Monday, February 13, 2017

This time it's different

“This time it’s different”. I bet these words have cost investors more money that any other since the inception of stock market. In fact, I would go out on a limb, and say that these words have probably lost investors more money than any wrong analysis or forecasts. These four simple words that make everything that we KNOW is wrong seem right. This time it’s different.

Market at historically overpriced P/E ratios? Company using non-GAAP or new accounting measures while reporting earnings? An overpriced IPO with very little cash flow? A business that you don’t understand but everyone says is critical to the “new economy”? Well, don’t worry dear reader. The answer to all the above questions is “This time it’s different”. I know you feel better already.

I consider myself to be a mostly rational, logical member of the human species. I am not easy to fool, at least in my opinion. But I must be an excellent salesperson, because every time I say these words to myself, I am able to justify to myself my every investment that I think is not quite right. 

Speaking for myself, I have learnt the hard way to watch out and be extra cautious whenever I find myself using these words. Of course, that’s only true when I am not using the five words that have probably lost investors even more money than these four words. “This time it REALLY is different”.

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Saturday, December 24, 2016

The Secret to being a Successful Investor

“If one negligently leaves the bath running with the baby in it, one will realize as one bounds up the stairs towards the bathroom, that if the baby has drowned one has done something awful, whereas if it has not one has merely been careless". I didn't say it. Thomas Nagel did. I just copied pasted it. Because it made me realize something. That this could be it!! After all these years of reading and learning and making mistakes (and repeating these steps again and again, though not necessarily in the same order!), I have quite accidently stumbled upon the secret to successful investing. The difference between success and failure. The answer is actually quite simple. Luck! Just plain ol’ simple dumb luck!

I know you are disappointed with the answer dear readers. But please bear with me. Just indulge me and read the above quote once again. What defines the magnitude of our mistake is not the nature of the mistake itself, but its consequences! Looking back at all the mistakes I have made in my investing lifetime (so far), I realize that I have been extremely lucky! Actually, I can hardly believe how lucky I have been. If all the mistakes that I have made had ended with the worst-case scenario, I doubt if I would have ever had the opportunity to learn from them. Or I would have learnt from them, but would certainly not have had the resources to implement my “learnings”. After all, there are just so many times you can lose your entire bankroll and start all over again.

So many times, we make the mistake of attributing our good luck to skill. And we attribute our bad luck to, well, bad luck. In fact, this phenomenon is so common, that there is a whole mental model about it. Self-serving bias.

“A self-serving bias is any cognitive or perceptual process that is distorted by the need to maintain and enhance self-esteem, or the tendency to perceive oneself in an overly favorable manner. It is the belief that individuals tend to ascribe success to their own abilities and efforts, but ascribe failure to external factors.” - Wikipedia

No matter what investing school you belong to, fundamental or technical, value or growth, there is a great amount of forecasting attached to it. Forecasting, by its very nature, involves uncertainty. And uncertainty involves probability. The easiest way to increase your odds of success is to reduce your odds of failure. And the simplest way to reduce your odds of failure is to learn from your mistakes and avoid repeating them in the future. Every little mistake ticked off results in increasing the odds of success. But like we said in the beginning, the magnitude of our mistakes is not defined by the nature of the mistakes themselves, but by their consequences. And this is exactly where luck comes in! What if the initial few mistakes all had dire consequences!

I believe I am becoming a smarter investor every year. Not because I am closer to finding any secret stock picking formula, but because with passage of time, I can now recognize mistakes that I have made in the past that I had never noticed before. And that, I believe, holds the key to being a successful investor.

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Monday, November 28, 2016

The market is going down

It's certainly been a long time since the last blog post. Long term investing sure is fun if you like watching paint dry. Luckily for me dear readers, it turns out that I actually do like watching paint dry. And its all the more fun if the paint company in question happens to be a sizable chunk of your portfolio! If you are Indian or invest in the Indian stock market, no prizes for guessing which is this paint company!

Anyway, in the last blog post, written on 31st July, I had commented about the negative divergences appearing in the Indian stock market. Here's a copy of the chart that I had posted last time.

Well, the prediction has played out perfectly and the market has fallen a good 10% from its highs. And here's how the index looks currently.

Pat pat. That was me patting my back. But seriously dear readers, I have to admit here that I didn't expect the market to fall this much. Same why like I didn't expect Donald Trump to be the leader of the free world. Same way like I didn't expect 500 and 1000 rupees currency notes to be banned in India. I guess my predicting abilities do have their limitations. So much for the pats on the back.

Anyway, the same negative divergences pattern is now appearing in MACD in S&P. 

Is the market headed for a fall? I think so. 
When will this fall happen? No clue. Your guess is as good as mine.
How much will it fall? I can give you the next support levels but so can any guy with crayons who can drawn horizontal lines and trend lines.

Come to think of it, I can't tell you much. But what I can tell you, and luckily for me, it turns out that this is the most important thing in investing, is that how I will react and what my reaction is going to be when the market falls. There are very few things that you and I can predict, and even fewer things that we can control, but we certainly have control over how we respond to these events. Do you have a game plan ready for when/if the markets fall 10% from here?

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