Reblog: 3 Mistakes Novice Investors Make All The Time & How To Avoid Them


Investing is a difficult business and that’s why most people under-perform the market. That said, here are three common mistakes novice investors make all the time and how to avoid them.

1) They Chase Price:

People do not fully understand the way the market works. The biggest lesson novice investors should learn is that the market is counter-intuitive in nature. The second biggest lesson is that successful investors separate price from value. A common mistake novice investors make all the time is that they tend to chase price rather than make decisions based on the underlying fundamentals.

2) They Confuse Price With Value

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Reblog: How Heisenberg’s Uncertainty Principle will help you make better investments


As mentioned in my previous blog on the double slit experiment, things can act as both particles and waves at the same time. In fact, it is known that everything in the entire universe acts in this manner. In 1927, German physicist Werner Heisenberg introduced the Uncertainty Principle which states that we can not measure both the position and the speed of a particle with total accuracy. The more accurately we measure one value the more uncertain the other becomes. Heisenberg’s notion can be used to explain a number of phenomena including and not limited to Alpha Decay, which is a type of nuclear radiation and the most common form of cluster decay.

But, how does this relate to investing? Unfortunately, this isn’t going to eliminate all uncertainty from your investments or your business but it will enable you to embrace it and use it in your favour. There will always be uncertainty and risk in everything you do, and it is important not to get caught up attempting to eliminate it all.

The goal of an investor is to reduce risk as much as possible while still making a desirable return. Yet, risk and return are closely related meaning there will always be a degree of risk if you want to make great returns. In fact, there are two kinds of risk, unsystematic risk and systematic risk. Unsystematic risk is also known as “diversifiable risk” and can be reduced through diversifying your portfolio. Systematic risk therefore relates to all other risk such as the kind that comes with the market. This risk can not be controlled and diversifying your portfolio will not reduce this risk at all.

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Reblog: Sun Tzu, The Art of War and your portfolio


Investing is full of sports metaphors, most of which are drawn from blood sports such as boxing, strategic team sports including football, and individual sports where brains are as important as brawn, such as golf. Those sports are all full of common metaphors drawn from warfare. In fact, all sports are, in essence, proxies for warfare, which makes a 2,000-year-old text particularly relevant to sports, but also to investing as well.

Translated into many languages and still referred to as one of the great works on military strategy and tactics, the lessons of Sun Tzu’s The Art of War are particularly relevant to investors as they navigate increasingly complex asset classes and investment strategies.

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Reblog: Some Common Mistakes by Investors


Over the last one year, I attended 3-4 fantastic value investing conferences. Many of the investors had spoken their heart out and many were not comfortable sharing their presentation publicly. Hence I have omitted the company and speaker names. But this compilation of mistakes of these investors could be helpful to both amateur and experienced investors.

Whenever I meet an experienced investor, I am more interested in their mistakes and not their success stories. I believe everyone investment philosophy should be as per their personality, so it’s not possible to follow someone else philosophy. But we can learn a lot from other’s mistakes.  According to Dhirendra Kumar of fund tracker Value Research, Prashant Jain of HDFC mutual fund did not manage funds differently from other fund managers. “He just kept it simple and committed lesser mistakes,”. Read this fantastic article by Shane Parrish on Avoiding Stupidity is Easier than Seeking Brilliance to understand the importance of studying mistakes.

Here is the list of mistakes shared by investors:

Management

  • Overlooking obvious good companies because of some small wrong acts of management eg. High remuneration, preferential issues at lower price etc. Refusing to invest in micro and small cap with fantastic business model and growth because of some IGNORABLE wrong acts of management is one of the most common mistakes.

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Reblog: A Little Knowledge is Dangerous


20How to Deal with Overconfidence in Financial Markets

It had been a little over a week since anyone had seen Karina Chikitova. The forest she had walked into nine days prior was known for being overrun with bears and wolves. Luckily, she was with her dog and it was summer in the Siberian Taiga, a time when the night time temperature only dropped to 42 degrees (6 Celsius). However, there was still one major problem — Karina was just 4 years old.

Despite the odds against her survival, Karina was found two days later after her dog wandered back to town and a search party retraced the dog’s trail. You might consider Karina’s 11 day survival story a miracle, but there is a hidden lesson beneath the surface.

In his book Deep Survival: Who Lives, Who Dies, and Why, Laurence Gonzales interviews Kenneth Hill, a teacher and psychologist who manages search and rescue operations in Nova Scotia. When Gonzales asks Hill about those who survive versus those who don’t, Hill’s response is surprising (emphasis mine):

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Reblog: How to Tell a Stock Market Correction From a Crash


News that the Dow Jones Industrial Average is down several hundred points sends shivers down the spine of even the most weathered investor. Such drops, while infrequent, can be scary because it’s impossible to predict how severe or long-lasting losses will be. And even if you trust the market will eventually rebound (as it always has), it’s hard to watch the value of your investments shrink before your eyes.

In the immediate term, people will argue about what to call it — a crash? A correction? Leave the vernacular to others, and instead understand what’s causing the market to fall. This knowledge may not bring your money back right away, but it could help you prepare for the market’s next move up or take advantage of lower stock prices in the meantime.

Defining a drop in the stock market


Reblog: Charlie Munger on Getting Rich, Wisdom, Focus, Fake Knowledge and More


“In the chronicles of American financial history,” writes David Clark in The Tao of Charlie Munger: A Compilation of Quotes from Berkshire Hathaway’s Vice Chairman on Life, Business, and the Pursuit of Wealth, “Charlie Munger will be seen as the proverbial enigma wrapped in a paradox—he is both a mystery and a contradiction at the same time.”

On one hand, Munger received an elite education and it shows: He went to Cal Tech to train as a meteorologist for the Second World War and then attended Harvard Law School and eventually opened his own law firm. That part of his success makes sense.

Yet here’s a man who never took a single course in economics, business, marketing, finance, psychology, or accounting, and managed to become one of the greatest, most admired, and most honorable businessmen of our age. He was noted by essentially all observers for the originality of his thoughts, especially about business and human behavior. You don’t learn that in law school, at Harvard or anywhere else.

Bill Gates said of him: “He is truly the broadest thinker I have ever encountered.” His business partner Warren Buffett put it another way: “He comes equipped for rationality… I would say that to try and typecast Charlie in terms of any other human that I can think of, no one would fit. He’s got his own mold.”

How does such an extreme result happen? How is such an original and unduly capable mind formed? In the case of Munger, it’s clearly a combination of unusual genetics and an unusual approach to learning and life.

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Reblog: 13 Simple Rules for Better Investing


The fund industry has grown massively in the last 25 years, and it has changed to a better-run, more professional, and lower-cost business, Here are some key lessons for investors:

  1. Build a plan for multiple investment goals and stick to it.
  2. Align your investments with each goal.
  3. Keep costs low, but evaluate whether some services like paying for financial or tax advice are worth the price if you don’t have the time or investing acumen to do it yourself.
  4. Choose funds that are good bets for five years from now because they have the depth of managers and analysts, low costs, and strong stew­ardship to keep them on the right path.
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Reblog: Separating the Dos From the Don’ts of Investing


In late July, Oaktree Capital’s Howard Marks put out a memo describing current investment trends that could turn out to be mistakes. Marks urged caution on equity valuations, low volatility, FAANG stocks (Facebook, Amazon, Apple, Netflix and Google), ETFs, interest rates, private equity, venture capital and even bitcoin.

Caution alone is not an investment strategy, so Marks penned a follow-up memo last week to give investors six options for how to invest in a low-return world:

  1. Invest as you always have and expect your historic returns.
  2. Invest as you always have and settle for today’s low returns.
  3. Reduce risk to prepare for a correction and accept still lower returns.
  4. Go to cash at near-zero return and wait for a better environment.
  5. Increase risk in pursuit of higher returns.
  6. Put more into special niches and special investment managers.

 And here’s how he would proceed, given today’s choices:

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Reblog: The Individual Investor’s Edge


“The goal of the non-professional should not be to pick winners – neither he nor his “helpers” can do that – but should rather be to own a cross-section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal.” — Warren Buffett, 2013 Letter to Berkshire Hathaway shareholders

As Albert Einstein wisely stated, compound interest is the eighth wonder of the world:  He who understands it earns it while he who doesn’t pay it.  The vast majority of individuals who take the initiative to accumulate savings should follow Warren Buffett’s advice on using index funds and dollar cost averaging to achieve satisfactory returns over time.  For those earning at or above the median wage in the United States, it would be very difficult to end up poor if one simply saves ten to fifteen percent of gross income and dollar cost averages into the S&P 500 over several decades.

But what about non-professional individual investors who want to achieve better than average results?  In the short run, the stock market resembles a manic-depressive character who bids up prices one day and sends them down the following day without much of a reason for the change in sentiment.  Benjamin Graham’s “Mr. Market” character perfectly personifies the psychology of financial markets in the short run.

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