Thursday, January 11, 2007

New Books I read...

Benjamin Graham - Memoirs of the Dean of Wall Street
Classics - I - Ellis
Classics - II - Ellis
Value Investing - Greenwald
More than you know - Mouboussin
Intelligent Investor - Again !!??
Wall Street Meat
Paradox of Choice
Benjamin Graham on Value Investing

Monday, November 27, 2006

Analysis, Paralysis and Decisions...

Truth - The more choices people face in life, the more likely they are to simply do nothing.

The above can also be encapsulated in a simple phrase - "Paradox of Choice"

This phenomena which was presented to us by Kahneman and Tversky explains a lot of irrational behaviour which arises in the stock market. The simplest way for a broker to make his client buy something is to tell him about this ONE big wondeful story that would get the client "wet". Ever wondered why the broker never tells his client about 4-5 equally enticing stocks. Simply, because in practice evolution the brokers have picked up this skill that too many choices will make sure that they end up confusing their client and not earning any commision.

Ever tried buying a new cell phone. The choices are galore, the models are breathtakingly beautiful, and almost everything has most of the features but NOT ALL the features. I recently tried buying an instrument and ended up confused after a day of searching for the "perfect" model for me.

Humans by their very nature are an optimising rather than a satisficing species. We try to optimise everything thing that we do in order to get the optimal result. This can be disasterous sometimes, if we arent focussed enough

More later...

Probability and Life...

There is a lot of difference between subjective judgement and impersonal probability. And because of the way our brains are "wired", we fail to decipher this difference in real life.

Many a times we take life to be too harsh or unfair to us. Psychological fragility explains our tendency to feel more aggrieved when an event which our non mathematical brain judged as unlikely occurs.

As behaviourial economists have noted, people tend to exaggerate the likelihood of events that are new, emotionally stirring, dramatic, or concrete, and tend to underestimate the probability of events that are old, emotionally neutral, boring, or abstract.

As humans, we use frames of reference and for each and everyone of us, these frames are different. These frames define our "view" of the world. And this is slighly tilted in favour of the right side of our brains. We would rather chat with others than try to figure out the patterns and probabilities around us. Then, there is the fat tail which throws a spanner in a lot of finance based theorems.

For example, all the new finance theories that I was taught were based on the normal distribution curve or the bell curve, but what the Professors did not care to tell me was that the world does not function this way. It is too messy and too complex and very, very inter connected.

Now, I am very lucky that I slept through most of the finance classes. Mark Twain's words come to mind - "I was brilliant, education ruined me"

Wednesday, November 01, 2006

Arbitrage is intellectually stimulating...

In economics, arbitrage is the practice of taking advantage of a state of imbalance between two or more markets: a combination of matching deals are struck that capitalize upon the imbalance, the profit being the difference between the market prices.

In the stock market arbitrage comes in very many varieties -
a) Buyback Arbitrage
b) Delisting Arbitrage
c) Mutual Fund Arbitrage
d) Difference between BSE and NSE or other exchanges
e) Merger Arbitrage
f) Demerger Arbitrage
g) Litigation Arbitrage

That just about covers what I know of.

The best part about an arbitrage is that it pits you against intellectually superior people working in Hedge Funds and other investment houses. You are forced to raise your level of performance just to keep up with them.

You have to look at the same scenario as everybody else and come out with the best Highest reward - Lowest risk solution to the problem. In case, you are not able to, like poker, just walk away.

The need for this arises in sustained bull runs for most value oriented individuals/funds, when pickings are slim and the probability of buying anything cheap declines substantially. You have to be on the lookout all the time to avoid the "value traps" also.

Thursday, October 19, 2006

My Favourite poems...


by W.E. Henley

But of the night that covers me,

Black as the Pit from pole to pole,

I thank whatever gods may be

For my unconquerable soul.

In the fell clutch of circumstance

I have not winced nor cried aloud.

Under the bludgeonings of chance

My head is bloody, but unbowed.

Beyond this place of wrath and tears

Looms but the Horror of the shade,

And yet the menace of the years

Finds, and shall find, me unafraid.

It matters not how strait the gate,

How charged with punishments the scroll,

I am the master of my fate:

I am the captain of my soul.

The Road Not Taken

by Robert Frost

Two roads diverged in a yellow wood,

And sorry I could not travel both

And be one traveler, long I stood

And looked down one as far as I could

To where it bent in the undergrowth;

Then took the other, as just as fair

And having perhaps the better claim,

Because it was grassy and wanted wear;

Though as for that, the passing there

Had worn them really about the same,

And both that morning equally lay

In leaves no step had trodden black.

Oh, I kept the first for another day!

Yet knowing how way leads on to way,

I doubted if I should ever come back.

I shall be telling this with a sigh

Somewhere ages and ages hence:

Two roads diverged in a wood, and I-

I took the one less traveled by,

And that has made all the difference.


by Rudyard Kipling

If you can keep your head when all about you

Are losing theirs and blaming it on you;

If you can trust yourself when all men doubt you,

But make allowance for their doubting too;

If you can wait and not be tired by waiting,

Or, being lied about, don't deal in lies,

Or, being hated, don't give way to hating,

And yet don't look too good, nor talk too wise;

If you can dream - and not make dreams your master;

If you can think - and not make thoughts your aim;

If you can meet with triumph and disaster

And treat those two imposters just the same;

If you can bear to hear the truth you've spoken

Twisted by knaves to make a trap for fools,

Or watch the things you gave your life to broken,

And stoop and build 'em up with wornout tools;

If you can make one heap of all your winnings

And risk it on one turn of pitch-and-toss,

And lose, and start again at your beginnings

And never breath a word about your loss;

If you can force your heart and nerve and sinew

To serve your turn long after they are gone,

And so hold on when there is nothing in you

Except the Will which says to them: "Hold on";

If you can talk with crowds and keep your virtue,

Or walk with kings - nor lose the common touch;

If neither foes nor loving friends can hurt you;

If all men count with you, but none too much;

If you can fill the unforgiving minute

With sixty seconds' worth of distance run -

Yours is the Earth and everything that's in it,

And - which is more - you'll be a Man my son!

Tuesday, October 17, 2006

Buybacks...A little complicated

First Observation - Share Buybacks seem very simple at first glance
Second Observation - They are not !

What is a company offer to buyback its shares - A company buys back its own shares with cash and either cancels them or keeps them in treasury for re-issuing them later.

PS - In India Cancellation is a requirement as per law

Now I got interested in two share buybacks of sorts in the last week. I have not participated in either and have derived some investing wisdom out of the entire exercise.

Steps to be followed by me in the future -
a) Check the SEBI website for the buyback offer document
b) Read and reread the document and keep the number of shares outstanding and the number of shares to be bought back central to all calculations.
c) Check the market price of the share before the buyback was announced
d) Check the amount of money pledged to take care of the cash requirements because of the buyback offer

What happens is that the offer is normally for a certain share of the outstanding stock. An individual investor has to think about the acceptance ratio of shares which would be tendered to the company under the buyback offer.

The tradeoff to be calculated is that if the company buys back 25% of the total non promoter holdings of 50%, that means out of 100 shares that I buy, 50 will be bought back ( Working on a proportionate basis, which is the normal case ), Am I ready to be stuck with 50 shares of the company which will NOT be bought back.

This is the worst case scenario as there are approximately 20-30% shareholders who do not participate in the offer due to numerous reasons ( Brain Dead Investors )

One of the companies had a P/E ratio of 32 and a current market price which was more than 5 times book value. I was not comfortable holding 50 shares of this company especially when the fact that the market is at 13000 levels and there is a "supposed" bull run on is factored into the trade off equation.

One easy calculation is the break even price of the lot of shares that you would want to buy. This atleast gives you a clearer picture about what sort of price would have to be sustained in order for you to make a reasonable profit from the overall transaction.

Monday, October 09, 2006

Flexibility - Another necessity...

Recently somebody said, "Hey, you lost weight," and I said, "Yeah, thirty-five pounds and three and a half billion dollars." So I'm quite a bit lighter and more flexible than I was.
John Malone

Flexibility is a much needed resource in Investing and life in general. People generally fall in love with their ideas, their decisions, their Spouses...

Investors suffer from Inconsistency bias and dissonance when they realize that the stock which they thought had great potential for reward is a lemon or their much valued tip from a stock broker does not stand up to somebody's thorough analysis of the company and it's stock. And then what do they do, they stick to their original choice in spite of logic prompting them to change their minds and sell the stock.

Galbraith said -
“Faced with the choice between changing one's mind and proving there is no need to do so, almost everyone gets busy on the proof.”

Changing one’s mind about an earlier held idea leads to an acute dissonance and most people aren't comfortable with this situation. So, they clam up and stick to their guns. There is another term which describes this condition better - Psychological Denial.

Necessity of Innovation...

If we take the field of value investing, it boasts of stars like Benjamin Graham, Warren Buffett, Charlie Munger, Walter Schloss, Michael Price, Andrew Weiss and many others. All the above mentioned stars have distinct stock picking methods but the same philosophy as the guiding light i.e. Value and Graham

After studying books, articles and academic papers on value investing, I have realized that no perfect method exists that can be picked up without any improvisations and adopted. Innovating continuously is the essence to finding one's own method or methods which can be used and that method has to be individualistic i.e. dependent on the person because everybody's level of risk tolerance, patience and synthesis abilities are different.

Trying out different variations of the themes of value investing, getting used to the routine of carrying out a similar activity day in and day out (For me, it is looking for bad news in the newspapers), understanding the real time psychological factors at play in the stock market are just some of the tasks for anybody wanting to seriously invest using a value approach.

Herein comes in the importance of a sound theory structure as advocated by Charlie Munger in one of his speeches. With a robust theory structure we can tackle the above tasks with much more surety and less strain. Mind you, it cannot guarantee success but it can surely tilt the odds in your favor. This also means that instead of letting the stock market be our master, we can have time tested and successful value investing approaches which would rest on a sound theory structure and would be the guiding light for us.

The theory structure can be derived from exposure to the markets or exposure to reading material and experiences of others. I prescribe to the second way, because it is cheaper and my limited ability to synthesize new information at a fast pace negates the first option. I would rather learn from other people's mistakes than make mistakes and lose money myself. And reading should encompass finance, psychology, probability and economics related books so as to help one in understanding the working of the business and the share market in deeper detail.

Saturday, September 30, 2006

New Books I Read...

Moneyball - Lewis
Great Works - Kafka
Margin of Safety - Thanks to Koushik
Good to Great - Jim Collins
The Money Game - Smith
How to think like Benjamin Graham and .... - Cunningham
The little book that beats the market - Greenblatt
A Devils's Chaplain - Dawkins
A short history of financial euphoria - Galbraith
The Great Crash - Galbraith
The Rediscovered Benjamin Graham
Biography of Edward De Bono
Intelligent Investor - My Favourite :-)
NCFM Modules :-)

Lot of material from Tweedy Browne, Michael Mauboussin and others...

Dalal Street and me...

My Friend - Mayank, my broker says this stock is dead, it is illiquid, I will lose money on it. And you're going on and on about it being a good bargain. It trades 1500 shares in a day.

Me - P*****, your broker is supposed to make money OFF you, not for you. If you buy a stock which is not among the current favorites that means in all probability you want to hold it for the long run. The broker will lose out on his commissions. The shorter your holding period for your stocks, the more your broker will earn. He is a parasite who just wants you to trade, trade and trade, and he does not give a rat's ass whether in the long run you increase your capital or not.

My Friend - The broker knows stuff, he has been in the market for a long time, he has insider information all the time.

Me - Then why isn’t he driving a Ferrari?

We talked a lot, but you get the general idea how our conversation went.

The point is, WallStreer/Dalal Street thinks for itself. There are just two fundamental things in the stock market Debt and Equity. And the rest of the "instruments" are all typical inventions of the market to rip off people.

Options, Futures, Puts or calls etc etc etc, I classify everything apart from Debt and Equity as a means of making a fool out of myself. The concept of puts can be used to invest in complex securities or situations but I would rather do it after atleast a period of six odd months.

When will we get it? All the market wants us to do is trade. It doesn’t care whether I go bankrupt (They invented Margin trading to make the road to bankruptcy smoother), it doesn’t care whether I even understand what I am doing (Never could understand the different strategies for derivatives trading), it just cares for itself and it's cronies.

Cronies - Brokers, Investment Bankers, Financial News Channels.

I define the stock market as the mass of people who compose it and whose buying and selling actions and misreactions dictate prices.

Cynicism is a life skill for an investor. And it should be utilized to the full extent when dealing with either the market or the "cronies" of the market.

We are bombarded with useless noise/financial news 24/7 on television. Even the smallest rise is made out to be an "opportunity" for individual investors. The analysts on television are articulate, very reputed and supremely confident. They sell us the sizzle instead of the steak day in and day out. Pretty anchors keep most men hooked onto the channel.

I think, the combination of such enticing entities makes for an exciting time pass.

Whenever I watch CNBC India, I switch off the sound and just watch the anchors. Some of them are the stuff that most men's dreams are made off. I would love to date them, but I would kick myself if I took investment advice from them. I am not being sexist; I actually wouldn’t take investment advice from anybody ( I would rather learn about different concepts and ideas from somebody with a Value orientation who knows lots more than me )

I came up with my own explanation for one of the numerous jargons that is used all the time on TV -

Resistance Level - (My Take) Strong Resistance level at 0, not too sure about other numbers