Tuesday, March 31, 2015
Friday, March 27, 2015
The Babe Ruth Effect - Michael J. Mauboussin
Michael J. Mauboussin
January 29, 2002
The Babe Ruth Effect:
Frequency versus Magnitude
“In the real world there is no ‘easy way’ to assure a financial profit. At least, it is gratifying to rationalize that we would rather lose intelligently than win ignorantly.”
Richard A. Epstein
The Theory of Gambling and Statistical Logic
Batting with the Babe
A well-known and very successful portfolio manager recently told us a story that initially sounded incongruous. He explained that he was one of roughly 20 portfolio managers running money for a company. The company’s treasurer, dismayed with the aggregate performance of his active managers, decided to evaluate each manager’s decision process in an effort to weed out the poor performers. The treasurer figured that even a random process would result in a portfolio of stocks with roughly one-half outperforming the benchmark (in this case the S&P 500) and the other half under performing it. So he measured each portfolio based on what percentage of its stocks beat the market.
The portfolio manager found himself in an unusual position. While his total portfolio performance was among the best in the group, he was among the worst based on this batting average. After having fired all of the other “poor” performing managers, the treasurer called a meeting with this portfolio manager to sort out the divergence between the good performance and the “bad” batting average.
The portfolio manager’s explanation for the discrepancy underscores a lesson inherent in any probabilistic exercise: the frequency of correctness does not matter; it is the magnitude of correctness that matters. Say that you own four stocks, and that three of the stocks go down a bit but the fourth rises substantially. The portfolio will perform well even as the majority of the stocks decline.
Building a portfolio that can deliver superior performance requires that you evaluate each investment using expected value analysis. What is striking is that the leading thinkers across varied fields—including horse betting, casino gambling, and investing—all emphasize the same point. We call it the Babe Ruth effect: even though Ruth struck out a lot, he was one of baseball’s greatest hitters.
The reason that the lesson about expected value is universal is that all probabilistic exercises have similar features. Internalizing this lesson, on the other hand, is difficult because it runs against human nature in a very fundamental way. While it’s not hard to show the flaw in the treasurer’s logic, it’s easy to sympathize with his thinking.
The Downside of Hard Wiring
In 1979, Daniel Kahneman and Amos Tversky outlined prospect theory, which identifies economic behaviors that are inconsistent with rational decision-making. One of the most significant insights from the theory is that people exhibit significant aversion to losses when making choices between risky outcomes, no matter how small the stakes. In fact, Kahneman and Tversky found that a loss has about two and a half times the impact of a gain of the same size. In other words, people feel a lot worse about losses of a given size than they feel good about a gain of a similar magnitude.
This behavioral fact means that people are a lot happier when they are right frequently. What’s interesting is that being right frequently is not necessarily consistent with an investment portfolio that outperforms its benchmark (as the story above illustrates). The percentage of stocks that go up in a portfolio does not determine its performance, it is the dollar change in the portfolio. A few stocks going up or down dramatically will often have a much greater impact on portfolio performance than the batting average.
Bulls, Bears and Odds
In his wonderful book, Fooled by Randomness, Nassim Taleb relates an anecdote that beautifully drives home the expected value message. In a meeting with his fellow traders, a colleague asked Taleb about his view of the market. He responded that he thought there was a high probability that the market would go up slightly over the next week. Pressed further, he assigned a 70% probability to the up move. Someone in the meeting then noted that Taleb was short a large quantity of S&P 500 futures—a bet that the market would go down—seemingly in contrast to his “bullish” outlook. Taleb then explained his position in expected value terms. He clarified his thought process with the following table:
In this case, the most probable outcome is that the market goes up. But the expected value is negative, because the outcomes are asymmetric. Now think about it in terms of stocks. Stocks are sometimes priced for perfection. Even if the company makes or slightly exceeds its numbers the majority of the time (frequency), the price doesn’t rise much. But if the company misses its numbers, the downside to the shares is dramatic. The satisfactory result has a high frequency, but the expected value is negative.
Now consider the downtrodden stock. The majority of the time it disappoints, nudging the stock somewhat lower. But a positive result leads to a sharp upside move. Here, the probability favors a poor result, but the expected value is favorable.
Investors must constantly look past frequencies and consider expected value. As it turns out, this is how the best performers think in all probabilistic fields. Yet in many ways it is unnatural: investors want their stocks to go up, not down. Indeed, the main practical result of prospect theory is that investors tend to sell their winners too early (satisfying the desire to be right) and hold their losers too long (in the hope that they don’t have to take a loss). We now turn to three leading practitioners in separate probabilistic fields: investing, pari-mutuel betting, and black jack.
From OTC to OTB
Warren Buffett, undoubtedly one of the 20th century’s best investors, says that smarts and talent are like a motor’s horsepower, but that the motor’s output depends on rationality. “A lot of people start out with a 400-horsepower motor but only get 100 horsepower of output,” he said. “It’s way better to have a 200-horsepower motor and get it all into output.” And one of the keys is to consider all investment opportunities in terms of expected value. As Buffett’s partner Charlie Munger notes, “one of the advantages of a fellow like Buffett is that he automatically thinks in terms of decision trees.” Says Buffett, “Take the probability of loss times the amount of possible loss from the probability of gain times the amount of possible gain. That is what we’re trying to do. It’s imperfect, but that’s what it’s all about.”
Naturally, coming up with likely outcomes and appropriate probabilities is not an easy task. But the discipline of the process compels an investor to think through how various changes in expectations for value triggers—sales, costs, and investments—affect shareholder value, as well as the likelihood of various outcomes. Such an exercise also helps overcome the risk aversion pitfall.
The expected value mindset is by no means limited to investing. A recently published book, Bet with the Best, offers various strategies for pari-mutuel bettors. Steven Crist, CEO, editor and publisher of Daily Racing Form, shows the return on investment, including the track’s take, of a hypothetical race with four horses. To summarize the lesson, he writes, “The point of this exercise is to illustrate that even a horse with a very high likelihood of winning can be either a very good or a very bad bet, and that the difference between the two is determined by only one thing: the odds.”
So a horse with a 50% probability of winning can be either a good or bad bet based on the payoff, and the same holds true of a 10-1 shot. He is saying, in plain words, it is not the frequency of winning that matters, but the frequency times the magnitude of the payoff.
Crist also solicits a confession from his readers, “Now ask yourself: Do you really think this way when you’re handicapping? Or do you find horses you ‘like’ and hope for the best on price? Most honest players admit they follow the latter path.” Replace the word “handicapping” with “investing” and “horses” with “stocks” and Crist could be talking about the stock market.
Yet another domain where expected value thinking is pertinent is black jack, as Edward Thorp’s best-selling book, Beat the Dealer, shows. In black jack, the payoffs are set, and the player’s principal task is to assess the probability of drawing a favorable hand. Thorp showed how to count cards in order to identify when the probabilities of a winning hand tilt in player’s favor. When the odds favor the player, the ideal strategy is to increase the bet (effectively increasing the payout). Thorp notes that even under ideal circumstances, favorable situations only arise 9.8% of the time; the house has the advantage the other 90.2%.10
So we see that the leading thinkers in these three domains—all probabilistic exercises—converge on the same approach. We also know that in these activities, the vast majority of the participants don’t think through expected value as explicitly as they should. That we are risk adverse and avoid losses compounds the challenge for stock investors, because we shun situations where the probability of upside may be low but the expected value is attractive.
A Useful Analogy
Long-term success in any of these probabilistic exercises shares some common features.
We summarize four of them:
• Focus. Professional gamblers do not play a multitude of games—they don’t stroll into a casino and play a little black jack, a little craps, a spend a little time on the slot machine. They focus on a specific game and learn the ins and outs. Similarly, most investors must define a circle of competence—areas of relative expertise. Seeking a competitive edge across a spectrum of industries and companies is a challenge, to say the least. Most great investors stick to their circle of competence.
• Lots of situations. Players of probabilistic games must examine lots of situations, because the “market” price is usually pretty accurate. Investors, too, must evaluate lots of situations and gather lots of information. For example, the very successful president and CEO of Geico’s capital operations, Lou Simpson, tries to read 5-8 hours a day, and trades very infrequently.
• Limited opportunities. As Thorp notes in Beat the Dealer, even when you know what you’re doing and play under ideal circumstances, the odds still favor you less than 10% of the time. And rarely does anyone play under ideal circumstances. The message for investors is even when you are competent, favorable situations—where you have a clear-cut variant perception vis-à-vis the market—don’t appear very often.
• Ante. In the casino, you must bet every time to play. Ideally, you can bet a small amount when the odds are poor and a large sum when the odds are favorable, but you must ante to play the game. In investing, on the other hand, you need not participate when you perceive the expected value as unattractive, and you can bet aggressively when a situation appears attractive (within the constraints of an investment policy, naturally). In this way, investing is much more favorable than other games of probability. Constantly thinking in expected value terms requires discipline and is somewhat unnatural. But the leading thinkers and practitioners from somewhat varied fields have converged on the same formula: focus not on the frequency of correctness, but on the magnitude of correctness.
Bridgewater's Ray Dalio Simple Advice For Success: "Think Independently, Stay Humble"
Submitted by Tyler Durden on 03/09/2015 18:45 -0400
Authored by Bridgewater's Ray Dalio via Institutional Investor,
To make money in the markets, you have to think independently and be humble. You have to be an independent thinker because you can’t make money agreeing with the consensus view, which is already embedded in the price. Yet whenever you’re betting against the consensus, there’s a significant probability you’re going to be wrong, so you have to be humble.
Early in my career I learned this lesson the hard way — through some very painful bad bets. The biggest of these mistakes occurred in 1981–’82, when I became convinced that the U.S. economy was about to fall into a depression. My research had led me to believe that, with the Federal Reserve’s tight money policy and lots of debt outstanding, there would be a global wave of debt defaults, and if the Fed tried to handle it by printing money, inflation would accelerate. I was so certain that a depression was coming that I proclaimed it in newspaper columns, on TV, even in testimony to Congress. When Mexico defaulted on its debt in August 1982, I was sure I was right. Boy, was I wrong. What I’d considered improbable was exactly what happened: Fed chairman Paul Volcker’s move to lower interest rates and make money and credit available helped jump-start a bull market in stocks and the U.S. economy’s greatest ever non-inflationary growth period.
This episode taught me the importance of always fearing being wrong, no matter how confident I am that I’m right. As a result, I began seeking out the smartest people I could find who disagreed with me so that I could understand their reasoning. Only after I fully grasped their points of view could I decide to reject or accept them. By doing this again and again over the years, not only have I increased my chances of being right, but I have also learned a huge amount.
There’s an art to this process of seeking out thoughtful disagreement. People who are successful at it realize that there is always some probability they might be wrong and that it’s worth the effort to consider what others are saying — not simply the others’ conclusions, but the reasoning behind them — to be assured that they aren’t making a mistake themselves. They approach disagreement with curiosity, not antagonism, and are what I call “open-minded and assertive at the same time.” This means that they possess the ability to calmly take in what other people are thinking rather than block it out, and to clearly lay out the reasons why they haven’t reached the same conclusion. They are able to listen carefully and objectively to the reasoning behind differing opinions.
When most people hear me describe this approach, they typically say, “No problem, I’m open-minded!” But what they really mean is that they’re open to being wrong. True open-mindedness is an entirely different mind-set. It is a process of being intensely worried about being wrong and asking questions instead of defending a position. It demands that you get over your ego-driven desire to have whatever answer you happen to have in your head be right. Instead, you need to actively question all of your opinions and seek out the reasoning behind alternative points of view.
This approach comes to life at Bridgewater in our weekly research meetings, in which our experts on various areas openly disagree with one another and explore the pros and cons of alternative views. This is the fastest way to get a good education and enhance decision-making. When everyone agrees and their reasoning makes sense to me, I’m usually in good shape to make a decision. When people continue to disagree and I can’t make sense of their reasoning, I know I need to ask more probing questions or get more triangulation from other experts before deciding.
I want to emphasize that following this process doesn’t mean blindly accepting the conclusions of others or adopting rule by referendum. Our CIOs are ultimately responsible for our investment decision-making. But we all make better decisions by maintaining an independent view and the conflicting possibilities in our minds simultaneously, and then trying to resolve the differences. We’re always in the place of holding an opinion and simultaneously stress-testing the hell out of it.
Operating this way just seems like common sense to me. After all, when two people disagree, logic demands that one of them must be wrong. Why wouldn’t you want to make sure that that person isn’t you?
Thursday, March 26, 2015
Warren Buffet's partner - 3G Capital
The Brazilian private equity firm stands apart from the rest because like Warren Buffett, 3G professes to be a long-term owner of the businesses it buys
David Gelles March 26, 2015 Last Updated at 21:46 IST
David Gelles
Warren E Buffett has made a habit of criticising ruthless Wall Street bankers and rapacious private equity firms over the years. As recently as last month, he railed against both in his annual letter to his shareholders at Berkshire Hathaway.
Yet for Buffett, a genteel billionaire who has managed to put a friendly face on big business, one private equity firm stands apart from the rest.
3G Capital, the Brazilian private equity firm co-founded by the billionaire financier Jorge Paulo Lemann, has in recent years emerged as Buffett's preferred business partner in striking multi billion-dollar deals.
On Wednesday, 3G and Berkshire Hathaway teamed up to orchestrate a merger between Kraft, the big processed food maker, and Heinz, which the two companies own. Combining the companies will create a global food and beverage behemoth worth nearly $100 billion.
The deal comes just two years after 3G and Berkshire Hathaway acquired Heinz for $23 billion. And last year, Buffett lent $3 billion to 3G when another of its companies, Burger King, acquired the Canadian restaurant chain Tim Hortons. In that case, Buffett essentially provided the leverage for a leveraged buyout.
The success of these deals has resulted in 3G and Buffett publicly proclaiming their mutual affection for each other.
On Wednesday, 3G's managing partner, Alex Behring, sang the praises of Buffett while discussing the merger of Heinz and Kraft in a call with investors.
"This partnership has been a key driving factor in Heinz's enormous success to date and will be a key driving factor in the success of the Kraft Heinz Company," he said. "Berkshire is a name that needs no introduction."
Buffett, speaking on CNBC on Wednesday, was equally effusive about his Brazilian partners. "I knew they were wonderful going into the Heinz deal," Buffett said. "In terms of ability, in terms of integrity, every aspect of it. 3G has been a perfect partner."
Yet in many ways, 3G follows the very private equity playbook that Buffett derides. 3G is known for its relentless cost-cutting and job elimination when it takes over a company. Shortly after 3G and Berkshire acquired Heinz, 11 of the top 12 managers at Heinz were replaced. Since the deal was completed, 7,000 employees have been dismissed.
When 3G took over Burger King, it sold the company jet, scrapped an annual $1-million party at an Italian villa and moved executives at the company's Miami offices from mahogany suites to an open floor of cubicles.
"When they first arrive, it can be pretty ugly for the people working there," said Cristiane Correa, who wrote a book about 3G called "Dream Big." "Their mindset is: if it doesn't generate any revenue, why are we spending money on that?"
What is different about 3G is that like Buffett, 3G professes to be a long-term owner of the businesses it buys. Since assembling the brewing company Anheuser-Busch InBev and acquiring Burger King and Heinz, the Brazilian firm has shown no signs of trying to sell the companies. Instead, they are being used as platforms to strike more deals.
"3G aren't buying things to sell," Buffett said. "The other private equity firms, they buy companies with the idea of IPO-ing them or selling them to a competitor."
But with 3G, Buffett argued, "I don't think it's even proper to call them a private equity firm."
Instead, "They're buying to keep, just like we're buying to keep," Buffett said. "You can't put them in the same category of the firms that are basically in the category of buying and reselling companies."
Behring reiterated that 3G was buying with an aim to hold, following a template that has worked for Buffett in more than 50 years in business.
"Both Berkshire and 3G Capital are long-term-oriented investors with shared vision and common values," he said. "Both Berkshire and 3G look for strong, enduring brands, and they seek to build and grow these brands through both meaningful operational improvements and a focus on execution."
For all its trophy assets and its enormous success, 3G remains relatively unknown, even its home country.
"They are by far the most successful story in terms of entrepreneurship in Brazil," Correa said. "They were not really known in Brazil until five or six years ago. They are really low profile."
Lemann, a co-founder of the firm, graduated from Harvard in 1961 and returned to Brazil to begin a career in finance. A former Brazilian tennis champion, he once played at Wimbledon.
As a young man, he built a small brokerage firm into Banco de Investimentos Garantia, which emerged as one of Brazil's largest investment banks. Then, in 1998, he sold the firm to Credit Suisse for about $675 million. (3G is short for "3 from Garantia," named after Lemann and the firm's other two co-founders.)
With the proceeds from that sale, Lemann and his business partners began building up their portfolio of breweries, eventually creating AmBev, which later acquired Anheuser-Busch, the maker of Budweiser and other beers.
Now 75, Lemann has handed over daily operations of 3G to a handful of trusted associates, including Behring.
Buffett met Lemann decades ago, when the two served together on the board at Gillette. Since then, the two men have grown close.
Now, investors and analysts are already looking ahead to the next deal Buffett and 3G might strike together.
"There is no finish line," Correa said. "I think there are going to be many more."
Wednesday, March 25, 2015
Puma to make India a manufacturing hub
http://www.thehindubusinessline.com/companies/puma-plans-to-buy-out-partners-stake/article7032581.ece
Puma plans to buy out partner’s stake
PURVITA CHATTERJEE
To launch own stores, make India a manufacturing hub
MUMBAI, MARCH 25:
Puma Sports India, which recently got the government’s approval for bringing in FDI, is planning to buy out its partner Knowledge Fire’s 49 per cent stake in joint venture Puma India Retail, and to launch own stores in the country.
Also on the cards is making India a manufacturing hub for the company’s products, said Abhishek Ganguly, Managing Director, Puma Sports India.
FDI proposal
Puma had proposed to bring in Rs 10.1-crore ($1.66-million) FDI, which the Foreign Investment Promotion Board approved late last year.
Currently, Puma has two companies in India — Puma Sports India (the holding company) and Puma India Retail, a 51:49 joint venture with Knowledge Fire. It is operating in the country through the single brand retail route.
“We have got FDI approval and will push for more footwear manufacturing in India, from the current 40 per cent to 60 per cent Made in India products,” said Ganguly.
“Our joint venture will also get dissolved as we are considering buying out the local partner’s 49 per cent stake and there will be greater involvement in retail. India is going to be a market of focus for Puma.”
Franchisee stores
Puma currently has 340 stores, of which about 230 are owned by smaller franchises and the rest by Knowledge Fire.
“We will continue having franchise-led stores for smaller markets, while our company-owned stores will be for the larger and more expensive real estate markets as we do not want to disturb the balance with our franchises,” added Ganguly.
Besides, India is also expected to emerge as a manufacturing hub for the sportswear company as it expects to shift its dependence on China for sourcing footwear.
“Almost 80 per cent of global sportswear manufacturing happens in China and we are now looking at an alternative destination. India could become a hub for the global market as manufacturing in China should get balanced,” he added.
Investment plans
However, with FDI being approved, Puma is planning to increase its number of stores and also enhance sub-contracted manufacturing, creating more employment opportunities. The company plans to invest about Rs 1.5 crore for each new store it plans to open measuring about 2,000 sq ft.
Focusing on areas like running and woman’s fitness, Puma has recently roped in Lisa Haydon to endorse its new footwear brand – Ignite.
Puma was one of the last entrants to enter India in 2005 after Reebok, Adidas and Nike in the sports footwear segment. However, both Nike and Reebok have yet to get FDI approval to sell through their own stores and are currently engaging in the wholesale cash & carry route to do business in India.
(This article was published on March 25, 2015)
Friday, March 20, 2015
The 35 Rules of gambling that all Investors should know
Red joker rules
The 35 Rules of gambling that all Investors should know
Pat Holland
Part 1 :Parlays
The parlay is a gambling term used to describe the practice of putting some, or all , of your winnings back into the pot
Rule 1. Start early
It is important to pile up your winnings - but much, much, much more important to limit your losses
Rule 2.Never offer an unlimited parlay
Rule 3. Keep a reserve tank
Ring fence a certain amount of the stake to take advantage of special situations. In the investing situation, it is necessary to keep part of your overall investment in funds that can be easily converted to cash. The advice, then is to keep not less than 20% of what you can invest in deposit accounts, bonds, Post Office savings accounts, or anywhere that permits you to access the full amount at short notice
Rule 4. Never chase your losses
Take your losses. And start, modestly, all over again.
Rule 5. Stay in your league
You have no business trading in futures, or commodities, or spreads, if your funds are so low that a bad day can wipe you out. You cannot live for long beyond your means, and nowhere is that more true than in the worlds of financial risk, be it at the poker table or at the stock exchange.
Rule 6. Gamble your early winnings
Hobby gamblers or inexperienced gamblers are tempted to walk away from the game when they get slightly ahead. Resist the temptation to take a profit early on.
Rule 7. Don't get addicted
Real life addictions impinge so heavily on the process of investments that your chances are poor unless you can beat them.
Rule 8. Bid boldly, play safe
First, there is no payoff in placing a low bid on ambition. Every possible aspect of the proposed investment must be studied and quantified. Until you know everything about the proposed investment, you must play safe.
Part 2: Pitfalls
Rule 9. Never bet too big
The trouble for a gambler who loses a big bet is that it drastically reduces his stake. It takes him a long time to build it up again. And when the bet comes up - it still causes problems. His zest for smaller bets is gone. They're suddenly boring. He is tempted to another big bet on lesser evidence than before. Many professionals draft a rule for themselves that they will never risk more than 10% of their stake on an individual event. You must never have all your stake riding on a single horse.
Rule 10. ...And never bet too small
Very small investments cannot bring results.
Rule 11. Turn down proposition bets.
The proposition bet has consistent features. The propositioner will come to the gambler. He will seem most keen that a huge amount should be staked on some unusual event that seems like sure-fire winner. Invariably, the bet is won by carrying out the test in some strange, unexpected location or circumstances that suits the propositioner. You will not often fall for the Proposition Bet if you apply all your usual rigorous checks. And accept that any investments that promises great returns, without spelling out how they will be realized, has to be iffy.
Rule 12. Visit the parade ring
The professional horse gambler may go to see the horses on parade before placing his bets. For more general investment, watch what your hand is doing when shopping
Rule 13. Don't get in hock to the bookies.
Do not leverage yourself in so deeply that you can never get out
Rule 14. Keep emotion out of it
Two great big emotions, Greed and Fear, will lose both in the short and long term. If you are emotionally involved, stop. Walk away for a while.
Rule 15. Never listen to tips
Most tips are wrong. An even when they seem reliable, tips should never be acted upon. The first reason, that you will inevitably bet more than usual. The second reason is that the very fact that "everyone knows" will drive down the odds and make the bed unprofitable even when it wins.
Rule 16. Watch the dealer
A serious player will never take his eyes, and ears, off the dealer's hands. The broker, dealer, auctioneer or agent who converts your investments from wish to reality occupies the same chair as the card dealer.
Rule 17. Don't bluff to bluff
Once you set the final price in your head, mean it. Walk away from the deal rather than exceed that final price. There is always another hand, and another investment, coming along in a minute.
Rule 18. Do not cheat
An investor cheats, in my book, when he invests his money in an area of business that he would not enter in everyday life. An area that he feels to be wrong.
Rule 19. Engage mathematics as your servant, not your master
In the world of investment, when a large group of investors become aware of a promising model and begin to use it en masse - their very presence in the market distorts it and makes the model invalid. You will do very well to familiarize yourself with as much game theory as you can stand. But you must constantly re-evaluate them in the light of changing circumstances. And, of course, never use a system you can't understand
Rule 20. Sessions are not seasons
You must not panic and sell when the value drops slightly, and you must not feverishly sell when the value rises slightly. You must not risk all on a single session. And when the session is over, you must rise from the table, you must leave the track, calmly accepting that whatever has happened is all part of the overall season.
Rule 21. Seasons are not sessions
It doesn't matter if you gain or lose sharply during a session. In a season it does.
Rule 22. Don't think of gains or losses as spending money until the game is over
Rule 23. Manage your money
Do not piddle away your chips. The strong point of professional gamblers was the ability to recognize when a particular horse in a particular race is on offer at odds that are greater than its empirical chances of winning. These might be just one such horse at a particular meeting or even in a particular month.
Rule 24. Set targets
A gambler is more likely to be successful if he knows from the outset how much money he wants to win. If nothing else, it will make him stop in time.
Rule 25. Reduce risks with time
As your target is in sight , it makes sense to move profits into safer vehicles
Rule 26. Look for a middle.
Middle is a situation you cannot lose
Rule 27. Study the form
Professional gamblers put a great deal of study into any gambling situation before they risk money.
Rule 28. Turn down most bets
Rule 29. Small percentages are big percentages
Always bring a percentage figure back to the real numbers involved to find what impact it really has.
Rule 30. Study your opponents
In the investment world, your opponents are those people who form the market. If shares have risen rapidly in value, you must ask yourself whether the rise is justified by the facts. It it is, buy as soon as possible. Similarly, if a fall in value has no convincing cause, it is time to buy.
Rule 31. Beware of long odds
Generally the promise of huge returns results in huge losses.
Rule 32. Never follow a springer to starting price
A stringer is a horse that starts out as an outsider and is bet down at the racecourse because the connections fancy its chances. if a new field of investment opens out, or a new market develops, you may well gain if you invest before it gains momentum. But once it is up and running, an the public see it as a golden opportunity, the price will become prohibitive. It is then a very bad idea to invest at all.
Rule 33. Never bet ante-post
Betting on a horse months before the race takes place makes it impossible to calculate the percentages. There are too many unknowns.
Rule 34. Get to know the trainer
Your chance of selecting winners improve if you have a chance in creating the race, and your chances of a successful investment improve if you can personally influence the outcome in someway.
Rule 35. The Ultimate rule
Find the right horse at the right race at the right price. The right investment is the one that suits you personally in terms of your means, your existing portfolio, your temperament and the stage you have reached in your investment career.
Wednesday, March 18, 2015
Rakesh Jhunjhunwala talks about his purchase of Dewan Housing and Lupin shares
http://www.moneycontrol.com/news/market-outlook/dhfl-lupin-buys-equal-meeting-aishwarya-rai-jhunjhunwala_1325914.html
Mar 11, 2015, 02.59 PM IST
Sometimes a stock’s story is too overwhelming to ignore; you just go and pick it up. Later one can sit and investigate the merits, says ace investor Rakesh Jhunjhunwala.
He cites buying Lupin and Dewan Housing with such mindset ---he calls it invest now, investigate later mindset, and likens it to dating Aishwariya Rai, silver screen’s most compelling face.
Below is an interesting peice of conversation between three market masters--Junjhunwala, Ramesh Damani and N Jayakumar discussing the importance of education as well as investment strategies.
Jayakumar: It is kind of appropriate in today’s forum that we talk about education. You have had to an extent what you would consider education enough to make you sort of take on the world, a street fighter. People have run out of adjectives but do you have any regrets that you could have studied a lot more and become a lot less successful as a corollary?
Jhunjhunwala: I have no regrets in life about anything except my habits. So I don’t regret and I don’t think that education is what makes you -- street fighters are born, they are not made because it comes from determination and guts. I don’t think the determination and guts come with education. Education gives me the ability to understand, education gives me the ability to be civil and I think -- I did chartered accountancy and I think it is one of the best education anybody could have. It is not a very glamorous education but it is a brass-tacks education and it made me understand financial matters, it also gives me the understanding of law, which is very necessary. To interpreting the Budget, you need to understand the law; what the Finance Bill means? So I think I had that education which gave me the right cutting edge in terms of understanding and of course I am a street fighter.
I do not know whether it came with my education. Research shows that formalized education takes away entrepreneurship because you reason and you analyze.
Damani: One of the things that you are famous for on the street, you have many colorful sayings, is ‘invest before you investigate’. The fact is that if you find something, go buy it and then do all the research. Is that still a driving force of how you look at markets?
Jhunjhunwala: Sometimes market gives such compelling opportunity like Dewan Housing. It had Rs 230 book value, 6 percent yield, 4 times earnings, growing at 20 percent for the last ten years, available at Rs 105 - I gave an order for 5 million shares, we will think about it later -- such ridiculous valuations!!! I bought Lupin because I knew one thing that Ranbaxy had earned Rs 250 crore in a single product. Lupin had only injectable Cephalospor in approved FDA plant in Asia. They were the single filer for a product having a size of USD 360 million and the marektcap was Rs 200 crore. What is there to think? So those kind of situations are like invest now, investigate later.
Damani: Does the market then tell you also to back up the truck in these situations.
Jhunjhunwala: Yes and then you research later. I bought my first five million shares of DHFL and after I bought the next whatever shares I bought, I did a lot of further research. Today it is like meeting Aishwarya Rai, what are you thinking!! You date her without thinking.
Friday, March 13, 2015
Presentation about Moats by Jeetay Investments
Mr. Chetan Parikh is a director of Jeetay Investments Pvt. Ltd., a portfolio management firm. He is also associated with Capitalideasonline.com, a website dedicated to investor education.
He had obtained his MBA from the Wharton School. He is a visiting faculty member of Jamnalal Bajaj Institute of Management Studies, Mumbai
http://capitalideasonline.com/wordpress/moat-millions/
He had obtained his MBA from the Wharton School. He is a visiting faculty member of Jamnalal Bajaj Institute of Management Studies, Mumbai
http://capitalideasonline.com/wordpress/moat-millions/
Thursday, March 12, 2015
Meet India's Oldest Investing Family
https://www.youtube.com/watch?v=O0tXOHkZEUc
ET Now has interviewed Mr.Janak Mathuradas
ET Now has interviewed Mr.Janak Mathuradas
- 5 generations of his family have invested in Indian stocks
- 120 years of stock investing
- 1st television interview
- Recent buys were Shreyas Shipping, Astral Poly, Power Grid, NTPC
- Prefer buying dividend paying companies
- Is a typically Value Investor
- Likes to talk to mgmt to know about the company / industry
Sunday, March 8, 2015
Wednesday, March 4, 2015
A Man Of Value And Wit - Chandrakant Sampat
http://www.outlookbusiness.com/article_v3.aspx?artid=293433
A Man Of Value And Wit
A pioneer of value investing in India, Chandrakant Sampat used simple metaphors to explain his philosophy
ROHAN SHAH
Howard Marks on Luck and Skill in Investing
Luck is very important, according to Marks, and he advised the future MBAs to “put themselves in the way of good luck” as opportunities only come around once in a while and you have to take them.
On the importance of second-level thinking
Eight years ago, Marks’ son advised him to invest in Ford because they were coming out with great new products. “Who doesn’t know that!” Marks said in response. He was not trying to denigrate his son’s enthusiasm for Ford, but to challenge him to think on a second level. The things everyone knows will not bring you an edge.
If you think the same as everybody else, you will act the same as everybody else. If you act the same as everybody else, you will perform the same as everybody else. If you want to outperform, then you have to think differently and act differently with higher level thinking.
With first-level thinking, an investor thinks that a company is great and buys the stock. With second-level thinking the investor thinks that the company is great but not as great as everyone thinks and therefore sells the stock. Marks described first-, second- and third-level thinking in the context of Maynard Keynes’ observations in predicting winners in newspaper beauty contests in London in the 1920s. With first-level thinking, you pick the winner based on your opinion. However to win the contest you need to have at least second-level thinking and pick the girl who you think will get the most votes.
Ben Hunt provided further details on Keynes’ observations of third-level thinking on his Epsilon Theory blog. Hunt stated that to win the contest you have to make a third-level decision and pick “who will get the most votes when all the voters are basing their votes on who they think will get the most votes”.
Successful investing comes from “variant perception,” Marks said, where the consensus view is incorporated into the price of the asset and you have a different view from the consensus. If your variant view is correct, then eventually the consensus comes to agree with you and the price moves favorably in your direction. Marks said if you think investing is easy and you do not see the complexities, you will not be successful.
On the ingredients for investment success
In the short term, Marks said the ingredients for success are aggressiveness, timing and skill. He mused that if you have enough aggressiveness at the right time, you don’t need any skill.
Marks said he has been successful by not taking bets that could lose dramatically, by mitigating loss, and by being consistent rather than having brilliant successes outweighed by dismal failures. He said, “If we avoid the losers, the winners take care of themselves.” He stressed the importance of matching your investment strategy with your personality and offered that his conservative nature supported his success in the bond market
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