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The Stoic Investor
‘The STOIC Investor’ is a series of uncommon yet thought provoking insights which will help investors in their journey from being a ‘Common Investor’ to an ‘Ideal Investor’. Today the word ‘Stoic’ is used to describe someone who remains calm under pressure and avoids emotional extremes. For the purpose of this newsletter, we refer to ‘The STOIC Investor’ as an investor who is Realist (avoiding extreme optimism and extreme pessimism), Resilient (withstand difficult conditions) and Rational (who acts with logic and reason). This series curated and penned by Mr. Nimesh Chandan, Head - Investments Equities at Canara Robeco, provides a fresh perspective to look at things which we may already be aware of.
Jun 12, 2020, Issue #22
“If making mistakes is the inevitable cost of striving, correcting mistakes – and learning how to avoid repeating them – is the best measure of a learning organization”. - Charles Ellis
It is surprising that, despite having the potential to add immense value to the investment process, the checklist is rarely discussed in B-schools, investment firms, journals or forums. An Investment checklist is a set of questions or areas of enquiry that one has to complete before making an investing decision.
Jun 05, 2020, Issue #21
If only Markets were like a Casino!
“In this world, nothing can be said to be certain, except death and taxes.” – Benjamin Franklin
Extreme moves and one-time events have significant impact on the investment returns. Investors have to learn to manage uncertainties. And to manage them, they need to understand this distinction between Risk and uncertainty.
May 29, 2020, Issue #20
THE LAST ITEM IN PANDORAS BOX!
Charlie: “Our investment strategy was simple. People hate to think about bad things happening, so they always underestimate their likelihood”.
Jared (Narrator): “Their strategy was simple and brilliant. Jamie and Charlie found (that) markets will sell options very cheaply on things they think will never happen. When they were wrong, they were wrong small. But when they were right, they were right big.
– From the Movie “The Big Short” (Scene introducing Brownfield Capital)
May 22, 2020, Issue #19
Less in Hand Lingers more in Mind!
Elder Shafir and Sendhil Mullainathan conducted several experiments to study the effect of scarcity on decision making and published them in an amazing book by the title, “Scarcity”. Scarcity, in this context, is defined as having less than you feel you need. This concept is relevant for not only money, but also for things like time or affection. When we don’t have enough of something, the mind gets absorbed by it, we subconsciously think about it all the time and that affects our attention and decisions in other areas.
May 15, 2020, Issue #18
Newton’s apple, Lorenz’s coffee and Complexity!
Max Plank, a Nobel Prize winner in Physics once told Economist John Maynard Keynes that he had once considered going into economics, but he decided against it because – it was too difficult. “Too Difficult” for a person who was responsible for the development of quantum physics! Most physicists were obviously referring to the difficulty of forecasting human behavior. Under this context, it seems surprising that Economics suffered what is called a “Physics Envy”.
May 08, 2020, Issue #17
The Problem of Overconfidence
Terrence Odean (one of the leading researchers in behavioral finance) shows that overconfident investors—who believe that the precision of their knowledge about the value of a security is greater than it actually is— tend to trade more frequently. And furthermore, that investors who trade more frequently tend to have inferior outcomes on an average.
Optimism, confidence and conviction are important in investment decision making, but in the right measure. An investor who is less accurate and overconfident will quickly lose money.
May 01, 2020, Issue #16
An Investor learns from the Grand Master!
Although Chess and Investing are quite different, there are many lessons that investors can take from the game. I found areas where the chess champion’s thinking process had elements that investors can use in building a good investment process.
A Stoic investor is a ‘consilient investor’ who derives knowledge from various fields to improve investment results.
April 24, 2020, Issue #15
Most of the time, when I talk to investors about value investing, they still picture buying a company with low price-to-book ratio or a low price-to-earnings ratio or (at the most) a company with good dividend yield. While these are short cuts to assess a relative value of a company, value investing in not about buying the cheapest companies on these parameters. Value Investing is a broader philosophy which involves buying companies at a price which is lower than their intrinsic value. For most people this is common sense. Why should one buy a company or an asset higher than its intrinsic value anyway?
April 17, 2020, Issue #14
North by North West
”I am not a professional security analyst. I would rather call myself an insecurity analyst.” – George Soros
Recognizing that one can be wrong in decision making, and thereby being insecure about it, is actually a strength. Trying to falsify the investment hypothesis using mental models will highlight areas of risk. Identifying and measuring risks increases the strength of the investment case and helps improve investment decisions which lead to better outcomes over a longer term.
April 10, 2020, Issue #13
Missing the Forest for the Trees
Attention is scarce and there is enough noise in the financial markets to keep investors distracted from their core investment process. Here I use ‘noise’ as representative of data / news flow / small events which ideally should not have a significant impact on the investor’s decision- making process (unlike information). However, noise does take focus away from long term investing and leads to shrinkage of investment horizons. Noise creates excitement and anxiety; and induces participants to trade more. Investors tend to fall into cognitive traps and swing with the crowd thereby compromising their investment returns.
April 03, 2020, Issue #12
The Four Herbs
Investment is most intelligent when it is most business like – Benjamin Graham
In a market fall, like the one we are currently experiencing, correlations between stocks shoot up. Companies with good businesses and competent management also fall along with bad ones. It is prudent for an investor to gradually accumulate these fallen angels rather than trying to predict market bottom. This requires a thorough analysis of business characteristics of a company rather than pure quantitative analysis.
March 27, 2020, Issue #11
The Ways of a Swan
In this issue I talk about :
March 20, 2020, Issue #10
Traditionally, the investor has been the man with patience and the courage of his convictions who would buy when the harried or disheartened speculator was selling. If the investor is now to hold back until the market itself encourages him, how will he distinguish himself from the speculator, and wherein will he deserve any better than ordinary speculator’s fate?
March 13, 2020, Issue #9
Experience, Memory and Markets
A lot of investors have experienced investing during crashes in the past. They carry a memory of how crises are an opportunity to increase allocation towards equity markets. And how ultimately, they make great returns when the markets bounce back. At the onset of every new crash, these investors recall those memories. The ‘remembering self’ recites to them the story of how profitable investing during bad times is. However, the ‘remembering self’ has not captured all the moments of the past. The ‘experiencing self’ went through every moment of fear, agony and anxiety that comes with contrarian investing during the previous crashes. But most of these moments are lost and only the happy endings dominate the story...
March 6, 2020, Issue #8
Investors might choose to hold on to the losers and sell the winners believing that today’s losers will be tomorrow’s winners. If these assessments are based on thorough evaluations, then this is a right approach. Unfortunately, experiments have shown that many a times the only reason for such a behavior is irrational expectation about short term mean reversal.
February 27, 2020, Issue #7
The Reflexive Relationship of Market Variables
At some point in time, the rising stock price and high expectations represented in the prevailing bias become vulnerable to disappointment. Eventually, the trend does not sustain and the correction sets in. If the fundamentals had become too dependent on the stock price, the correction would turn into total reversal. In that case, stock price falls, fundamentals trend is reversed, and expectations fall even further. A self-reinforcing trend begins on the downside. Eventually the downturn also reaches the climax and reverses itself.
February 20, 2020, Issue #6
The Talk Market
… While disciplines like Anthropology, Political Science, History, Psychology and Sociology give adequate importance to the role of narratives; Economics and Finance have lagged far behind. Narratives influence our decisions on how and where to save, spend and invest. However, economic models have not acknowledged this important role of narratives.
February 13, 2020, Issue #5
The Warmth of the Crowd
Neurologists have found that the parts of the brain that respond to exclusion, were the same parts that responded to physical pain. In other words, the feeling of being excluded or rejected provoked the same sort of reaction in the brain that physical pain might cause. Standing against the crowd is hence extremely painful.
However, for successful investing, contrarian thinking is important...
February 6, 2020, Issue #4
The Mind sees what it chooses to see…
This story of the Procrustean Bed is used to describe how people try to fit facts into a preconceived theory. Researchers have shown that we actively seek out only the information that supports our beliefs or actions and ignore or undermine the information that is contradictory. This tendency affects investment decisions too. It comes in the form of two characteristics of our behavior - Confirmation Bias and Cognitive Dissonance.
January 30, 2020, Issue #3
The Two gatekeepers of a good portfolio
The parameters for screening should be economically sound after considering those investment principles which have historically delivered good returns for the investors. Nivesh may arrive at an investible universe by either a top-down approach or using a combination of qualitative and quantitative screeners based on some micro or firm-based parameters.
Unlike Nivesh, Vinivesh doesn’t have to monitor too many companies. His area of work is only the invested set. If the buy discipline has been properly adhered to, then the sell discipline has clues of what to monitor and when to act.
January 23, 2020, Issue #2
What is Risk?
“… But aren’t mid caps riskier than large caps?!” the correspondent interviewing me on the channel exclaimed. Her tone was of a person stating a fact rather than asking a question. I smiled. “Well, that depends on how you define risk”
January 16, 2020, Issue #1
The Investing Edge
In the very beginning of the book, “Intelligent investor”, the legendary investor Benjamin Graham talks about the importance of psychology in investing. He says that the chief problem of the investor is likely to be himself. He also highlights the importance of temperament over knowledge. To understand the significance of this statement one needs to understand the sources of Alpha for an investor...