portfolio with random stocks then also that person generated a good return. Doubled your Money in Last 3 Years? Skill or Luck?

In short term, we can able to generate a good return and many a time achieved an abnormal return by just being in the right place at a right time. But what about the long-term result? How we can say that luck always keeps on favoring us.

04

Generally, during a boom period, the person who takes a higher risk get highest returns. But that is not the reason to consider them as the best investors. Very few people appreciate the role of randomness or luck in the life or in investment journey.

Mr. Taleb has mentioned the list of things which are generally mistaken by us.

05

We should understand that when things going right, luck looks like a skill and people misinterpret lucky investors as skillful investors. Many a time, we get an extremely good reward by chance and we make a mistake to consider such result as our skill.

That means batsman hit ball for six and that ball also declared “No ball” and batsman get free hit and he again hit another six on a free hit.

In short run, we can win and make good returns by an occurrence of chances but in a long run, our wise decision provides us a good reward.

06

When we realize that investment outcomes get an influenced by the randomness then we can able to focus on every event with the different perspective. Otherwise, we just thought that such outcomes happen due to our skills only.

We have made a list of assumption for the occurrence of events but we also should focus on the occurrence of other different events; which we may not have assumed. It might be possible that sometimes all other events have collectively more probability to occurred compared to the single event on which we have put the huge focus. Such ignorance becomes dangerous for our financial health.

07

Investing something like a mixture of both skills as well as luck. Investing is not a pure luck like a snake and ladder game or not a purely skilled by the game of chase.

While we play chase then we require a skill to protect ourselves from moves of an opponent’s. We cannot able to win chase just by waiting for the favor of luck and mistake made by an opponent. We have to create a scene where opponent commits a mistake and we can able to win a game.

Whereas, there is not a requirement of a skill in throwing a dice while playing a snake and ladder game.

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But we generally consider our winning as our skill while we should recognize that we are winning a snake and ladder just due to a support of a luck. While we should reach towards 100, we should not forget that there is a snake on 99 number which can bring us towards number 7. And transform our success into failure due to highly dependencies luck. Similar happens to us while we play an investment game on the base of pure luck. We may win till number 98 and maybe that our fortune transforms into failure by destruction in our wealth. We climb many ladders, get many multifold return generator stocks but we forget that such occurrence is due to luck. If we do not have our skill involve in it, then our wealth get destroy. We should not forget that investment requires a luck but also it requires a skill. If we fully dependence on the luck then we should never forget a snake on number 99.

08

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SIMPLE IS BETTER – ISSUE -11 – CASH FLOW STATEMENT

We have seen profit and loss account in Issue-8, Balance sheet in Issue-9 and Relationship between balance sheet and profit & loss account in Issue-10. After understanding of Profit & loss account and Balance sheet, we move forward to the third financial statement in the current issue that is “Cash flow statement”.

“The cash flow statement shows how much cash comes in and goes out of the company over the quarter or the year.” – Investopedia

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For Detail Issue, Click here —> SIMPLE IS BETTER – ISSUE -11 – CASH FLOW STATEMENT

BIBLIOPHILE: THE MOST IMPORTANT THING BY HOWARD MARKS “HAVING A SENSE FOR WHERE WE STAND”

01 WWS

Some category of people does not accept that cycle is unpredictable and largely unknowable, and those people put efforts for predicting the future. Few people ignore the cycle and adopt the buy & hold approach. They do not get aggressive or defensive with their investments in the cycle. Many people have wrongly understood the statement of Mr. Warren Buffett – “Our favorite holding period is forever.”

And the last category which is an appropriate approach for the investment. Such category of people accepts that cycle will occur. Everything moves in a cycle. Fundamental, psychology, prices, etc all moves in a cycle. We cannot able to know when existing trend will go, get the stop and start getting reversed. But we need to be confident enough that trend will stop sooner or later. No trend continuously keeps on going forever.

So that we should try to know where we are standing in the cycle rather than to predict timing and extension of the cycle.

02 WWS

By knowing where we are standing at the cycle, we cannot able to know what will be going to happen in the coming future. But we can prepare ourselves with a probability of occurrence of events.

I can’t change the direction of the wind, but I can adjust my sails to always reach my destination. – Jimmy Dean

Knowing present environment is not much hard compared to knowing future. We can come to know the present environment by observing the behaviour of participants around us, by observing our surrounding environment.

We have to focus on everyday events prevailing to the market. Such events provide us a rough idea of our position at the cycle.

Liquidity

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When everyone is aggressive in buying a particular asset then we must have to take care and be aware of the upcoming risk. We should be aggressive in buying a particular asset while everyone is in panic and selling particular assets.

“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful” ― Warren Buffett

We have to look around and think it by ourselves regarding present situations and make a decision that where we are standing in the cycle. What is market participants doing? What media is talking? Such questions need to be answered by looking at situations around us.

SENSEX 2024-2030

Liquidity 2017

03 WWS

When too much money getting deployed into few assets then huge liquidity drives prices of an asset, such price momentum is not due to its actual fundamental. And also at the higher valuation people are ready to buy an asset aggressively. People are ready to buy Rs.100 worth of asset at Rs.200-300-400…. With the bright future expectations.

We cannot predict when huge liquidity gets dry but as a contrarian investor, we can prepare ourselves for upcoming risk.

04 WWS

05 WWS

We need to check which side majority of our answers falls and as per it, we can make an estimation of the present situation. And can able to prepare ourselves for the situations. When a majority of our answers falls at the happy situation then we have to be cautious towards the present scenario and vice-versa.

06 WWS

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BIBLIOPHILE: THE MOST IMPORTANT THING BY HOWARD MARKS “KNOWING WHAT YOU DON’T KNOW”

01 KWDW

When we concentrate on the small part of the things then we acquire more knowledge regarding particular aspects. We need to work harder and harder to develop our skills by which we can able to know more than another person. Enhancing knowledge will be work like an edge for us to knowing our positions better than others.

Also, we try to identify that where we currently stand, what’s our actual position so that we can prepare ourselves for the further development.

When we predict upcoming changes then we can able to earn money from participating in that changes. But if we have predicted something which is not going to change then it will be near to impossible to earn money. If things do not go to change then we cannot able to earn money by taking benefits of those changes.

It’s very difficult to forecast future and people generally forecast future with regard to what has happened in the past.

So that forecast can get right some of the time but it should be consistent in the getting right every time which can be very difficult.

Some of the people stick to always bullish or always bearish view and keep that view for a longer period. So that sometimes they get right with their forecast. It does not mean that their forecast will be right all the time. If you toss coin 100 times then there are a half of the possibilities to get the head of the coin. We cannot say such outcomes as a consistent outcome.

02 KWDW

We have to check that how many forecasters have predicted meltdown of subprime crisis or again boom was driven due to huge domestic liquidity currently.

Forecasters are called as “I know” school of investors. They are more confident about the future and the things will work out as per their assumptions.

“I don’t know” group of people can able to guard themselves while they have to deal with the future at the macro level.

03 KWDW

We never want to invest for the future which is largely unknowable and on the other hand, we need to face unforeseen future without forecasting the future.

The biggest problems arise when we forget the difference between probability and outcomes. We cannot surely know the occurrence of future events but we can know the probability of the occurrence of the events. When we forget the difference between probability and outcomes then we start predicting future events with surety.

04 KWDW

Investors who ignored such limitations then they make mistakes in their portfolio and also incurred huge losses. Events do not always occur as per our assumptions and we have to be ready for it.

When we do not know the future then we act in a different manner such as we diversify, hedge to the position, taking less leverage, focus on today’s value over a future growth, etc. On the other hand, while we feel that we know the future or future event will occur as per our assumption then we start taking more risk, taking more leverage, play on making an assumption of bright future. If we know the future then we play an aggressive game. We not take a diversification and take a huge leverage.

When we know that there will be no obstacle comes to our way while we are driving then speed, carelessness will increase. And on the other hand, when we know that our way is clear but any obstacle can come on the road anytime then we drive the vehicle more carefully with a speed which we can able to control. Similarly with the investment, when we believe that future is knowable then we behave for investment in a different way and when we believe that future is unknowable then also we behave for investment in a different way.

As the road is clear while we are driving but anytime any vehicle can come to that road and we can able to meet an accident if we do not have a control over our driving. Similarly, if we do not have a control over our investment then any unforeseen event can destroy our wealth. We need to wear a helmet while driving for controlling risk and also take proactive steps while making an investment for guard ourselves against unforeseen accident.

05 KWDW

Read for more detail: The Most Important Thing Illuminated by Howard Marks