Jerry Tsai You’re not as smart as You Think

BM C07 01

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-

BM C07 02

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.

BM C07 03

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.

Infy new

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.

BM C07 04

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

BIBLIOPHILE: THE MOST IMPORTANT THING BY HOWARD MARKS “Combating Negative Influences”

In this article, I am going to discuss regarding the psychological factors which affect our decisions negatively.

CNI01

Market many times provide us an opportunities to earn superior performance through inefficiencies, mispricing, misperception, mistakes of other people.

But the question is why such opportunities come? What makes us different from other people? Why mistakes do occurs?

CNI02

We need to analyze data and reach the conclusion. In investing errors occurs not due to analytical factors but errors mainly come from psychological factors.

Let’s look at the few psychological elements which affecting the investment decisions.

First emotion is GREED – Desire for money.

Most of us are making an investment for making more money. If we don’t care about the making more money than we are not going to make an investment.
And also there is nothing wrong with trying to make money. The market and economy run because of our desire to make money. But we should remain careful with a transformation of desire towards greed.

CNI03

Real estate

Real estate sector in India in the year 2007-08 creates a bubble and huge jump in the optimism by everyone. Such situation resulted under the sharp fall in the value of the sector.

Deepak parekh

Due to an impact of greed, people hope that their strategies help them to produce higher returns without taking higher risk for forever. And due to this hope, many times people hold highly priced securities with expectations of more appreciation can be possible. Many times such expectations went wrong and prove that expectations were unrealistic and people have ignored the risk.

Opposite of Greed is FEAR. As similar to the greed, excess fear is also harmful to the investors. Excess of fear stops us from taking a constructive decision while actually, we require taking such decisions. Due to fear, many a time we cannot able to make a good investment and also lose the opportunity.

The third factor is PEOPLE’S TENDENCY TO DISMISS LOGIC.
Generally, it happens that people stop using logical thinking and they start doing work with an irrational mindset. Many a time, we are not ready to accept logical reasoning for the situations and work as per unrealistic scenario. We do not apply what we have learned in the past but get easily deviate from those learning.

CNI04

When market or a particular strategy starts generating higher returns for a while, then we started believing that it will continuously generate such returns without an involvement of risk.

Howard Marks called such situations as “Silver bullet”, the Holy Grail.

But is it really same strategy keeps on generating higher returns without risk?

CNI05

As Warren Buffett mentioned, when prices started rising then it affects to the reasoning power of the people. It led to mania and situations of mania results towards the bubble.

The fourth factor is THE TENDENCY TO CONFORM TO THE VIEW OF THE HERD RATHER THAN RESIST.

Many a time, we started Believing to the crowd and starts to take an action as per the crowd behavior. Though behavior of the crowd is harmful and dangerous to us.

CNI06

The fifth factor is ENVY. Envy comes into the picture when we are comparing ourselves with others. And envy works as a negative force which affects our decisions.

When we see that our investment is growing then we remain happy. But the time we start comparing our investment returns with investment returns of others then we become sad. Now, envy starts showing its color and we make decisions which we may not take or which may be harmful to the financial health.

It is very difficult to see the higher growth of other compared to our growth.

Dost-fail-ho-jaye-to-dukh-hota-hai-lekin-dost-first-aa-jaye-to-jada-dukh-hota-hai

The sixth factor is EGO. Ego gets satisfaction while we generated higher returns compared to others. And we are keeps on evaluating our return in the short term. While we should focus on the longer horizon returns rather than keeps on tracking returns in the short term and also try to get out of the trap of ego. Ego can be harmful to the financial health. We keep on demonstrates that how much we know much compared to others rather than focusing on how much we know and how much we do not know.

CNI07

The seventh factor is the CAPITULATION. It means investors give up towards the situations while economic and psychological pressure becomes irresistible.

Many a time, overpriced assets become more overpriced, and underpriced assets become more and cheaper. This scenario affects to the psychology of investors and repetitions of such situations inspired investors to give up towards the situations and make investment decisions without using logical reasoning.

CNI08

When few or all the factors combined then it affects to the investor’s decision making and that affects the market. This resulted in the mistakes and those can be expensive for our financial health.

Psychology in IPO is funny. When our friend is applying to IPO and we asked for the business then he doesn’t know about the business. But he is applying for getting good returns. And he continuously getting higher returns and such higher returns earned by our friend attracts us to make an investment into the IPO. And such situations keep on repeating & more people get involved into the IPOs.

IPOs

CNI09

CNI10

CNI11

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