Snowball your Savings

Snowball your Savings

  

“Stocks are the things to own over time. Productivity will increase and stocks will increase with it. There are only a few things you can do wrong. One is to buy or sell at the wrong time. Paying high fees is the other way to get killed. The best way to avoid both of these is to buy a low-cost index fund, and buy it over time. Be greedy when others are fearful, and fearful when others are greedy, but don’t think you can outsmart the market. “If a cross-section of American industry is going to do well over time, then why try to pick the little beauties and think you can do better? Very few people should be active investors.” - Warren E Buffett

Each sentence in the paragraph above is an investment tenet by itself. Lets break it down.

1.     Equities are the things to own over time. Productivity will increase and equities will increase with it. There are only a few things you can do wrong. One is to buy or sell at the wrong time.

2.     Paying high fees is the other way to get killed. The best way to avoid both of these is to buy a low-cost index fund, and buy it over time.

3.     Be greedy when others are fearful, and fearful when others are greedy, but don’t think you can outsmart the market.

4.     If a cross-section of American industry is going to do well over time, then why try to pick the little beauties and think you can do better? Very few people should be active investors

In simple terms, a snowball effect is a situation that increases in size or importance at a faster and faster rate.

Simply put: 

• Very few people have the time and inclination to be full investors. And this is not something to dabble in over the weekend. Start accumulating low cost index funds early in your life and keep snowballing it regularly. 
• Paying high fees means giving away snow from your snowball. Be careful. 
• The crowds get fearful at bottoms and at tops. But no one, not even Buffett or Soros or Rakesh or your local fund manager can ring a bell at the PRECISE top or bottom. But you can approximately time the market via following some simple rules. It is boring and its slow. But you are not doing this for excitement or entertainment. 
• Don’t be too cute and think that you can outsmart the market consistently over a long periods of time. If most retail investors were to even get market returns over a long time, they would end up far richer than trying to be extra smart. 

The market is like a haystack and everyone is looking for a golden needle in it. But if you could get access to a gold haystack then would you really waste time looking for a golden needle. There are lot of other things in life to focus on. Pick your share of gold hay and move on.    

To Be Continued.....

Day 21: Invest for a cause

And just like that I am on day 21. 

Today I am going to just talk about one point and that is please understand the difference between investing and speculating. Its not a simple trivial point. There are also no value judgements being cast about being a speculator. But unfortunately society tends to overrate investors and look down upon trader or speculators. 

Graham and Dodd many years ago said: Investment "is a convinient omnibus word, with perhaps an admixture of euphemism - i.e., a desire to lend a certain respectability to financial dealings of miscellaneous character."   

Investors provide long term patient capital and speculators provide short term liquidity and price discovery. We need both for markets to function efficiently. 

Warren Buffett is an investor and George Soros is a speculator. Both are very good at what they do and they are very successful at what they do. But they dont pretend to be what they are not. 

Warren Buffett offers a simple yet insightful take on this. Investment as Buffett explained: "And I say, the real test of how you - what you're doing is whether you care whether the markets are open. When I buy a stock, I don't care if they close the stock market tomorrow for a couple of years because I'm looking to the business - Coca Cola, or whatever it may be, to produce returns for me in the future from the business.” On speculation he said, "It's a tricky definition. You know, it's like pornography, and that famous quote on that". (Supreme Court Justice Potter Stewart famously wrote that, regarding whether something was pornography or not, that, "I know it when I see it.")

In short, Buffett basically argues that what separates and investor from a speculator is the intent of the person engaging in the transaction. However, upfront it is very difficult to provide a precise definition of both.

What is important is to know what your intent is: 

• Do you care the about price every hour or do you look at price once a month or quarter and evaluate your portfolio. 
• Do you buy because your friend is buying or are you buying because you understand the business and have done your homework. 
• Do you intend to hold on to the investment for atleast a few years or are in only for the next few days or weeks.

If you are able to answer these simple questions upfront before buying then you would know what you are doing.

Given below are list of blogs which have received the maximum page views, so I assume they have resonated with a lot of people.

1. Day 6 - Understanding Greed and Fear
2. Day 18 - Buy a home beta!!
3. Day 1 - Introducing "Behavior Gap"
4. Day 11 : Understanding Greed and Fear: Herding Bias
5. Day 19 - Mutual Fund - Index or Active Management

I have really enjoyed writing these blogs over the last twenty one days. I would be continuing to write on a weekly basis now. And I hope to be regular.

I would also like to say thank you to all the people who have contributed so far to my campaign for the Nudge Foundation. They are doing a wonderful job. I hope many of us come forward and support this cause.

You can contribute here: http://thenudge.ketto.org/anishpteli

Regards
Anish
QED Capital

Important Disclaimer: Please do not treat anything on my blog as investment advice. I do not provide any recommendations of any stocks or securities. Any stock mentioned may be merely by way of an example

Day 20 - Buying stocks - If you must

Its a full time business. Not a hobby. But most people treat it like one. Remember, you never make money off a hobby, you only spend it. 

Stocks are have a very high internal correlation than any other asset class. For eg the correlation between Tata Motors and HDFC Bank will be much higher than steel and crude oil. So I personally think obsessing with stock picking is overrated. If you pick the right sector and get the direction of the stock market broadly, your job is done. Even if you get the market direction right and buy good stocks, you are done.  

However here are some guidelines from Security Analysis by Graham and Dodd.

There are three aspects to consider while constructing your stock portfolio
1. The value of a stock depends on what it can earn on the future.
2. Good common stocks are those which have shown a rising trend of earnings. 
2. Good stocks will prove sound and profitable investments. 

Now lets do a very simple exercise. We will see the returns of Nifty of the past 5 years. And then i randomly picked some stocks to represent each sector.

So we see above that nifty has given annual return of 10.4% for the last five years. Now recount all the events that the market has seen to get here. 

1. Coal Scam and other UPA Scams 
2. Modi elected in 2014 
3. Three years of Raghuram Rajan
4. Taper Tantrum in the US
5. Ben Bernanke leaving and Yellen taking over
6. Start of rate hikes in the US
7. Greece crisis and talk of Grexit
8. Oil price collapse by 75%
9. Brexit
10. Trump election

I picked Sun Pharma, Infy, HDFC Bank, Hindalco L&T and Zee to represent Pharma, IT, Banking, Materials, Industrials and Media. 

The return that this portfolio made is 16.5% which was a big surprise to me also. Inspite of having laggards like Infy, Hindalco and L&T  the portfolio has done quite well. This is not a recommendation but just an example. A real portfolio should have atleast 10 stocks but not more than 15. Over 15 there is diminishing return from adding more stocks.

The important thing is not in the stocks picked but holding them through the events that we have witnessed. Temperament trumps intelligence any day in the investment business. 

Buy and hold doesnt mean never sell. Even Warren Buffett evaluates his portfolio and sells losers or books profits in stocks he believes are over valued. But thats the tough part that most people dont focus on - When to sell ?

Regards

Anish

QED Capital  

Important Disclaimer: Please do not treat anything on my blog as investment advice. I do not provide any recommendations of any stocks or securities. Any stock mentioned may be merely by way of an example

Day 19 - Mutual Fund - Index or Active Management

Occam's razor ( "law of parsimony") is a problem-solving principle attributed to William of Ockham (c. 1287–1347), who was an English Franciscan friar, scholastic philosopher and theologian. The principle can be interpreted as stating Among competing hypotheses, the one with the fewest assumptions should be selected.

Picking mutual funds is perhaps even more difficult than picking stocks for me. You cant talk directly to fund managers to find out what they are like. So you have to evaluate the fund house, fund returns and a bunch of numbers. Basically you are picking the guy who is going make decisions for your money but you have very little knowledge about him. When picking stocks, there is a lot more information available about the promoter of the company, media interviews and the fact that they have been managing the company for a certain time frame. Here you dont know how much skin the fund manager has in the game. While recently there have been disclosures in India about fund manager investments and their salaries, it is still not enough.

And then most of them dont even end up getting average returns.

In the US mutual funds, the S&P Index vs Active Report June 2016 reported that:

• Over the five-year period through June 30, 2016, 91.91% of large-cap managers, 87.87% of mid-cap managers, and 97.58% of small-cap managers lagged their respective benchmarks.
• Similarly, over the 10-year investment horizon, 85.36% of large-cap managers, 91.27% of mid-cap managers, and 90.75% of small-cap managers failed to outperform on a relative basis

You can read the entire article here

The good news is that in India the numbers are better. But its still about 50:50 chance. A coin flip. And the edge will diminish as the market becomes more institutionalised. 

So by Occam Razor's principle, I would pick an Index MF or ETF for the average retail investor. Now make no mistake an Index ETF is sold as a passive investment. It is not. It is a very basic trend following system where a committee lays down a set of rules and criteria of including and excluding stocks in the index. Stocks which fulfil the criteria stay and those which fail, go. Similar to trend following where winners stay and losers go. Remember our friend: Disposition effect - Holding on to losers and cutting winners. An index and trend following strategy do the opposite.

You can read more on this topic here:

1. The future is passive

2. Index Fund or ETF

3. MFs are not hands off investments

Another decision to make is whether one should make lumpsum investments or do an SIP. I would say do an SIP for your regular savings and if you do get a lumpsum windfall like a bonus or from sale of another investment, then invest that amount over 6-12 months and not immediately.

There is no need to have so many mutual fund schemes. There are perhaps more schemes than there are investible stocks in India. 

Regards

Anish

QED Capital

Day 18 - Buy a home beta!!

Upfront disclaimer: I may be suffering from a full blown case of confirmation bias and I may be looking only for information that suits my belief. So bear with me. 

Rent hai paraya, aur EMI hai hamara. Thats how homes are sold in India and world over. Playing on our primal instincts for shelter, this social construct is now an industry so large that the global economy can be bought down with it. 2008 is still fresh in our minds.

Germany is perhaps the only developed country where home ownership is not encouraged. Germany’s home ownership rate remains quite low at 43% in 2013 vs 66% for Britain in the same year and much higher in most other EU nations. The only populace that rents more than the Germans is the Swiss populace. And we all know that the Swiss and Germans are quite logical and rational albeit boring maybe.

You can read more here. Most Germans don’t buy their homes, they rent. Here’s why

The only reason one can perhaps buy a home if it is available at a reasonable price (as a thumbrule your house should not exceed 2-3 years of gross annual income at the time of purchase) is to use it as a piggy bank to save your surplus income. I doubt most homes in Mumbai would qualify. If you are not savvy enough to invest in equities and mutual funds, then perhaps a home is ok. But it would be stupid to buy one, especially at these rates, if you are a decently savvy and well informed investor.

Why It's Plain Stupid To Buy A House In India

A blog on this by well know finance advisor Subramoney : Should you buy real estate?

A table is worth a thousand words. So look at the post tax returns below. Assuming you can sell your property at will at the price you want, you would still make a much lower amount than equities and just as much as gold. 

But if you had bought Asian Paint shares versus a home, you would not have called people home for a Griha Pravesh and got some social rub off of owning a home. Imagine how the conversation would go: Your mother/father calls up your relatives and invites them home for a puja because 10,000 shares of Asian Paints are going to be credited to your demat account. So buying equity and mutual funds woudnt get you social prestige but it can make you rich if you are willing to postpone that gratification. 

The 14% of smart money that could exit between 2000 and 2013 has generated a mind boggling 2% IRR. And if the balance 86% smart money below could not exit, I doubt the average retail guy has much of a chance.

I may be completely wrong but thats my view. 

Next three days I will cover, picking mutual funds (which is even more difficult than picking stocks) and buying equity. 

Regards

Anish

QED Capital

Day 17 - What chance does the small guy have ?

One of the biggest myths prevalent in the stock market is the small retail investor is at a significant disadvantage to the professional investor be it a mutual fund manager or hedge fund investor or HNI. However that is not the case.

Size: WB has famously said in 1999 in an interview to BusinessWeek: "Its is a huge advantage to not have a lot of money. If I was running $1 million today, or $10 million for that matter, I’d be fully invested. Anyone who says that size does not hurt investment performance is selling. The highest rates of return I’ve ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.”

Career risk: Keynes said that it is better for career prospects to fail conventionally than to suceed uncoventionally. If you take risk and it pays off, in a fund, you may still get fired for taking too much risk. No one will fire you for buying HDFC Bank but you may get fired for buying a risky bank which may still turn out to be right. However as a small investor you have no such risk because you are your own client.




Institutional imperative: When you work as a fund manager in a professional capacity, you are paid for activity. You need to come up with new ideas all the time and keep on meeting company management or researching an industry and be active for the sake of it. The biggest asset in investing in being able to think for yourself and calming your selves down in this day and age of noise. Man's biggest problems come from not being able to sit in a room quietly or in some cases keep their fingers from tweeting randomly. Investing is watching paint dry. Its very boring. If you sit by yourself and come up with 2-3 good ideas a year, you wont have have that job for long. 

So the next time you think the market is tilted in favor of the big guys, think again.

Regards

Anish

QED Capital

Day 16 Check Check Check Mate !!!

Mohnish Pabrai is a classic value investor in the tradition of Warren Buffett, Charlie Munger and Seth Klarman. He currently manages an approx $500 mn fund which is highly concentrated. In the great crash of 2008, his portfolio got decimated and had a huge drawdown. It compounded at negative 47% almost a year and half - 2008 and 2009. He attributes this to hubris as he didn't have negative returns even in 2000 during the dotcom crash. He says that he completely missed the housing bubble.

Pabrai then drew upon the idea of a checklist from a NYT article and read The Checklist Manifesto by Dr Atul Gawande. Dr Gawande got the idea from the aviation industry where checklists were used to lower the number of human errors. 

An excerpt from the article:

"In 2001 a critical-care specialist at Johns Hopkins Hospital decided to give it a try. He didn’t attempt to make the checklist cover everything; he designed it to tackle just one problem: line infections. He plotted out the steps to take in order to avoid infections when putting a line in. Doctors are supposed to (1) wash their hands with soap, (2) clean the patient’s skin with chlorhexidine antiseptic, (3) put sterile drapes over the entire patient, (4) wear a sterile mask, hat, gown, and gloves, and (5) put a sterile dressing over the catheter site once the line is in. Check, check, check, check, check. These steps are no-brainers; they have been known and taught for years. So it seemed silly to make a checklist just for them. Still, Pronovost asked the nurses in his I.C.U. to observe the doctors for a month as they put lines into patients, and record how often they completed each step. In more than a third of patients, they skipped at least one.

The next month, he and his team persuaded the hospital administration to authorize nurses to stop doctors if they saw them skipping a step on the checklist. This was revolutionary. The specialist and his colleagues monitored what happened for a year afterward. The results were so dramatic that they weren’t sure whether to believe them: the ten-day line-infection rate went from eleven per cent to zero."

Pabrai studied his own investing errors and asked the question as to were there factors which were clearly visible before the investment was made. In most cases where the investment went bad, he found that the factors were visible. He looked at his own portfolio as well the portfolio of investors like Warren Buffett etc. and studied their mistakes and if these mistakes were identifiable at the time the investment was made. He then came up with his check list which has about 97 questions.

He also talks to a like minded investor, who has no vested interest in the outcome, and runs him through his investing thesis. This is a good way to check confirmation bias.

So depending on whether you invest directly in equities or indirectly in mutual funds, you must have a written down checklist of factors that you must keep in mind while making any investing decision. We may think that we have covered all factors, but very often we miss a few often. 

I have my own checklist and I urge you all to make yours too. 

If you want help on making one, please email me and I shall be happy to help you with it. 

Regards

Anish

QED Capital

Day 15 - Mind it!!!

For the past 8 days I have gone on and on about biases and today I am going to tell you that while it difficult to overcome these biases, it is not impossible to reduce the effect that they have.

A famous behavioral finance professor carried out this experiment in her class. She asked all the students to write down the last two digits of their cell phone number on a piece of paper. And then she asked them to estimate the number of countries that are there in Africa. Then she collected all the papers and showed that those whose cell phone numbers were higher offered higher estimates. Then she did it again after telling the students that they had been warned. And the same result emerged again.

So what this tells us that just being aware of a bias is not enough to overcome it. We see it all the time in real world too. Cigarette warnings, fat content warnings on junk food, need to exercise et al. We know all of this but find it hard to follow them. Because we are humans. This is harmful to our physical health.

And the behavioural biases are harmful to our financial health but we still continue to be plagued by them.

The one way I have learnt to atleast move one step ahead of just knowing that I have a bias, is to figure out a way to pause between a thought/stimulus and action. Its called being mindful. Mindfulness is said to be a buddhist concept and has been made popular in the west by Jon Kabat-Zinn.

And the way to pause is to check yourself before acting on your thought and the best way to do it ....you guessed it...have a checklist of things to keep in mind before acting.

Mindfulness and use of checklists may perhaps be the single most concept that I can perhaps try and convey to all the readers. Being mindful and using checklists has not made me error free. I still make errors. But I make fewer errors and usually I dont make the same ones again.

Tomorrow more on checklists. Today lets pause and be mindful.

Regards
Anish
QED Capital

Day 14 - Putting the biases together

Today I am going to try and show you how these four biases which I have written about early impact each stage of decision making in investing. 

• Confirmation Bias :The tendency to ignore information contradictory to prior beliefs or look for information confirming prior beliefs.
• Herding : Also known as the “bandwagon effect,” herding is the tendency for individuals to mimic the actions of a larger group.
• Anchoring Bias :The tendency to rely too heavily on the first piece of information received.
• Disposition Effect: Investors tend to sell winners too early and hold on to losers too long.

The starting point for a retail investors starts off with a belief about which he/she has already made up his/her mind. And then they look for information to confirm that belief. They think they can understand or analyse the impact of demonetisation on the indian economy, Or the benefits of GST implementation or how inflation will impact the RBI's decision in the next credit policy and so on. 

At times the belief also stems from herding i.e. a colleague, friend or neighbour has "apparently" made a lot of money from that idea and you just cant be left behind.  

And they have the friendly business channels also to their rescue. If you close your eyes and try and listen for about 5 mins to what the anchors are saying something about the day's market movement, it will not amount to anything. That's 5 mins of your life you will never get back. (I have tried it). 

Investors also believe they will correctly able to assess the impact of all this on the earnings of a company, on the sector and then are able to also express this into a position i.e. buy or sell or hold. Most of the time its a buy. And once they get some information that supports their prior belief, they get heavily anchored to that. And even if by chance they get information to the contrary they will find it hard to disregard the earlier information. 

Now it is virtually impossible to get someone to consistently do all of the above. Not even Rakesh Jhunjhunwala or Warren Buffett will get all the time. Infact Steve Cohen has famously said that his best traders are right on a trade only 50%  of the time. So now where does that leave the average retail person. 

But with a high degree of confidence and ego invested, if the stock starts going south then disposition effect (tendency to hold on to losers) kicks in. One will tend to hold on to it even if the orignal investment belief is proven wrong and information is available to that effect. 

And if by chance, the stock goes up, then itchiness to sell the stock and book profit kicks in. Greed and ego wants to lock in the gains. 

However there is one place where one can get away with all this. Read the next two paras from an article by Barry Ritholz.

"In politics, you can get away with this. Voters live in bubbles of their own making -- the selective perception and confirmation bias through which they view the world. The penalty for fabricating your own reality, false though it might be, seems to be minimal or nonexistent in politics. Voters live with the consequences of the ballots they cast, though the effects may not be felt for years. Making up alternative facts about childhood vaccines, the unemployment rate, climate change or where your predecessor was born certainly hasn’t hurt Trump -- it may even have helped him win the election.

Investors, however, aren't quite so lucky when their belief systems diverge from reality. Mr. Market seems to take delight in taking money away from those whose capital is deployed based on a set of faulty convictions. This is why I harp on cognitive issues, the importance of understanding your own psychology and, most recently, not mixing politics with investing."

You can read the entire article here.

There are many other biases but these four are key. And today I will end here and from tomorrow we will move on to other aspects of investing like the nature of markets and how it is complex adaptive system which is never in equilibrium and then how trends are formed. 

Thank you too all of you for reading and supporting. You all know who you are. I really appreciate the support and encouragement. 

Regards

Anish

Day 13 - Understanding Greed and Fear: Anchoring Bias

Anchoring Bias :The tendency to rely too heavily on the first piece of information received

Most vegetable vendors in Indian markets use this bias to great effect while bargaining with buyers. The first quote that they give is high but not so high so as to drive the buyer away. And then the negotiations anchor around the first quote. Sometimes the buyer will wear him down and sometimes they get the better of the buyer.

Even auction houses use this bias by setting a reference price or a reserve price. Given below is an example of a bid for a wine bottle. Both the bidders are first asked their social security number and then asked to bid for the bottle. Both give widely different bids, which are close to their social security number.

In the context of investing, this effect plays out when investors get anchored to their buy price. All their future decision making then is referenced around this buy price. And then this bias feeds into the Disposition effect that I wrote about here. 

Remember Disposition Effect is the effect to hold on to losers and sell winners early.  

And once price goes below the buy price, most investors will not sell it until is comes back to break even i.e. the buy price. Another way it plays out is when a stock falls from a recent high and buyers rush, anchoring their reference point to the recent high and think they are buying at a discount. 

Tomorrow we will tie up the key biases that I have written about.

You can read more about Anchoring Bias here 

Regards

Anish

QED Capital  

Important Disclaimer: Please do not treat anything on my blog as investment advice. I do not provide any recommendations of any stocks or securities. Any stock mentioned may be merely by way of an example.

  

Day 12 - Understanding Greed and Fear: Herding and Magazine Covers

I came across these magazine covers today and they totally fit in with the point I want to make about herding. 

Also with the Dow Jones Index finally hitting 20,000, Barron's has decided to put it on the cover and make a prediction yet again. But dont sell your stocks just yet. 

Number one coming up is the crude oil chart. When Crude oil was at approx $105/bbl in July 2011, Barron's put out a cover saying get ready for $150. And Oil just decided to top out there and then in Feb 2016 when oil was at $35 , Barron's again put out a cover saying get ready for oil at $20. The oil chart with monthly chart is given below. They got the top and the bottom almost accurately - Just in the opposite order.

Now in February 2016 when the markets dived, Barron's put out this cover with Sanders and Trump on the cover saying that markets are concerned about the rise of these two extreme candidates. See the weekly chart of the Dow Jone for 2016 and 2017 below.

The covers above clearly show that how media tries to marry the narrative with price. Markets are a complex adaptive system and do not follow a linear set path. Even if one is able to predict the outcome of a certain economic or political or social event, it is next to impossible to call the next month , quarter or year move. Because no one knows for sure what the market has already priced in and what it is expecting. It is clear only in hindsight.

And when a mainstream business magazine puts out some prediction on its cover, you can be rest assured that it is already a crowded trade i.e. the sheep have been rounded up and FOMO is driving the ones who are left out.  

And now for the scary cover before I go sleep.

All the best. Please support the Nudge Foundation. They are doing a wonderful job. You can donate here. No amount is too small or big. Your participation will give the foundation and me a lot of joy and encouragement.

Regards

Anish

QED Capital  

thenudge.ketto.org/anishpteli 

Important Disclaimer: Please do not treat anything on my blog as investment advice. I do not provide any recommendations of any stocks or securities. Any stock mentioned may be merely by way of an example.

HT:@charliebilello

Day 11 : Understanding Greed and Fear: Herding Bias

Herding Bias: Also known as the “bandwagon effect,” herding is the tendency for individuals to mimic the actions of a larger group.

Shepherds, Teachers and Pied Pipers in the stockmarket use this bias to great effect. I used to observe my kid's teachers. They ensure that and the first 3-4 kids were walking properly in line and then rest of the class would line up. Shepherds identify the leader in the herd and use them to keep the rest of flock in control. There are many in the stock market who use this a lot. Financial news channels who get "ëxperts" to predict the next 50-100 point "big move". I only have one question for the viewers: If the experts knew, why are they still coming on TV and telling you all this. After all the stock market is a zero sum game. But humans are gullible and want to be led like sheep. 

Adult humans are bit more complex but as a group they behave similarly. There is a modern word for the bandwagon effect - FOMO - Fear of Missing Out. The younger generation uses this word a lot. But it has been around for centuries. Everyone wants to be cool, have the latest "in things" etc.

And hence diamonds are sold not because they convey your love for your beloved effectively, but because everyone does it. Everyone wants the new iphone, the new "new" thing.

As I explained in the blog on how bubbles are formed. When a sound rational premise is taken too far, price action takes over. We dont pause to think if the original premise still holds true. If it has been true for so long it must be still true. I repeat a paragraph from that blog because it is a recent and very prevalent example.

In his testimony to the Financial Crisis Investigation Committee, Buffett is said that the housing market demand was driven by a sound reason to buy a home because over a period or time it costs more to buy a home and if you are going to buy a home to reside in it then it better to buy early than later. However, as time passed genuine demand for housing began to taper off, but the supply of financing continued to be strong. And this caused housing prices to go up and at some time buyers were buying homes not because they wanted to stay in those homes but because prices were increasing at a rapid pace and cheap financing was available. And a sound investment premise became a bubble. The crossover point is known to none. And that's what makes it a market.

A trader wakes up in Tokyo and looks at what US has done overnight. Indian trader wakes up to see what Singapore, Hkg and Tokyo are doing. Europe ambles in about 5 hrs later and checks what Asia is doing. And US wakes up again to see what Europe is doing and where Asia has closed. And then the merry go round starts again. 

Investors and traders are lemmings. No one wants to be left behind even if one is jumping off the cliff. 

But thats how it rolls.

About 100-150 people are reading this blog everyday. Thank you very much for it. And only 5 have contributed so far. So please use your online payment method and make a contribution.

http://thenudge.ketto.org/anishpteli

More tomorrow.

Regards
Anish

Day 10: Understanding Greed and Fear: Confirmation Bias

It is going to be a short blog today.

Confirmation Bias is one of the most lethal biases and also very hard to detect. It has a overlap with Conviction. Its a slippery slope.

And hence one of the best ways to avoid it is to 

• Seek out data contrary to your belief
• Try to disprove your own theory
• Talk to someone who is not invested in the outcome of your idea

However being aware of this is not the only way to overcome confirmation bias. Before making a buy decision it is best to put down on paper or make a note of why you are buying the stock. It need not be a very detailed note but even if you make a half pager covering the salient points it should be enough. A very importannt component of your note should be the scenario in which your investment thesis is proven wrong and what action would you take in that scenario. I will try and provide a format in the coming days. 

Going back to the Day 6 blog, profits take care of themselves, losses seldom do.

And hence when a stock goes in to a loss , that is when we start looking for data points to justify our decision to keep holding on to our position. It hurts our ego to book a loss and there is also FOMO (Fear of Missing Out) incase the stock starts going up after we sell it. And some stocks will. 

Here are two intersesting articles to read on confirmation bias.

• How Investors Suffer From Confirmation Bias
• Why We Think We’re Better Investors Than We Are

Wishing you all a very happy Republic Day.

Regards

Anish

 

Day 9 - Understanding Greed and Fear: Confirmation Bias

Belief: If Trump wins, markets will tank, gold will go up. If Hillary wins, markets will rally.

Confirmation Bias: All kind of data was mined and displayed. This is the 2nd/3rd longest bull run in history. It wont last. A Trump victory will result in flight of capital from equity and into safe haven assets.

Reality: Today the Dow Jones has hit 20,000. It was 18200 odd on November 8th 2016 when Trump won.

Now we dont know how the year will pan out but it sure has started well.

Markets and equity markets in general are all about the narrative. Humans are very uncomfortable with uncertainty and randomness Everything has to have some explicible cause. Hence there will be multiple stories with healthy doses of hindsight how they saw a rally or crash coming.

At this stage I must introduce this excellent book by Michael Mauboussin called The Success Equation. Michael does a great job of explaining how luck and skill impact various professions.

Below is the luck and skill continuum. Investing and trading fall somwhere closer to luck than to skill. Not to say that there is no skill there but chance plays a big role. 

So how do we avoid falling prey to confirmation bias? 

• Seek out data contrary to your belief
• Try to disprove your own theory
• Talk to someone who is not invested in the outcome of your idea

There is a very thin line between conviction in your idea and having a confirmation bias. But then that is what makes investing challenging.

I hope you enjoyed reading the blog. If there is any feedback or comment please feel free to write to me or in the comments section below.

And also contribute to my campaign http://thenudge.ketto.org/anishpteli

Regards
Anish
QED Capital

Day 8 Understanding Greed and Fear: Confirmation Bias

After Disposition Effect, today I am going to talk about another very prevalent bias in our behavior: Confirmation Bias. Confirmation bias is when someone forms an opinion and then will accept only information that agrees with it discounting or ignoring everything else.

To understand this, we have to take a step back and understand how belief's work and affect us. Over a period, a limited set of experiences take root in our brains and give rise to our Core Beliefs. Most of the time these beliefs govern our behaviour in the real world and protect us from danger and harm. As a result, we also carry over or extrapolate these to challenges in the modern world where the dangers are more mental or to the mind. At times we also get blinded by these beliefs which lead to mistakes that can have serious repercussions.

Let us see some very famous examples of beliefs leading to confirmation bias and the consequent outcome.

Belief: President Bush believed that Iraq had Weapons of Mass Destruction. Confirmation Bias led him to see and believe only data which supported his belief. And we know how it ended. When the US army invaded Iraq, they found no weapons of mass destruction.

Belief: Donald Trump was a joke and that Hillary Clinton was going to win the primaries and then the US presidential election? Nate Silver,someone who hasnt been wrong for a while now, for example, said Clinton had a 99% chance of winning the Michigan democratic primary. Confirmation Bias led someone as data driven as Nate Silver to ignore what his data and models were telling him and he let his beliefs take over under the excuse that Donald Trump was an out lier as a candidate. Result: Hillary Clinton lost Michigan Primaries to Sanders and also lost Michigan and also the election to Trump. Sui Generis was Silver's excuse
.

Belief: Closer home let us look at a recent event. The belief was Demonetization will result in black money hoarders not depositing money in the banking system. Hence almost 20-30% of the currency in circulation will not come back. This was stated by the Attorney General in the Supreme Court. Now we dont know what were the assumptions or data backing the decision of the RBI and the Government but its more likely now that they presented data which supported this claim rather than looking at the data objectively and then coming to a conclusion. Instead today it is estimated that 95% of the money has come back into the system. Now the jury is still out on the longer term benefits of this exercise but the quick win of a windfall gain for the goverment has not materialised.
                                              

If such smart, resouceful and powerful entities and institutions can fall prey to confirmation bias then you can imagine what the average retail investor faces.

Tomorrow we will see precisely that.

Regards

Anish

http://thenudge.ketto.org/anishpteli