Michael Batnick Looking in the Mirror

Mr.Batnick has mentioned that he has made each of the mistakes made by other well-known investors. He was not clear during his college studies regarding his career. Lastly, he completed his studies into the economics and got a job at a financial planning company for selling insurance. He has sold a policy to his family and not able to sell anything to others. During his job, his father introduces him with a financial advisor and Mr.Batnick has taken place his liking for the wall-street.

During the year 2011, Mr.Batnick has started trading ETFs which are 3x levered. He thought that he can create a fortune by trading. During that time, he got a temporary job and due to his job, though he is not able to stick to the computer, he started trading through options.

He was bearish on the Netflix so that he bought put option of Netflix before earning got announced. The stock fell by 35% and he earned 10 times of his original investment. He started reading on trading, technical analysis. He knows that he couldn’t beat the market but he keeps on doing the same because he does not know anything else.

During the year 2012, he got hired by Josh and Barry. And his journey got started.

We all have made a mistake to think the stock market as a money printing machine where we put an order and machine make us billionaire sooner. We need to understand that this is not a machine but it’s a platform which facilitates us to make an investment into the various businesses. Businesses having a good time, bad time, best time, worst time as per our life. So that we need to give time to the business to grow, to prosper for creating wealth for every investor. It is just a platform, it does not have emotion, it drives through our emotions.

Everyone has made a mistake, the main difference between best investors and normal people is, best investors learn and grow from their mistakes but normal people do not, they keep their mistakes into their mind and bring them back to achieving the goal. If we want to grow then we need to learn from the mistakes and improve our way of doing things. If we keep on doing things in the same way then the result will remain as same as we have achieved during our mistake. Mistakes provide us an opportunity to change, learn and improve in the way we perform our job.

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

Chris Sacca Dealing with Regret

Many of the immature investors buy overvalued stocks and then they sell when those stocks become cheaper in nature. But this is a wrong way of making an investment and making a decision. If we keep on making a wrong decision, then we keep on feeling a regret which affects our decisions. Our mind carries a past experience which affects our decision. As an investor, we need to make every new decision independently without getting effects from the past experience. If we have a bad past experience then our current decision will affect our regret and if we have a good past experience then our current decision will affect our overconfidence.

After the bad experience, people work more cautiously until they do not again start playing the game. As we again start playing a game, our past experience starts affecting us. When things go up then also greed for taking out profit stop us from getting more gain.

Mr. Chris Sacca is the founder and chairman of Lowercase Capital which is a venture capital fund. This fund considers as one of the successful venture capital funds which have recorded return of 250 times from its initial investment. This fund has put $300000 of a fund to Uber, currently, it’s 5000 times. Some of the other success of Mr. Sacca was Instagram, Uber, Kickstarter, Slack, Automattic (WordPress parent company), Twilio, and Twitter.

He has also a regret of pass on some of the investment. One of the business was Dropbox and giving a pass on to the Dropbox cost him a lot. Another miss of Mr. Sacca was Snap, the parent company of Snapchat. He can speak for his misses because he has a more winner also which has created a fortune. But if we have missed an opportunity or sold-out good businesses earlier then we always remain into the regret. We actually need to move on to the opportunity which we have missed out and need to focus on the other coming opportunities.

Emotional biases affect us badly during our investment journey. If we have a winner into the portfolio and we sold it then also the winner keeps on growing. If we have a loser to the portfolio and we have cut losses then stock again gains from that level. Such situations affect the decision making skill and we make faulty decisions.

As we have seen that Mr. Sacca has missed a few opportunities, Mr. Buffett has missed many and also he has lost money in a few of his investment. Important is that they have never kept their regret with them which has helped them to build an empire. We have to move on rather than sticking with the past decision or getting attached to the previous decision. Our life is full of such decisions and if we stuck with it then we will not make further decisions in our life. We have to learn from our decision and use it for further decisions.

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

Charlie Munger Handling Big Losses

Majority of the big winners’ companies have also seen the worst period during their journey. It is not necessary that if the company has delivered a 25%+ CAGR then it will get into the smooth way. There always be a huge up and downs to it. Many storms such companies have experience but as investors, we need to stay during those storms if we have made an investment into the great companies then only we can able to earn good returns from it.

Mr. Munger has established a hedge fund company, Wheeler, Munger & Company in the year 1962 which has a pre-fees return of 37.10% during the year 1962 to 1969. And 14-years of partnership, Mr. Munger has delivered around 19.82% CAGR compared to 5.20% CAGR with the dividend of S&P500.

If we love when stocks moving into the upward direction then we must have to be ready to accept its downward journey also. It is a part of the game and without accepting the losses, we cannot become a seasoned investor. Even Mr. Sachin Tendulkar cannot hit a century into the each of the match, some of the match having a ZERO score also. If he only focuses on the century then it might be possible that he cannot able to play well. Similarly, if we keep focussing on the scoreboard then we may not able to create a good investment fortune.

Mr. Munger has an investment of 61% of his portfolio to the Bluechip stamp and original business of the bluechip stamps has started getting deteriorate from the peak revenue of $12.42 crore in 1982. Bluechip has made an investment into the See’s Candies, the Buffalo Evening News, and Wesco Financial before getting merged into the Berkshire Hathway in the year 1983.

The firm of Mr. Munger has lost 31.90% in the year 1973 and 31.50% in the year 1974 v/s 13.10% and 23.10% decline of Dow Jones respectively. And he bounces back by 73.20% of the gain to the year 1975 but few of the large investors have left him which break him mentally and emotionally. He decided to liquidate the partnership. But after the worst performance during the year 1973-1974, Mr. Munger has delivered a 24.30% CAGR before fees.

We need to be mentally ready for the big losses during our investment journey if we want to earn a decent return for the long term. If we are not mentally and emotionally ready we will not able to survive to the investment journey.

We should not sell stocks just due to a fall in the price of the stocks. If we keep on doing such practices then we will not survive for the long term to the stock market. If we know that stock can fall by 50% after we bought it, then we will make a position which is comfortable for us during the decline.

We need to make a balance between equity and debt as per own comfort. So that we can able to play an investment game in a good manner. Also, get the strength of absorbing such shock.

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

John Paulson You Only Need to Win Once

Luck is not always going to support us if we do not have the proper skill to make appropriate decisions. If we won by help of luck but make the wrong decisions thereafter then we end up with the losing a game. And for making an appropriate decision, we need to work on developing our skills. If we get success by using a stroke of luck then we cannot say that failure will not come to our way. Actually, success and failure is a cycle so that if we meet success then failure will come to meet us next. By developing a skill, we can reduce the intensity of the failure.

John Paulson has started a hedge fund company with $2 million of own fund in the year 1994. His firm is specialized into the merger arbitrage. But during the year 2005, one of his analyst Mr. Paolo Pellegrini suggested him that US housing market is into the bubble territory. And after reviewing facts presented by Mr. Paolo Pellegrini, Mr. Paulson convinced to go against the housing price. He started acquiring credit default swaps. As he got a confirmation for his idea, he has started acquiring more swaps. The largest mortgage guys of the country were positive on the sub-prime during the year 2005. But outside of his team called him a crazy. He has earned during a fall of subprime in the year 2007 worth of $15 billion for the fund and $4 billion for personal.

After the big success, he started searching for a similar big winning idea. When we get a huge success then we need to save ourselves from the trap of ego. This is a very crucial emotional bias which enters to us and we remain unknowable about it.

Mr. Paulson has an idea to buy more valuable asset compared to inflation during the year 2010. So that he bought gold and gold-related investment worth of $5 billion, he became the largest owner of gold in the world. He could not able to repeat his past success and lost 30%+ value in a year and after that, he lost value for consecutive three years. Mr. Paulson other funds also lost in value and also merger fund where he has an expertise that also falls.

We cannot able to hit winning shot every-time but when we hit a winning shot, we need to keep those value which we received. But generally, we try to repeat those winning shot again and again which create destruction of wealth for us. I learn from my Guru – Mr. Neeraj Marathe Sir, from Howard Marks and Mr. Ben Graham, that protection of wealth must be our priority. Neeraj Sir always mentioned that if we focus on avoiding mistakes then we won half of the battle. So that we should focus on not to hit a winning shot but rather focus on not to lose money. If we survive into the game then we may have a chance to hit winning shot again. But if we do not survive into the game then there will not be any probability to hit a winning shot again. If we keep our focus on hitting a winning shot then we compromise with the capital protection which is an essential part of the game. And we should not forget it ever.

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

John Maynard Keynes The Most Addictive Game

Every minute market is putting new information, fun, clues, etc. which can be excited and addictive to us. It is a game which always excites us with its nature and it is never ending game so that slowly, we become addictive of it.

In investing, odds are decided by the human, investor’s expectation. Odds cannot be quantifiable. We all have information but users of that information are human so that human sets prices for the odds which have emotional biases also.

Mr. Keynes has started managing fund of family and friends with $30,000 in the year 1920 which was turned out to be $80,000 in April 1920. But after that, he made a huge loss which has wiped out entire capital and his father has to help him. Mr. Keynes has started speculating and build the capital worth of $120000 till the end of the year 1922. This success has encouraged him to make speculation into the commodities. Here also, Mr. Keynes lost 80% of his net worth.

Mr. Keynes has worked on to the evolving his investment style.

He stops focusing on the macroeconomic, currencies, interest rate forecasting, etc. and made the transition of his focus to the cash flow, earning the power of the companies which are selling below the intrinsic value. He put aside his ego and created fortune with the bottom-up approach rather than a top-down approach.

As we have seen in my article on Howard Marks that no investment strategy works forever. It’s cyclical, sometimes growth works, sometimes value works and sometimes momentum works, etc. Mr. Keynes was successful as a value investor but during the year 1936 to 1938, his strategy was failed and he lost around 2/3^rd of his wealth.

Mr. Keynes has explained his strategy to his clients – we need to look at the discount from the probable and potential intrinsic value, need to hold large quantity for a longer period of time.

Mr. Keynes has shifted from macro to company-specific matrix and short-term to the long-term focused investor. During the year 1928 to 1931, the value of his assets fall by 50% v/s US market fall by 30% but during the year 1932 to 1945, the value of his assets grew by 869% v/s US market rise by 23%. Additionally, his portfolio turnover reduced from 56% to 14%. He has truly focused on the long term investing and due to his long-term thinking, he has delivered a remarkable result during the 1929 great depression and also during World War II.

We always need to focus on the investing strategy which is suitable to us rather focusing on identifying a perfect strategy and following it. No strategy is perfect in all the market cycle. I like to build a portfolio of bargain stocks which badly fail during the last 2 year were no huge bargain available into the broader market level. But staying with the pre-decided strategy has helped a lot and I can able to outperformed benchmark with decent margins. So we need to select a strategy which suits our temperament and need to stick on it.

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

Sequoia The Risks of Concentrated Investing

One of the wise advice given on risk management is we don’t have put all your money into one basket. If we have 100 stocks of a portfolio and equal 1% allocation to each company then erosion into any company will affect the entire portfolio by 1%. Whereas if we have a 10% allocation to the 10 companies then erosion to any one company will affect the entire portfolio by 10%.

When we have concentrated our portfolio to the winning businesses then we will be a winner and if we have concentrated our portfolio to the losers then we also are losers.

Sequoia fund which has done a concentrated investing, they are not interested in the short term profit making, also not interested in the low allocation to the portfolio and which is known as –

Mr. Buffett has closed his partnership in the year 1969 and suggested Mr. Bill Ruane manage the capital of partners so that Mr. Bill Ruane has set up the Sequoia fund. During the dot-com bubble, Sequoia fund has lost ~16.50% whereas the S&P 500 gained 21% and NASDAQ gained 86%. But after the dot-com bubble in the year 2002-2002, Sequoia fund has gained by 29% whereas the S&P 500 lost value by 38%.

In the year 2010, Sequoia fund has started acquiring a position to the Valeant Pharmaceuticals which becomes the second largest position. And in the year 2011, it becomes the largest position of the fund which has overtaken Berkshire Hathway which was the largest position in the 20 years.

In the year 2015, many consider Valeant business practice as an unethical and after that, it caught under accounting fraud. As Valeant was the largest position of the Sequoia fund, the fund lost 9.03% whereas S&P500 gained by 8.44%. Sequoia fund has bought again when Valeant fall by 50% and Sequoia fund becomes the largest shareholder of Valeant. But Valeant fall by 90% and Sequoia fund has to sell the entire position of the Valeant. Sequoia fund’s assets have fallen from around $9million+ to $5million. A single stock becomes a reason for the fall of their asset massively.

For avoiding such impact, we need to write down our assumption for buying a business so that we can take an exit when our assumption started getting wrong. This practice helps us to reduce the effect of endowment bias towards the stock which we hold. This also reduces the emotional bias towards the stock and help us to protect our capital. I always make a write up of the entry and exit reasons for the investment which help me for making a better decision and reduce my emotional bias. After all such activities, we need to be thankful for the role of luck which can support us. Concentration is good till we stay within our predefined process, assumptions, rules, etc. When we go out of any of the mentioned, we need to pay huge tuition fees for the concentration.

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

Stanley Druckenmiller Hard Lessons Can Be Necessary

Mr. Charlie Ellis has explained to the book Winning the Loser’s Game – professional players force others to make an error which helps the professional player to win whereas amateur players play a faulty shot. This is similar to the investing field. And the main difference between an amateur and a professional investor. We have to keep on defending ourselves and wait for others to make errors. We need to stay on the pitch and wait for the loose ball for hitting it outside of the boundary.

Return of the investment instruments and our return having a gap which is known as a behavioral gap, which tells that investors’ behavior affects their own returns.

Amateur investors do not focus on risk management. Generally, they focus on the risk after they meet to the risk. It is similar to wearing a helmet after facing a road accident as a precaution. Whereas professional investors do things in a different manner, they buy things which others do not want to buy and they sell things which everyone wants to buy. Mr. Howard Marks are given this technique as a second level thinking.

Howard Marks – Second Level Thinking

During the year 2015, Stanley Druckenmiller was getting an introduction as –

During the year 1981, a 28 years old Mr. Druckenmiller has started with Duquesne Capital Management. During the year 1987, Mr. Druckenmiller had buildup long position as he felt that 2200 level supported zone for the Dow Jones but on Monday, Dow goes down to 1738 level which known for “Black Monday”. On Monday, after lunchtime, Stocks got to bounce back and Mr. Druckenmiller has covered all his position. Mr.Drukenmiller has left his job to join George Soros. In the year 1989, Mr.Drukenmiller has shorted Japan Index Nikkei which is still down from the top of the year 1989.

In the year 1992, Mr.Drukenmiller has shorted the pound currency and he turns out to be a winner. Mr.Drukermiller has a track record of generating a return of 31.50%, 29.60%, 53.40%, 68.80% and 63.20% in the year 1989, 1990, 1991, 1992 and 1993 respectively.

But during the year 1994, Fund lost in a bet against the yen and 1998, Quantum fund had lost $2 billion in Russia. The worst is about to come. Mr.Drukenmiller has invested in the IT stocks and he was uncomfortable with his positions so that he booked and took gained. But he had hired new young employees in the year 1999 and they kept on making money by investing in the IT stocks.

He had double his position at the top to the tech stocks and when IT bubble got burst, Quantum fund had lost 21% or $7.60 billion since their peak value.

Mr.Drukenmiller cannot able to see others making money and he can’t. So that he also makes an emotional error. Mr.Drukenmiller was known that what he is doing but he cannot able to stop his emotion and he has occurred an error. Sometimes it is important to see others making money. And we need to stay with not making money.

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

Bill Ackman Get of Your Soapbox

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.

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.

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.

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.

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

Warren Buffett Beware of Overconfidence

When we own something, we value it more preciously. If we purchase any stocks than it becomes a value for us. We value more which we are holding, which is known as an endowment bias. Due to the higher value for us, we cannot able sold out or go away from our holding.

Mr. Buffett has always mentioned that not to become too much confidence.

We can see that Mr. Buffett does not get overconfidence on his own holding, but especially he mentioned that he can have poor performance for his investment. And when he felt that he could not able to manage fund then he has discontinued his partnership approach.

Mr. Buffett has made much successful investment such as see’s candy, Coca-Cola, GEICO, Nebraska Furniture Mart, etc. But he has also made a mistake to make an investment to the Salomon Brothers, US Air, and Dexter Shoes, etc.

When Berkshire had purchased Dexter shoes than they have issued shares of Berkshire for acquiring a Dexter. Dexter got bought by Berkshire for the worth of $433 million which turnouts to be a ZERO a few years later. Mr. Buffett has mentioned into his letter to shareholders that one of the biggest mistakes he had made was to acquire Dexter shoes and that is by issuing a share of Berkshire. Berkshire share was quoted at $16765 at the time of Dexter acquisition which is currently quoted at $304057, which has grown by 13% CAGR for the same period and at the same time Dexter becomes zero. Mr. Buffett had bought H.H.Brown and Lowell Shoe in the year 1991 and 1992 respectively before the acquisition of Dexter.

In the year 2000, Mr. Buffett has recognized his mistake and write of remaining accounting goodwill. The overconfidence of Mr. Buffett has hampered a huge value to the Berkshire which teaches us that we should not be overconfident for any of the trade. When we are overconfident, we cannot able to see the negative part of our trade. We have to be neutral with our holding. I always mentioned that there is not a favorite stock of mine when people asked me for my favorite holding. I would like to hold the stock until it remains within my criteria of holding. As and when it goes out of it, I put a sell order into it. If we consider any of our investment as a favorite, then we get attached towards it and we cannot able to sell it when it is going out of our criteria.

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

Jerry Tsai You’re not as smart as You Think

When the market is into the bull phase, each and every stock in upward momentum. So that everyone who has made an investment is shining and looks like a genius. But we should understand that earning during a bull phase is not our skill, it’s has a role of luck also which has supported us. Our actual skill comes during a bear phase, while we protect our wealth or fall less. But we get confuse and does not appreciate the role of luck during the bull market and make blame to the luck, market, other external factors during the bear market. Such behavior stops us from growing into the investment field.

“APPRECIATING THE ROLE OF LUCK” – Howard Marks

If we could not survive during a bear phase then we definitely going to wipe out or end up with the lower return. But bull phase of the market makes us tempting and overconfidence to our skill rather make an appreciation of luck which has actually perform a role.

Jerry Tsai was run Fidelity Capital Fund by the year 1957 and he was one of the celebrity fund managers during that time. And everyone eager to observe what he was doing.

Mr. Jerry style of managing fund-

Mr. Jerry has earned a return of 296% in the year 1958-1965 compared to 166% return of conservative equity funds. In the year 1965, Mr. Jerry has sold his ownership stake of Fidelity back to the Fidelity for $2.20 million and launched Manhattan Fund.

Mr. Jerry holds a few of the stocks during the year 1968-69 was Polaroid, Xerox, and IBM. These stocks were traded more than 50 times P/E ratio due to the high growth of earning. And University Computing, Mohawk Data, and Fairchild Camera traded at several‐hundred times their trailing 12‐month earnings.

We should be always prepared for the bear phase of the market. And also should avoid hot stocks during a time. Whenever I make any investment decision, I keep the year 1929 – great depression to my mind. So that I can survive and stay prepared for a bear phase of the market. When the market is into the bull phase, everyone talks about the return and focus only on earning a return, they do not like to talk about the risk and also do not focus on the risk. Such behavior has proven as a danger for us. And our behavior also responsible for inviting a bear phase from the bull phase.

The game which is played by Mr. Jerry was not a long term surviving but he believes that he can survive for the long term because he has huge insights for the market moves. And he was overstated for his own skills. We need to understand that everyone can earn during a bull market but survival during the bear market is essential. If things do not fall under the criterion then we should avoid it rather chase for it. Not great company will be a great investment at any price. If we are not able to understand it, then does not able to survive for the long term.

If someone has bought this company during the March-2000, at the high price of around Rs.215 then after the 19 years of the period, he gets returned at 7% CAGR. And if enter to the similar company at the low price of around Rs.138 during the March-2000 then after the 19 years of the period, he gets a returned of 9% CAGR (*Considering recent all-time high price for calculating returns). Though revenue has grown at 26% CAGR, Operating profit grown at 23% CAGR and Net profit also grown at 23% CAGR during the same period. The company is supported by a good management team, good business, leadership position into the industry. During March-2000, the company was traded at 64x P/E at the low price of Rs.138 and this multiple are common nowadays and we consider it as a quality company ask for the premium. We cannot estimate which valuation multiple is high or low but we can understand that what is reasonable and what is not.

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