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I was intrigued by the new series, Scam 1992: The Harshad Mehta Story at Sony Liv. An absolute stunner!! Many important lessons to be learnt, both in Investing as for Life. I couldn’t resist myself from putting down the dialogues below (verbatim) and some of my interpretations below:
Inability to control the emotions of Greed & Fear leads to committing mistakes – in Life, as well as in Investing. Benjamin Graham, the father of value investing and Warren Buffett’s Guru, advised to make friends with stock price fluctuations. Graham used a brilliant metaphor to capture this idea. He asked investors to imagine someone called Mr. Market to be acting as your partner in a business. Sometimes, Mr. Market is in an elated mood and ready to buy your stake in the business for a very high price. That is where Greed sets in and one ideally should start to sell to Mr. Market.
On other occasions, Mr. Market could be very pessimistic and is ready to sell his stake for a very cheap price. This is time for maximum fear and pessimism and ideally one should start to buy from Mr. Market
He comes to your doorstep every-day with a price quote and he doesn’t mind being ignored. What you need to learn is that Mr. Market is there to serve you, not to guide you.
Market is more rational than emotional. That’s precisely the reason market participants say “Bhaav Bhagwaan Che” – Market Price is God, but this is not always true!! Sometimes, the market turns more emotional than rational. When market turns emotional, an independent prepared investor needs to understand the emotionality of the market along with his; this is when money gets made!!! More at Investing Lessons from Sherlock Holmes – Lesson 12
Self-denial is like fooling yourself and you are the easiest person to fool. The innate confidence that things will become better is what keeps us going. After all, its hope that keeps things ticking!! However, one should differentiate between daydreaming and being realistic.
There are times wherein we don’t sell our losers, knowing fully well that either the stock selection is incorrect, or the company’s fundamentals have weakened since the time the stock was purchased. Psychological biases, viz. Social Proof (if we have told the entire world about our investments), Loss Aversion Bias (Pain of losing is much higher than the pleasure of gaining), Confirmation Bias (tendency to interpret information that confirms our prior beliefs) do not enable us to take decisions rationally.
Fear always results in higher intensity of market corrections as compared to the rise in the markets. Now, it is only when there is fear in the markets that you should start getting greedier and vice versa. However, in order that you are able to execute it, your investment framework, philosophy and ability to understand answers to some basic questions should be crystal clear.
Some of the questions which has bode me well from a framework perspective, especially when company’s stock prices have tanked:
Read more at Market mayhem+Investing Framework!!
You will end up making mistakes on your investments, no matter, how much caution you exercise. Hence, it is important to have a robust investment process and philosophy, so that your probability of making mistakes get lowered. I have penned down my Investment philosophy here
Some of the greatest investors or entrepreneurs had failed miserably initially to become successful eventually. This happens all the time!! However, the key lesson here is that you need to stay and survive in the game.
Its only when Radha Kishan Damani, one of the “R”s of the bear cartel led by Manu Manek (The Black Cobra) moved out of the stock market on incurring huge losses and then concentrated building the retail behemoth, D-Mart that he created stupendous wealth for himself and his shareholders ultimately. (Avenue Supermarket, aka D-Mart’s market cap: INR 1,284 Trillion, ~USD 17.1 Billion as on October 16, 2020)
The other “R”, Rakesh Jhunjhunwala, who was also part of the bear cartel and who lost heavily during Harshad’s bull run is now considered India’s Warren Buffett and is worth upwards of ~USD 2 billion.
As Howard Marks of Oaktree Capital has very succinctly said: “It’s more important to ensure survival under negative outcomes than it is to guarantee maximum returns under favourable ones.”
Playing ON and Playing WITH the trust of the people are diametrically opposite. Many a times, bankers and advisors provide wrong investment advice based on the trust which investors place on them. This short-sighted behaviour and the lure to get bonuses and carry at the expense of gullible investors is what has resulted in many stringent rules being placed upon them. After all, trust once lost is very difficult to regain.
In my recent post of Curse of Assured Returns!! I wrote about how it’s best to separate turds from Raisins. After all, you get rewarded optimally both from an insurance and Investing standpoint only by keeping them separate!!
Stock price is a function of Rationality and Irrationality. Most times, wherein the price seems to be in congruence with the rational elements, i.e. fundamentals of the company. However, irrationality in terms of emotions and volatility create risk perception. At times, perceived risk perception takes over the fundamentals!!
Obviously, this comes only from the experience of investing. As Don Vito Corleone in Godfather said: “I have learnt more in the streets than in the classroom”
Investors often tend to weigh the opinion of an authority figure more heavily, thereby leading to Authority Bias. Humans usually have deep-seated duty to authority and tend to comply when communicated by an authority figure.
In the investing world as well, the common investors usually get influenced or mis-influenced by some of these authority figures, however, we can perhaps avoid or reduce this bias by following the famous mathematician, Jacobi’s Inversion principle – Invert, Always, always invert.
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Thank you Yuva members for organising such a fun and informative lecture. We enjoyed it a lot. Meeting and learning from Mihir Sir was really an amazing experience. And this is not only our feeling but all the students enjoyed his lecture very much and look forward to many such events.