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

Thursday, September 07, 2006

Framing of Decisions...

A decision is based on the frame using which it is viewed. People ought to make decisions based on the situation itself rather than the description of the situation. But, that hardly happens in the stock market. And, the way news is reported to investors also doesnt help.

Picture this, Our entire country is obsessed with the epidemic of fear based on Terrorism nowadays. If I was to ask anybody what they feared more, Death from a terrorist attack or a Car accident, they would in all probability end up saying a Terrorist attack. The probabilities of the Car accident have been underweighted substantially due to incorrect framing of the decision/response. The framing has been distorted due to the following Heuristic/Thumbrule built into us over the last thousands of years -

Availability - Individuals assess the frequency, probability or likely causes of an event by the memory's ability to recall its instances or occurrences. The role played by the press in "sensationalising" the terrorism aspect. The vivid images/Videos that we have been subjected to by the world press just add onto this bias.

This is just the tip of the iceberg, There are very many heuristic biases that affect our day to day lives, favourably or sometimes unfavourably with extreme financial harm.

Now, I do not know about the perfect way to counter this problem. What I do know is that a better decision maker relies on three constants -
a) A focus on decision process rather than outcome
b) A constant search for favorable odds
c) An understanding of the role of time