Very happy to be back to my blog post routine, there was a gap of 1month, since I am busy with a few personal tasks.
Now I am returning to the blog post with a bang.
The below interview of Howard Marks is a goldmine of knowledge about investing, in simple terms 50 years of investing experience.
Warren Buffett has written of Howard Marks: “When I see memos from Howard Marks in my mail, they’re the first thing I open and read. I always learn something”
Please listen to this to this wide range of conversation with Tim Ferriss and enjoy.
I highly recommend you to listen to Tim’s podcast.
A Hidden Cost Called Rented Suit Liability (Safal Niveshak)
Warren Buffett explained the idea of long-tail hidden costs in his 1985 annual letter
A man was traveling abroad when he received a call from his sister informing him that their father had died unexpectedly. It was physically impossible for the brother to get back home for the funeral, but he told his sister to take care of the funeral arrangements and to send the bill to him. After returning home he received a bill for several thousand dollars, which he promptly paid. The following month another bill came along for $ 15, and he paid that too. Another month followed, with a similar bill. When, in the next month, a third bill for $15 was presented, he called his sister to ask what was going on. “Oh”, she said. “I forgot to tell you. We buried Dad in a rented suit.
Every business has three main stakeholders: Investors, employees, and customers.
Investors are easy to please, Mackey said. They just want to stock to go up.
Customers want good products at good prices with good service. Hard but simple.
Employees are another story. Their needs are endlessly complicated.
“If you don’t pay them enough they’re unhappy. If you pay them more, they’re still unhappy if they lack opportunities to advance. If you pay them a lot and give them opportunities, they still may hate their boss,” he said. Or their coworkers. Or their commute. Or they get tired of doing the same thing. Glimpses of satisfaction followed by a gravitational pull towards wanting something else.“
By three methods we may learn wisdom First, by reflection, which is noblest; Second, by imitation, which is easiest; third, by experience which is bitterest.
In this post, we will see some of the most common mistakes we make while investing.
Humans are hard-wired with emotion, we are risk averse, we anchor to our purchase price, we are all manipulated with hindsight bias. Difficult as it is, we must figure out how to prevent previous mistakes from interfering with future decisions.
The best way to learn how hard investing is to do it yourself. The second best way is to examine the mistakes committed by the worlds most successful investors.
The best way to learn to invest can only be done through practice. You can’t learn how to invest through reading a book on investing, you just have to do it over and over and over again.
I hope you will enjoy the post as much as I did enjoy writing it, let’s go and see the mistake of some of the most successful investors.
1. Benjamin Graham
Benjamin Graham, the dean of Value investing has written Security Analysis in 1934 which are just as relevant today as they were in 1934. Ben Graham is to investing as what Wright Brothers are to flights.
Value Investing is
“to purchase a security at less than their intrinsic value as determined by careful analysis, with particular emphasis on buying less than liquidation value”
The most important lesson investors should take from the person who taught us the difference between value and price is that value is not a Solution. Cheap can get cheaper. Rich can get richer. Margins of safety can be miscalculated, and value can fail to materialize.
Value investing is a wonderful option over the long-term, it is not immune to the short-term vicissitudes of the market.
Try to Avoid Value Traps
It’s critically important to be aware of the value, but it’s more important not be a slave to it. Graham Taught us that there are no iron-clad laws in finance and that cheap can get cheaper.
2. Jesse Livermore
was a full-blooded character who happened to embody every trade maxim of the time.
Here are some of the quotes from the famous trader and market speculator
“They said there are two sides to everything. But there is only one side to the stock market and it’s not bull side or bear side, but the right side”
“The training of a stock trader is like a medical education. The physician had to spend long years learning ”
“I had made a mistake. But where? I was bearish in a bear market. That was wise, and I had sold stocks short. That was proper. But I have sold them too soon, and that was costly. My position was right but my play was wrong”
“Always sell what shows you a loss and keep what shows you a Profit”
“a man must believe in himself and his judgment if he wants to make money a living at this game. That is why I don’t believe in tips. If I buy stocks based on smith’s tips I must sell those stocks based on Smith’s tip… No sir. nobody can make big money on what someone else tells him to do”
“All my life I have made mistakes, but in losing money I have gained experience and accumulated a lot of valuable don’ts. I have been flat broke several times, but my losses have never been a total loss. I always know I would have another chance and that I would not make the same mistake the second time. I believed in myself”
What can we learn
“if a man is both wise and lucky, he will not make the same mistake twice. But he will make any other ten thousand brothers or cousins of the original. The mistake family is so large there is always one of them around”
Investing is inherently an act of uncertainty, so we can never say to ourselves “I’ll never let this happen again”. Risk Management is part of investing. Repeating is part of investing. its all part of investing.
Focus on avoiding unforced error.
3. Mark Twain
A Humorist and a highest paid writer in America.
When Dollars transmitted from our pocket to an investment, the expectation is they’ll become more in the future. But when the results disappoint us, we are loath to admit we are wrong. Our natural tendency is to hold onto the losers.
we are deferring the defeat and keeping our ego intact.
In the world of finance, nothing springs eternal like hope. we will watch out holdings fall 5% loss becomes 10%, with fear as it becomes 20% and utter terror as it falls any further.
He has speculated in a lot of new ventures and often throws good money after bad money, which resulted in his bankruptcy.
Great Line to Describe the danger of holding on to losers
“I will get out when I’m even” is a poisonous thought.
“A stock that fell from $100 to $20, that doesn’t mean it can’t easily fall to $10”
40% of stocks that experienced a 70% decline from which they never recovered.
“If you ever find yourself in a hole stop digging”
Some of his quotes
” A banker is fellow who lends you his umbrella when the sun is shining and wants it back the minute it begins to rain”
“I was seldom able to see an opportunity until it had ceased to be one”
“There are two times in a man’s life when he should not speculate when he can’t afford it, and when he can”
What can we learn?
Risk and reward go together as copy and paste; there cannot be one without the other.
Keep your losses manageable
The best way to avoid catastrophic losses is to decide before you invest how much you are willing to lose, either in percentage or dollar terms
This post is part 1 of the Big Mistakes by Great investors, we will release the Part 2 soon…
We hope you have enjoyed reading this post, if like it please share this post with your friends and family.
This memo covers three ways in which securities markets seem to be moving toward reducing the role of people:
(a) index investing and other forms of passive investing,
(b) quantitative and algorithmic investing, and
(c) artificial intelligence and machine learning
A fascinating discussion, please read it and enjoy!!
Every week I go through a ton of reading, these are the interesting content I found useful for this week.
I hope you will enjoy as much as I do.
If you enjoy it please share and comment your feedback.
Quote, I’m pondering —
“The big question about how people behave is whether they’ve got an Inner Scorecard or an Outer Scorecard. It helps if you can be satisfied with an Inner Scorecard.”
— Warren Buffett
Enjoy and Have a Great Week End.
A Collection of Quotes from legendary investor and thinker. Take time and think deeply about each quote, we can find answers to most of our questions about life, investing, happiness.
If You find useful please share it with the people you love and care.
“The best thing a human being can do is to help another human being know more.”
“Own Great Businesses and Do Nothing”
Most of history is made by those who mastered the art of doing nothing when nothing needed to be done, their doing nothing can be more important than their inclination of doing something.
My basic idea is 99% of Investing is doing nothing the other 1% is the Visible part so it’s all we talk about.
Doing something contrarian to overcome mediocrity, requires you to take a bold action. Capitalism job is to allocate capital to successful business, which seeds its own decline if you tend to make a lot of decisions.
Surviving the decline & let compounding to work requires enough buffer, Doing Nothing will minimize the number of rash decision and builds up capital, this is the difference between getting rich and staying rich.
Good Strategies rarely requires action, swinging for the fences and being conservative are not mutually exclusive, and the most enduring businesses and investors have elements of both, usually at the same time, often feeding off each other.
I have never seen Warren Doing DCF (Discounted Cash Flow Analysis on a potential investment), we expect investment opportunities to present themselves and shout at us. -Charlie Munger
Doing Nothing will help you to grab these low-lying fruits.
Charlie Munger deal making philosophy is
“Look at lots of deals and don’t do almost all of them.” Combine these two quotes: “In my personal portfolio I’ve sat for years at a time with $10 million to $12 million in treasuries. Just waiting, waiting. A lot of people can’t stand to wait. It takes character to sit there with all that cash and do nothing.” “The wise ones bet heavily when the world offers them opportunity. They bet big when they have the odds. And the rest of the time, they don’t.”
What is Investing?
An investment is an operation “That promises the safety of principle with satisfactory results”
Investing is not a science, it is Discipline in which both skill and luck play a major role. Security analysis is the prescription for maximizing the influence of former and minimizing the later.
What is Stock Market?
Stock Market is a place where you can own a Part ownership of a business. If the business you own makes money you will also make some money, it’s as simple as that.
So the game is how to select a profitable business?
If you have the temperament to behave like a real owner of a business, over a long period of time you can be wealthy.
What is an ‘Auction Market’?
An auction market is a market in which buyers enter competitive bids, and sellers enter competitive offers at the same time.
The price at which a stock is traded represents the highest price that a buyer is willing to pay and the lowest price that a seller is willing to sell.
Matching bids and offers are then paired together, and the orders are executed.
The stock market is an auction-driven market.
Why is Stock Market so Volatile?
“In the short run, the market is a voting machine but in the long run, it is a weighing machine.” ― Benjamin Graham
How can you take Advantage of Volatility in Markets?
Mr. Market is an allegory created by investor Benjamin Graham. Graham asks the reader to imagine that he is one of the two owners of a business, along with a partner called Mr. Market. The partner frequently offers to sell his share of the business or to buy the reader’s share. This partner is what today would be called manic-depressive, with his estimate of the business’s value going from very pessimistic to wildly optimistic. The reader is always free to decline the partner’s offer since he will soon come back with an entirely different offer.
Since its introduction in Graham’s 1949 book The Intelligent Investor, it has been cited many times to explain that the stock market tends to fluctuate. The example makes it clear that the sole reason for the change in price is Mr. Market’s emotions. A rational person will sell if the price is high and buy if the price is low. He would not sell because the price has gone down or buy because the price has gone up. Graham instead believes that it is important to focus on whether the stock valuation of a company is reasonable after calculating its value through fundamental analysis.
How to Select a Stock/Business?
We want the business to be:
- One that we can understand with favorable long-term growth prospects,
- That has a Competitive Advantage,
- Operated by honest and competent people, and
- Available at a very attractive price.
What is a Good Business?
A Good Business is one which is
1. Strong barriers to entry (Great Moat)
2. Limited Capital Requirement
3. Reliable Customers
4. Low risk of technological obsolescence.
5. Abundant Growth possibilities
And thus Abundant growth possibilities
LIC, Britannia, Nestle, Bata, Colgate, Amazon, Google, Coca-Cola
How to Value a Business?
It’s an estimate of the current value of the future expected cash flows of the company discounted at the appropriate rate.
Valuation of a business requires you analyzing the financial filings of the company. Intrinsic value is an estimate rather than a precise figure.
Current Earning of Company A = 1.03
Both Earnings and Dividend expected to grow at 15% pa
If Earnings grow at 15% next 5 years Future Price to earnings will be 10 times earnings, this is the estimate of the analyst.
Discount rate to us is 12% (in general we will use the interest rate on long-term bond)
FV = (PV * (1+r)^n)
FV = Future Value
PV = Present Value
r = Rate of return per year
n = Number of terms
Since we expect 10X of future earnings
Price = 10(1.03(1+.15)^5)
5Y FV Price = 20.71
Now Discount it to Today value at 12%
PV = FV/(1+r)^n
PV = 20.71/(1+.12)^5
PV = 11.75
Conservatively valued Company A is valued at 11.75 (We did not consider Dividend and taxes), if the current market price of Company A is 7.5 you will have a margin of safety of 40% which make a good buy.
How Common Stocks Compounding works?
If the companies in which you invest earns profits, and if the management of those firms retains a portion of those profit into business, and if those retain earnings, in turn, produce future earnings, the principal value of the portfolio would tend to increase in accordance with the operation of compound interest.
Stock Market history
Fear and Greed Plays a Major role in investing.
Be fearful when others are greedy and be greedy when others are fearful.
Below Chart Shows the Market volatility with growth higher than previous levels.
“The most important investment you can make is in yourself.”
― Warren Buffett
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Howard Marks is one of the most respected minds in investing community. His quarterly letter are wisdom nuggets.
Below is the transcript of the latest news letter, in which he discussed Current Market Environment, Bitcoins, Passive Investing.
On Current markets is it time to be in or out of the market?
I am not that “smart to tell its time to get in, or get out of the market”, so the correct answer is always somewhere in between.
No one can predict the future, but we all should know where we are standing now in the cycle is important.
Based on the valuations we can see that we are on top of the bull market, so proceed with caution.
So How to Play Now?
Changing our assets allocation from aggressive to the defensive mode is a more cautious approach.
Are we in a Bull Market? What are the Indicators?
FMO (Fear of missing out) can be taken over from value discipline, a development that is a sure sign of bull market.
Bull markets are always indicated by a set of few leading companies selling at very high multiples, these are the indicators of a bull market. E.g. FAANG (Facebook, Amazon, Apple, Netflix, Google)
Is it time to Sell my Stocks or ride the bull market?
People are waiting to ride the bull market and planning to sell if the market is down a couple of days, but no one knows how much will it drop? What happens if the drop drags back to the fair value of the security?
No one can ascertain when we are at the exact top or bottom, the key to success in investing is to sell out when we are close to the top of the market and buy when we are closer to Bottom.
Are We in a Bubble?
He also doesn’t see any bubbles, but since the valuations are high hence the current environment is risky.
In the current markets,
1. You can buy undervalued stocks with caution
2. Expect low returns
3. When you don’t find any you may remain in cash position
There are a lot of confusions about bitcoin, is it a currency, an Asset class, Payment Mechanism, or a medium of Speculation.
Let’s take a case of viewing bitcoin as a Currency (Digital Currency).
The main purpose of a currency is it’s a legal tender of exchange agreed by most people (Used to buy and sell goods), storage of value, and Medium of exchange for other currency.
If we consider bitcoin as storage of value, serious investing is buying things relative to the underlying intrinsic value of an asset, speculation is simply what the other person is willing to pay & does not depend on its underlying intrinsic value. It seems to be more of a speculative asset class
If you compare Bitcoin against any other currency (Dollar…) is no different, except most people agreed to use it as a legal tender.
For long periods currencies are backed by gold are silver, but that’s no longer the case, hence this makes fiat currencies no different from digital currencies, except fiat currencies are backed by the government.
If more people accept bitcoins as a legal tender there is no chance it cannot be a currency.
But the main problem comes from its volatility of value. Bitcoin has increased in value more than 3900% for the last three years. This makes the holders not to spend it freely and stores it to sell for higher profit. This violates the purpose of a currency.
Why is it so volatile? Is it desirable? Value of 1 Bitcoin today is around 16000$,
Can a bitcoin buy the same amount of goods worth 16000$?
These questions still remain unanswered
Bitcoin as a payment system?
Will the banks and other financial systems accept the territory of bitcoin? What if Amazon announces its own? Will you pay with Bitcoin or Amazonians?
Finally, if you think Bitcoin can grow in value 50X, this attitude is a lottery ticket attitude where the odds of success are too low, but potential growth is huge. The common cause of catastrophic events
Bitcoin is not alone, there are hundreds of digital coins – eleven include more than 1 billion market cap. Which one will turn out to be a winner? We Don’t Know
Howard Marks finished Bitcoin as a speculative Bubble & he is willing to be proven wrong.