One, “Why is a site that should tell me ‘how to invest’ telling me ‘how to read’?”

And two, “Who needs to learn how to read?”

The answer to your first question is – Before you invest, you must read. What to read? First, read my outline of a 2-year course in investing.

The answer to your second question is – Before you read, you must learn how to read.

But then, as you rightly asked, who needs to learn how to read?

After all, we all learned how to read fairly early in life, usually in elementary school, right?

But do you know how to really read?

More importantly, are you really reading?

If I were to go by my interactions with several tribesmen through emails and during my Art of Investing workshops, I find many struggling with reading.

Some of the common issues outlined are…

• I don’t have time to read.
• I don’t know what to read.
• How can someone read so much stuff out there?
• Is it necessary to read?
• I have seen people making money in stocks without reading much, so why should I?

Overall, the underlying issue is…

Why Read?
You should not read good books for the sake of talking about them. Mentioning them by name may give you the appearance of literacy, but you do not have to read them to outshine someone else at a dinner party.

Reading is a means toward living a good human life. It’s a means toward living the life of a free man.

You see, the most remarkable thing about us humans is that we can sharply differentiate our minds from our bodies.

The body is limited in ways that the mind is not. In fact, by the time most people are thirty years old, their bodies have begun to deteriorate. But there is no limit to the amount of growth and development that the mind can sustain.

The mind stops growing only when the brain itself loses its powers, and not before that.

But most of us are turning this great advantage to a great disadvantage. Like our muscles, if not exercised (used), our minds can atrophy.

This is dangerous given that atrophy of the mind is a deadly disease. What else explains that so many busy people die so soon after retirement?

So, reading well is thus not only a good in itself, nor is it merely a means to advancement in your career.

Most importantly, reading well helps keep your mind alive and growing. And that’s why you must read.

Just look at Buffett and Munger. The biggest reason they ascribe to their current state of being is that they kept getting smarter.

How? By reading a lot.

Being a writer, I know for sure that reading has made me better at my art. Being an investor, I know for sure that I won’t have a bright and profitable future without a lot of reading.

I know that in this world of information overload, it’s a tough ask to concentrate and read everything’s that’s nice out there (including Safal Niveshak’s posts )

And thus, if you are facing the problem of ‘what to read and what to avoid’, I am with you.

I have realized over my years of reading that while seeking out new information and ideas from a wide variety of sources is admirable, it doesn’t necessarily give you an advantage.

The ancient Greeks called a person who was widely read but not well read as “sophomore” (sophos or wise + moros or foolish).

I will count myself in this category, at least as of now.

Anyways, coming back to my original question of “How to read”, I will answer it with due help from a great book I read a few years back.

The name of the book is, well, How to Read a Book, and it was written by Mortimer J. Adler in 1940 (revised in 1972). This book attempts to inculcate skills that are useful for reading anything.

I know you are cursing me for recommending another book to you! But if you have been a reader of Safal Niveshak for long, you know this sadistic side of mine.

Anyways, in this book, Adler wonderfully describes the process of reading and how anyone can learn the art of effective and efficient reading. He does it through…

Four Levels of Reading
How to Read a Book identifies four levels of reading:

1. Elementary
2. Inspectional
3. Analytical
4. Syntopical

Adler explains that each of these reading levels is cumulative. This means that you can’t progress to a higher level without mastering the levels that come before.

Here is how he describes each of these levels.

1. Elementary Reading
As the name suggests, this is what we learn in elementary school – when we move from illiteracy to literacy, or when we learn to differentiate between a collection of black marks and words.

At this level, the question that is asked of the reader is – “What does the sentence say?” So it’s like learning to read, “The cat sat on the hat.”

For an investor, it’s like reading and understanding the meaning of words like ‘investing’, ‘gambling’, ‘speculation’, ‘annual report’…and even ‘Ben Graham’ and ‘Warren Buffett’.

2. Inspectional Reading
This is the other name of “scanning” and “superficial reading”.

Inspectional reading means giving a piece of writing a quick yet meaningful advance review in order to evaluate the merits of a deeper reading experience.

Here is how Adler describes this type of reading…

Inspectional reading’s aim is to get the most out of a book within a given time – usually a relatively short time, and always (by definition) too short a time to get out of the book everything that can be gotten.

Still another name for this level might be skimming or pre-reading. However, we do not mean the kind of skimming that is characterized by casual or random browsing through a book. Inspectional reading is the art of skimming systematically.

When reading at this level, your aim is to examine the surface of the book, to learn everything that the surface alone can teach you. That is often a good deal.

Whereas the question that is asked at the first level (elementary reading) is “What does the sentence say?” the question typically asked at this level is “What is the book about?”

Stopping at inspectional reading is only appropriate if you find no use for the material (like you do sometimes with my posts ).

Unfortunately, this is all the reading most of us do, and that’s why we have unread books piling up in our wardrobes.

3. Analytical Reading
This level of reading is more complex and a more systematic activity than either of the first two levels of reading.

This is where a book raises its demand on your time and concentration. Adler explains…

Analytical reading is thorough reading, complete reading, or good reading – the best reading you can do.

If inspectional reading is the best and most complete reading that is possible given a limited time, then analytical reading is the best and most complete reading that is possible given unlimited time. The analytical reader must ask many, and organized, questions of what he is reading.

On this level of reading, the reader grasps a book and works at it until the book becomes his own. Francis Bacon once remarked that “some books are to be tasted, others to be swallowed, and some few to be chewed and digested.”

Reading a book analytically is chewing and digesting it.

You’ll note that the inspectional reading you did perfectly sets the stage for an analytical reading.

For an investor, this is what you must do with books like…

• The Intelligent Investor by Benjamin Graham
• The Richest Man in Babylon by George Clason
• Poor Charlie’s Almanack by Peter Kaufman
• The Most Important Thing by Howard Marks
• Margin of Safety by Seth Klarman
• Warren Buffett’s Letters

So far so good. But till now, we are talking about how to read “a” book.

The highest level of reading, as Adler explains, allows you to synthesize knowledge from a comparative reading of several books about the same subject. And it’s called…

4. Syntopical Reading
This is where the real fun of reading starts. Adler explains…

When reading syntopically, the reader reads many books, not just one, and places them in relation to one another and to a subject about which they all revolve.

But mere comparison of texts is not enough. Syntopical reading involves more. With the help of the books read, the syntopical reader is able to construct an analysis of the subject that may not be in any of the books.

Isn’t this similar to Munger’s idea of creating a “latticework of mental models”?

It is, I believe.

Anyone can read five books on a topic and be an expert. In fact, I often consider myself an ‘expert’ after finishing just one book!

Well, that may be true i.e., you can be an expert on a subject after analytically reading five books. But what makes the real difference is how you read those five books.

If you read those five books analytically, you will become an expert on what five authors have said.

But if you can read those five books syntopically, you will develop your own unique perspective and expertise in the field.

In simpler words, syntopical reading is all about you and the problems you are trying to solve by reading books. It’s not anymore about the authors of those books.

So, in the ‘syntopical’ sense of reading, the books you read are simply tools that allow you to form an understanding that’s never quite existed before.

Here, you create a latticework of the information in those books with your own life experience and other knowledge to create mental models and new insights.

This is how you become an expert in your own right.

How to Read Syntopically
Here is Adler’s suggestion of five steps to syntopical reading:

1. Identify the five (or ten) relevant books you need to read from a sea of irrelevant ones – like the ones on investing and human behaviour I mentioned above. Read those books ‘analytically’ and make your notes.
2. Assimilate the language of each author into the terms of key words that you choose. Like, bring together all ideas on “margin of safety” as suggested by Buffett, Klarman, Graham, and Marks. Don’t just search for the exact terms (“margin of safety” here) but for all relevant ideas that describe the idea. I realized this while reading Buffett’s letters. There’s no point in reading all letters year-by-year. Instead, it’s better to choose a focused topic (like “float” or “compounding”) and then understand how Buffett has used that over the past 45 years.
3. Frame clear questions that will shed light on the problems you are trying to solve by reading those books – like “How do smart managers allocate cash?” or “How do smart investors assess management quality?” In case any author fails to address any of your questions, know that you had messed up at the inspection stage.
4. When you ask a good question, you’ve identified an issue. At this step, you identify the pros and cons of a specific topic that helps you flesh out all sides of an issue, based on what you are reading. When you understand multiple perspectives within an issue, you can come to your own conclusion (which may be different that what a single author has suggested, and thus adds unique perspectives).
5. The first four steps of syntopical reading help you answer the questions “What do the authors say about an issue?” and “How do they say it?” Now, at the final stage, we create the latticework upon which you hang the answers you have arrived at by assimilating what you have read and your own experience and intelligence. This is the step that, as Adler writes, can clear away the deadwood and prepare the way for an original thinker to make a breakthrough.

In all, and as you must have realized by now, syntopical reading is probably the most rewarding of all reading activities.

The benefits are so great that it is well worth the trouble of learning how to do it.

Make a Book Your Own
The four levels of reading we discussed above can help you frame the best ideas out of the books you read. But how do you remember those ideas long after you’ve read them?

The answer is – by making a book your own.

And how do you make a book your own?

The answer is – by asking questions to the book, and seeking answers within it.

In fact, if you have the habit of asking a book questions as you read, you are a better reader than if you do not. But then, just asking questions won’t take you far. You also need to answer them, and this is much easier done with a pencil in your hand.

As Adler writes…

The pencil becomes the sign of your alertness while you read. It is an old saying that you have to “read between the lines” to get the most out of anything. The rules of reading are a formal way of saying this.

But we want to persuade you to “write between the lines,” too. Unless you do, you are not likely to do the most efficient kind of reading. When you buy a book, you establish a property right in it, just as you do in clothes or furniture when you buy and pay for them.

But the act of purchase is actually only the prelude to possession in the case of a book. Full ownership of a book only comes when you have made it a part of yourself, and the best way to make yourself a part of it—which comes to the same thing—is by writing in it.

• Underlining or circling of major points
• Vertical lines at the margin to emphasize a statement already underlined or to point to a passage too long to be underlined
• Star, asterisk, or other such symbol at the margin for emphasis
• Numbers in the margin to indicate a sequence of points made by the author in developing an argument
• Writing in the margin, or at the top or bottom of the page to record questions (and perhaps answers) which a passage raises in your mind

Do any of these, or anything you are comfortable with to make the book your own.

Like, as a true investor, you don’t just hold a stock but own a part of a business, don’t just hold a book but make it your own.

Read, My Friend
I recently came across this wonderful article on Farnam Street, titled “The Buffett Formula – How to Get Smarter“.

The answer that the author suggests, and as Buffett has stressed upon for long, is – Read a lot.

Warren Buffett says, “I just sit in my office and read all day.”

Here’s Charlie Munger’s edition…

We read a lot. I don’t know anyone who’s wise who doesn’t read a lot. But that’s not enough: You have to have a temperament to grab ideas and do sensible things. Most people don’t grab the right ideas or don’t know what to do with them.

What Munger says about people “not grabbing the right ideas”, Adler wrote in a different way in his book…

The person who says he knows what he thinks but cannot express it usually does not know what he thinks.

So read, my friend.

Read a lot.

Don’t just read to absorb information. That’s what everyone else is doing.

Instead, read to ask questions. Read to look for answers. Read to understand the various answers. And read to decide for yourself the best answer for the question you asked.

Now, if you think what I just suggested sounds like a lot of work, well you’re right!

I am sure most people won’t do it, just like most people will never sit quietly to understand why they are investing in the first place.

But you do it…for your own sake.

Remember what Munger says, “The game of life is the game of everlasting learning. At least it is if you want to win.”

I’m sure you’re here to win.

Happy reading!

Image Source: indiaphoto[dot]org

Since founding his investment partnership in 1983, Klarman has not only produced unrivaled returns (in excess of 20% per year), but he has also from time to time offered wise and timeless commentary on markets and the craft of investing.

He is the author of Margin of Safety, Risk Averse Investing Strategies for the Thoughtful Investor, which became a value investing classic ever since it was first published in 1991.

As I was reading Margin of Safety for the third time, I thought of collating the key ideas Klarman has written about, and present to you as a compilation.

These ideas are hardly all encompassing of the wisdom Klarman distills through this amazing book, but these have helped me as an investor over the years. This book was written more than 20 years ago, yet Klarman’s ideas are perfectly suitable today.

All ideas in this Special Report represent direct quotes of Klarman from Margin of Safety. I have not tried to interpret them for the simple reason that I couldn’t have said better what Klarman says through these thoughts.

Click on the image below to read the 30 big ideas that Klarman presents through Margin of Safety, which I believe can help you become a more sensible and simpler investor.

30 Big Ideas from Seth Klarman’s Margin of Safety
(You can also ‘right click’ and ‘save as’ to download the file)

Happy weekend reading!

———————–Safal Niveshak Value Investing Unconference 2013——————
Announcing “The 2013 Safal Niveshak Value Investing Unconference”, a 2-day meetup of Safal Niveshak tribesmen where we discuss and debate unique and profitable investment ideas and get to know other members of this tribe better. Seats filling up fast! Click here to Register.
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One of the great enduring myths of the Indian middle class is that an investment in real estate can never go wrong, and that buying or constructing a house is the best investment that you can make.

I believe Vishal himself wrote a post on Safal Niveshak stating that his house was the best investment for him.

———————–Safal Niveshak Value Investing Unconference 2013——————

Announcing “The 2013 Safal Niveshak Value Investing Unconference”, a 2-day meetup of Safal Niveshak tribesmen where we discuss and debate unique and profitable investment ideas and get to know other members of this tribe better. Click here to Register
—————————————————————————————————————–

Well, we are here to see if that statement holds true regardless of age, life situation, and individual circumstances for all investors. But first…

What is an investment?
If you were to avoid Ben Graham’s definition for some time, in simple words, an investment is something where we deploy our money, time and effort into, so that it can generate a reasonable amount of return or create wealth in a reasonable time period.

By that yardstick, your education is an investment, the fee you pay for a certification which helps you to get a better job is an investment, and the subscription you pay to a stock newsletter can also be an “investment”.

However for all investments, there is one common factor which determines the future returns you derive from it. That factor is the “price” you pay for the investment.

I believe no long-time reader of Safal Niveshak will say that we can buy an “investment” at any price and expect it to be successful.

This brings us to the main point of this article – Is real estate really your best investment?

Real estate is the perennial favourite of the Indian investor. But is buying a house at ANY price a wise investment?

A house is an essential need for an individual, not an investment, exactly like insurance. But the guise for the vast majority is that it is an “investment”.

Do they plan to sell the house after 10 years? No. Do they intend to run a reverse mortgage on the house? No. Then how exactly will this house be an investment?

Clothing, food, and shelter are the basic needs of any individual, so buying a house or flat as primary residence makes sense.

However, buying at any price due to the fallacy that “real estate prices never go down” does not make sense. But, look around you, and that’s exactly what is going on!

People are willing to throw money at any substandard flat, in any remote location, without proper roads, electricity or water supply, but just because ‘real estate is safe’.

They are also willing to take loans at inflated prices from banks and willing to spend 10-15 years of their lives as corporate wage slaves. And they call this an investment!

If one is sure that he/she will live in a city for a period of 5-10 years or intends to settle down in that place – for work and/or retirement – then yes, it stands to reason to buy a house or a flat.

Otherwise, a house property acts as a shackle to the individual, forcing him to curtail his career moves and flexibility.

Another argument is that buying a house acts as a forced saving. Well, I can buy this argument if this is for a house for residential purposes. But if it is for investment purposes, it might be better if the money were invested via a SIP in a well-managed mutual fund for 10-15 years.

Case for real estate investment
We can distill the case for real estate investment as follows.

If you need a house to live in, you are reasonably certain about the city you want to live in, and your career, plus you can muster up at least 30-40% of the price as down-payment, please go ahead and buy.

Else, rent and invest the surplus in a well-managed mutual fund on an SIP basis.

And please, don’t create arguments like, “…the rent will be equal to the EMI in any case.”

I have rarely heard of anyone paying rent of Rs 40,000 per month for a rental apartment for reasonable living accommodation (I’m talking about an average Indian middle class here). Especially if you are not sure, please invest your surplus in both equity and debt, based on your asset allocation.

Still, if there exists a need for residential property as an investment, then make sure that your income from other sources (salary, dividends, interest income) exceeds any potential EMI payments that you might need to make.

To conclude, real estate is a great investment…but it is not a great investment at all times and at any price.

“Buyer beware” must be your motto, dear tribesman.

About Nishanth: Nishanth is a middle-class 30-year old IT software engineer, hailing from Kerala and currently residing in the US. He has been investing in the Indian stock market for eight years now and is a keen follower of value investing.

If you have ever wanted to network with fellow small investors but never knew where to look…

If you are open to learn from others’ investing gains and pains…

If you are open to take a mini-holiday of different kind…

Here’s announcing “The 2013 Safal Niveshak Value Investing Unconference” – a 2-day meetup of Safal Niveshak tribesmen.

The idea is to get together, discuss and debate unique and profitable investment ideas and get to know other members of this tribe better.

And why I call it an “Unconference”? It’s because the agenda and structure of the event will be created by tribesmen who will attend it, plus it will not be about an expert-to-peer learning but peer-to-peer learning and collaboration.

For tribesmen in West and South India

• Dates: 28 & 29 Sep. 2013 (Sat & Sun)
• Tentative Place: Goa

For tribesmen in North and East India

• Dates: 19 & 20 Oct. 2013 (Sat & Sun)
• Tentative Place: Agra / Rishikesh

Who must attend?
You must participate if…

• You are already a “long-term” investor in the stock market.
• You are planning to get into stock investing (not speculation) in a serious way.
• You want to not just learn, but also contribute with what you have already learnt.

But if you want to attend the Safal Niveshak Unconference with a view to sell your wares (advice, broking, PMS etc.), please avoid attending, for you will risk being looked down upon.

Also, if you already are an “intelligent” investor expecting to meet a roomful of “intelligent” investors, fanatical about investing and discussing complex ideas, you should avoid attending, for you will be disappointed by the low “investing IQ” of participants (like me).

Seeking no experts, only un-experts…
The Safal Niveshak Value Investing Unconference will be a facilitated event where the tribesmen will create the agenda and lead discussions around a few themes.

I am seeking volunteers to present / contribute on specific topics like…

• Financial shenanigans
• Identifying a company with “sustainable” competitive moat
• Making behavioural finance work in investing
• Appraising management’s capital allocation decisions
• Special situation investing

Apart from these, we will be discussing a lot of personal experiences in picking up great stocks and, of course, bad stocks.

The exact modalities of the Unconference will be worked out as we move forward.

Overall, the idea of The Safal Niveshak Value Investing Unconference is not just to leave you with actionable ideas, but also insights into how other smart small investors think.

You will benefit from this invaluable knowledge for years to come.

Approximate Costs
If you pass the above-mentioned criteria of “who should attend the Unconference”, here are the details of the approx. costs of attending.

The to-and-fro journey tickets and accommodation have to be arranged by you.

Apart from this, you have to pay Rs 3,000/- as Safal Niveshak Unconference Fee.

Register
If you wish to register for The 2013 Safal Niveshak Value Investing Unconference, please fill up this small form, and then wait to hear from me soon.

To encourage participation from all, the idea is to limit the number of tribesmen to 30 (first-come, first-served), so please register only if you are serious about attending.

He sent me his notes from the trip, which I requested to be used on the Safal Niveshak website.

Jana agreed, and here are his (unedited) notes from his trip to Omaha.

My Visit to Berkshire Hathaway Annual Meeting 2013
by Janardhanan Vembunarayanan

In 2006, I got interested in investing. I read a lot about Warren Buffett and his investment style. I wanted to become a shareholder of Berkshire Hathaway and attend the shareholders meeting.

Finally in Jan. 2012, I purchased the Class B shares. In 2013, I got an invitation to attend the shareholders meeting and I was on my way to Omaha. It was a dream come true after 7 years.

I landed in Omaha on 3rd May around 2:00 p.m. I checked into Travelodge hotel and immediately headed to ’3555 Farnam Street Omaha, NE 68131′.

Why? It is the headquarter of Berkshire Hathaway. I could not get into the building but I took a picture of the address. I can see my reflection on the address!

It is about 2 miles from his office. He purchased the house in 1958 and it costed him US$ 31,500. I did an estimate on Zillow and its value is around US$ 709,433 now. In 58 years, the compounded growth rate comes to 5.83%. It is a single family home with built up area of 5,830 sqft and the lot size of 31,363 sqft. It is me standing in front of his house.

I headed to the shareholders reception which was in ‘Boreshims’, a Jewellery shop and a subsidiary of Berkshire. Shareholders were busy purchasing jewellery and they were partying as well. The place was electrifying.

Economy

I’ve never made the least effort to predict short-term swings in macroeconomics. When things are awful, I predict that some day they will be better. When things are wonderful, I predict some day they will be awful. But apart from those general feelings, I never try and predict. I think it’s a waste of time.

High Frequency Trading

Well, I think the long term investor is not too much affected by things like the flash crash. That said, I think it is very stupid to allow a system to evolve where half of the trading is a bunch of short term people trying to get information one millionth of a nanosecond ahead of somebody else. It’s legalized front-running. I think it is basically evil and I don’t think it should have ever been allowed to reach the size that it did and I now see that people are starting to talk about cutting it back. Why should all of us pay, a little group of people, to engage in legalized front-running of our orders?

Bankers

A banker who’s allowed to borrow money at x, and loan it out at x + y, they will just go crazy and do too much of it if the civilization doesn’t have rules that prevent it. They are like heroin addicts.

Had a great sleep after watching the video. On May 4th, I went to ‘Century Link Center’ to attend the annual meeting. I was there at 7:00 a.m. expecting to get the front seats. The front rows were full and I had to go all the way back.

1. The Great Crash 1929 – John Kenneth Galbraith
   
2. A Few Lessons for Investors and Managers From Warren Buffett – Peter Bevelin
3. Investing between the lines – L.J. Rittenhouse (Recommended by Warren in his Annual Letter)

Peter Bevelin is the author of one of my favorite books ‘Seeking Wisdom’ and I had the privilege to meet him.

1. Buffett lobbies for the role of the villain in “Terminator 5″, but Charlie Munger gets it instead.
   
2. Buffett’s testament on Salomon Brothers. Lose money for the firm I will be understanding. Lose a shred of reputation for the firm and I will be ruthless.

At 9:00 a.m. Buffett went through the results of Q1. Then the Q & A session started. It went until noon 12:00 p.m. It resumed again at 1:00 p.m. and went until 3:30 p.m. Buffett (82 years) and Munger (89 years) answering questions for 5 1/2 hours with topics ranging from Health Care,Insurance,Real Estate, etc… is mind blowing. The ones I liked are…

Which ratios to look for when analyzing companies

Understanding the business is more important than looking at ratios like p/e. Buffett mentioned he was not sure how Berkshire would have been if they just looked at ratios. Munger response was ‘It would have been poor’

Will kids’ behavior be affected by inheritance amount they receive from their parents

Buffett: “Parents behavior impacts their kids more than the amount of inheritance they may receive from them.”

Best one for the day

Munger: “The game of life is a game of everlasting learning. At least, it is if you want to win.”

About the current environment

Buffett: “This environment makes it clear that owning business is better than fixed-dollar investments

Bitcoin

Munger: I have no comment whatsoever on Bitcoin being some kind of universal currency.
Buffett: Of our $49 billion, we haven’t moved anything into Bitcoin.

It was all over by 4:00 p.m. I was stunned by the duo’s breadth and depth of the knowledge. Clearly they were not born genius. They made themselves genius by being a Learning Machine. The take away for me was “There are no silver bullets” and “Keep Learning”

Next day on May 5th on the way to the airport I went to Nebraska Furniture Mart. It is a subsidiary of Berkshire and is the largest home furnishing store in America.

Last year, in discussing how managers with bright, but adrenalin‐soaked minds scramble after foolish acquisitions, I quoted Pascal: “It has struck me that all the misfortunes of men spring from the single cause that they are unable to stay quietly in one room.”

Even Pascal would have left the room for Mrs. Blumkin. About 67 years ago Mrs. Blumkin, then 23, talked her way past a border guard to leave Russia for America. She had no formal education, not even at the grammar school level, and knew no English. After some years in this country, she learned the language when her older daughter taught her, every evening, the words she had learned in school during the day.

In 1937, after many years of selling used clothing, Mrs. Blumkin had saved $500 with which to realize her dream of opening a furniture store. Upon seeing the American Furniture Mart in Chicago ‐ then the center of the nation’s wholesale furniture activity ‐ she decided to christen her dream Nebraska Furniture Mart.

She met every obstacle you would expect (and a few you wouldn’t) when a business endowed with only $500 and no locational or product advantage goes up against rich, long-entrenched competition. At one early point, when her tiny resources ran out, “Mrs. B” (a personal trademark now as well recognized in Greater Omaha as Coca‐Cola or Sanka) coped in a way not taught at business schools: she simply sold the furniture and appliances from her home in order to pay creditors precisely as promised.

Omaha retailers began to recognize that Mrs. B would offer customers far better deals than they had been giving, and they pressured furniture and carpet manufacturers not to sell to her. But by various strategies she obtained merchandise and cut prices sharply. Mrs. B was then hauled into court for violation of Fair Trade laws. She not only won all the cases, but received invaluable publicity. At the end of one case, after demonstrating to the court that she could profitably sell carpet at a huge discount from the prevailing price, she sold the judge $1400 worth of carpet.

I boarded the flight around 2:45 p.m. back to California. On the way back I immersed myself into the book ‘Predictably Irrational’ written by ‘Dan Ariely’.

This is one of the best books in Behavioral Economics and Decision Making.

To the left of me I saw a passenger reading a report on ‘Coca Cola’. I sneaked into the report and saw words like Buffett and Munger. Out of curiosity to find out what the report is, I introduced myself as a Shareholder of Berkshire. I asked him what report he is reading. It was ’1988 Valuation of Coca-Cola’ by Bud Labitan.

He told me that he is also a shareholder and his name is Cialdini and he is an author of a book called as Influence. Yes this is one of the best books on Psychology I read several times and it has changed by way of thinking. Influence: The Psychology of Persuasion – Robert B. Cialdini. I cannot believe my Serendipity. Several years back Charlie Munger gifted him 1 share of Berkshire as the book Influence helped him to decide on an investment decision for Berkshire. I took some tips from Cialdini on…

1. Notes taking
2. Avoiding Procrastination

It was a dream come true!

Anyways, here’s the transcript of 2013 Berkshire meeting as shared by another tribesman, Manish Sharma. Thanks Manish!

But as the author of the transcript warns, these are based on his recollections only, and without the aid of a recording device. Thus, they should not be relied upon.

Happy weekend reading, guys!

Her answer stumped me, simply because I was not expecting it and in the way she said it.

She said, “Papa, money is something that, if we don’t waste, can get us bigger and better things in the future.”

“Wow!” I told her. “You deserve a hug for this.”

How Kavya defined money may not be its perfect definition, but it effectively contains almost the entire essence of how we must handle it (money).

It contains the importance of saving money by spending less money now, and letting the power of compounding grow that money so that we can maintain our purchasing power (and still have more money) in the future.

I was especially amazed at her answer because the same child, till about two years back, thought that money came from the ATM, and that her father could get as much as she wanted to buy as many toys as she could set her eyes on. That’s what most kids think these days.

Anyways, since then, it hasn’t been an easy ride for me and my wife to get the right money ideas in her brain…but then who says parenting is easy?

My first-hand experience in parenting
I don’t remember how many times I have told Kavya to change her clothes after coming from school, brush her teeth twice a day, do her homework before going to play, and do anything else for that matter.

It starts with “Please do this!” and ends with “This is the fifth and last time I’m telling you to do this!”

I am sure if you are a parent, this is also a normal part of your daily life.

As parents, we ask, and ask, and ask, and ask…and if we are lucky, our kids cooperate after the fourth or fifth request or after a loud but otherwise harmless scolding.

We complain that our kids never listen to us, and ask other parents how they get their kids to behave, eat healthy food, and go to sleep on time.

If that’s not all, we consult the Internet and several books on bringing up well-cultured and disciplined children.

Then, even as we apply all those techniques, our kids just don’t listen. But, they do observe.

Yes, that’s the way kids listen to parents – not to their words, but to their actions.

While I am yelling at Kavya, she is watching me. While I am arguing with my wife, she is watching us.

While I speak out my mind at rash drivers or lose my patience during traffic jams, she is watching me.

While I spend money, she is watching me.

Our kids are watching our every move, even when they don’t listen to one word, at least not till we say it for the fifth time.

Our kids also watch our money behaviour
I have been a parent for just the past eight years, so whatever I am suggesting below is from my limited experience.

The truth I have realized is that, as parents, we shouldn’t worry that our children never listen to us.

Instead, we should worry that they are always watching us.

When it comes to money, I have realised that whatever little Kavya has learnt has been by watching me and my wife handle our money.

So I feel proud to know that, at a tender age of eight, she knows the importance of…

• Spending less than earning (and now she is spending even less, seeing her parents spend even lesser as the family income has come down)
• Not following the crowd (she is happy that her father owns a small car even as her friends’ fathers are moving to bigger ones)
• Avoiding borrowing money (she is happy that Papa has no liabilities on his head and that’s why he will never have to go to work on a job to earn money to pay off any debt)
• Giving (she reminded us that the annual sponsorship of two kids are coming up due, and is always willing to give away her possessions to anyone who cannot afford them)
• Enjoying life instead of running after money (she wants Papa and Mummy to stay with her 24×7, even if that means lesser money to spend on dolls and dresses)

There are many more things that she will learn about money as she grows older (at least this is what I hope).

In fact, here is broad plan I am working on to teach her the several key ideas on money at different points in her life…

Cheatsheet: What I’m Teaching My Child about Money, and When

I hope this cheat-sheet also guides you in your effort to raise a financially responsible child.

The bottomline is…
As a parent, I have learnt that the only way we can design our children’s futures is by our own behavior.

So there is no point teaching them (or wanting them to learn) things we ourselves are not doing.

Telling them, “We should not waste money!” or “We should give money to the needy” will, in my experience, not lead them to do what we want them to do.

However, showing them how to not waste money and how to give to the needy will surely lead them to something good.

In short, keeping in mind that our children are not only watching us but learning from us should be reason enough for us to change our behavior before it is cast in stone for them and for their future generations.

I am just writing from my experience, however limited it may be.

The tribe would be happy to hear views from the more experienced parents and grandparents on how they have inculcated safe money habits in their children and grandchildren.

Experience is, after all, the best training manual.

I passed one such moment last weekend, watching the Iran-born Saudi Arabian music sensation Alaa Wardi render his composition of a couple of Bollywood songs in a very unique style.

I have loved contemporary music for many years now, but watching Wardi was an experience in itself, and for several reasons.

So what’s so special that I found in Wardi?

As impossible as it may sound, Wardi does not use instruments to generate music for his songs. Instead, he creates his own music using just his body – mouth, tongue, hands, and chest.

You have to watch this video below to see his classy act (Click here if you can’t see the video)…

It’s a Hindi song, but don’t worry if you don’t understand the language for the music will enchant you.

A lot, I think.

Before I move ahead, I know you may accuse me of finding investing inspiration in everything I see around me. But that’s the way I look at my world – for inspiration on not just investing, but on living life.

And believe me, there’s enough inspiration to be found everyone. One just needs to open up to the possibilities.

Anyways, coming to Wardi and his amazing music, there are a few investing lessons I can relate to…

1. Harmony
Like Wardi shows, the different music he creates using different body parts all contribute towards the overall performance. That’s what harmony is all about.

In investing as well, you need a great harmony in understanding a business, knowing how to value it, and then having the emotional intelligence to buy it at considerable margin of safety.

Try missing a step, and especially the last one, and you will see an unharmonious disappearance of your savings.

2. Independence
Wardi shows that he needs no musicians to compose his classy music. He has learnt and practiced to do it all by himself.

In investing, it’s the same as learning to be an independent, do-it-yourself investor. It’s not easy to become one, but then who said successful investing is easy?

3. Humility
Just see the humility with which Wardi performs. It’s easy to make out when someone is being arrogant even if he or she is acting in front or the camera. Wardi shows no signs of arrogance.

As an investor, you must avoid arrogance at all times. So what if your last stock-pick turned a multi-bagger? Watch out for overconfidence bias.

4. Precision
Wardi shows an amazing precision in his execution, for without it, his performance would have been noise.

Precision is also vital when it comes to investing. You must not expect a perfect outcome, but try to avoid mistakes that can cause permanent loss of capital.

A great way you can do this by having a precise process and the discipline to act on it.

5. Practice
In his book ‘Outliers’, Malcolm Gladwell talks about the importance of deliberate practice as a way to succeed at anything in life.

I’m sure Wardi has passed Gladwell’s “10,000 hours of deliberate practice” test to perform the way he has done.

As an investor, deliberate practice is what you require to get good at picking the right kind of stocks. If you think you don’t have the time or patience to do it, ask someone else who can do so to manage your money.

Go, create your art!
Learning how Warren Buffett invests or what Charlie Munger says about mental models and behaving well is one thing, creating your own ‘art’ of investing is different.

Believe me, investing is simple but not easy.

As Graham writes in The Intelligent Investor…

The art of investment has one characteristic that is not generally appreciated. A creditable, if unspectacular, result can be achieved by the lay investor with a minimum of effort and capability; but to improve this easily attainable standard requires much application and more than a trace of wisdom.

So, it’s important to learn the art of investing, and then apply your learning to create a masterpiece of a financial life.

Like Wardi is doing in his life, I wish that you keep living and keep rocking!

As you hear him out to get over your Monday morning blues, I’ll watch his second beautiful composition.

Dev has been a long time tribesman of Safal Niveshak and a friend. I have come to respect him a lot via our discussions and also via his work at Stable Investor, a website dedicated to long-term investing.

True to the spirit of Safal Niveshak TribeStar, Dev lays bare his entire investment philosophy for us to learn.

He claims to be no superstar of an investor. But as the legendary investors say, “Focus on the process and not the outcome,” Dev is a superstar when it comes to working on a sound process that I surely believe will lead him to a great outcome in the future.

Over to you Dev!

Safal Niveshak: Before I pick your brains on investing, please share about your life, family, and career.

Dev Ashish: I was born in an upper middle class family of advocates and doctors. But instead of becoming a doctor or a lawyer, I chose a different path and went on to complete my engineering.

After engineering, I got a job in an Indian Fortune 100 organization in oil refining sector where I worked for a few years. After that, I went onto complete my MBA. Very soon, I would be joining the banking sector.

Being born and brought up in Lucknow seems to have had an effect on my investing style too.

I prefer ‘Nawabi-styled’ passive and long term investing.

It is based on the premise that you should not work for money. But money should work for you.

SN: What got you into investing, and how did you begin to learn about the market and investing in general?

Dev: There were two things which got me interested in investing.

First was when my father used to occasionally bring home a copy of The Economic Times. He had his money invested in shares of a few MNCs and would check their prices every few months.

My father told me that I could buy pieces (shares) of businesses which featured in list of stock quotes provided in the newspapers.

Being a kid, I felt excited to be able to buy part-ownerships in companies without having to setup any infrastructure or factories!

Second thing which got me excited was the constant flow of dividend cheques, which used to arrive in our mailboxes from these MNCs.

I just loved the concept that you are being paid to hold pieces of paper (physical shares). It was the concept which I am still happy to quote every now and then.

You should not work for money. Rather the money should work for you. I really liked the system of getting a regular flow of passive income (cash flow) without going to work for somebody else.

SN: What would you say is one of the most important lessons you learned early on?

Dev: I don’t know how this concept found its way into my head, but I always feel that it is very important for an asset to generate regular cash flows.

Most people focus solely on capital appreciation. But I think that though capital appreciation is important, it is actually the regular, dependable and sustained incoming flow of cash, which changes one’s decision making with regard to building long-term wealth.

Suppose, one purchases a property (ex: land) to sell after a few years at higher prices. This would require a person to wait for years to sell the property and lay his hand on the cash, which can then be used elsewhere.

In contrast, if one purchases a flat or a commercial property, which generates monthly rent, then this constant flow of monthly rents can be used to purchase more cash generating assets.

One can use this rent for payment of EMIs on loan taken to create more assets. It’s once again an example of your money working to create more assets for you.

SN: How would you describe your investment philosophy?

Dev: I don’t look at my stock portfolio in isolation. I have investments in stocks, mutual funds, PPF, bank deposits & precious metals.

I always try to look at the bigger picture. Being young, I should be (theoretically) investing close to 100% in equities & mutual funds. But I consider myself to be a balanced investor and have resorted to diversification across multiple investment vehicles.

I invest regularly in mutual funds, individual stocks, PPF and bank deposits.

Mutual fund investments allow me to create a growing corpus to fund my retirement or my entrepreneurial ambitions.

The amount I invest in PPF is generally equal to the difference in annual premium amounts between term and endowment plans of LIC. Though I made the mistake of buying a few endowment plans of LIC some years back, I have corrected those mistakes by selling them (at a loss) and buying plain term plans.

These plans do not pay anything in case I survive, but are incredibly cheaper than endowment ones. Insurance is not an investment and hence, I treat the two of them differently.

I use bank deposits as war chests to fund further asset purchases or expenditures in short term (less than 5 years). If I am sure about a future cash outflow (expenditure), I start an online recurring deposit which would provide me with lump sum money at maturity to provide for the expenditure.

I use fixed deposits as emergency funds and to park cash when I cannot find any investment opportunities.

But all this does not mean that I don’t invest in individual stocks. I have been investing in them as and when I feel comfortable with their valuations or future growth prospects.

I generally follow the Core-Satellite approach for individual stock portfolio (discussed later).

SN: How do you typically find ideas and what is your selection process before an idea gets added to your portfolio?

Dev: I would say that I am an amateur and it is not I who finds an idea. It’s rather the idea which finds me.

By this I mean that I invest only in those ideas which appeal to common sense, which don’t require knowledge of rocket science to simply look profitable.

An idea should be so ‘obviously’ good on few important parameters that it must just jump out of a list of stocks which I regularly track.

For example, In March 2009, buying any large cap stock was the ‘most-obvious’ way of making money. But this required one to have the knowledge to judge the overall market valuations.

So, if the index was trading close to P/E multiples of 12-14 and a large cap stock was available close to its multi-year lows, and there was enough evidence that company was not going to go bankrupt or stagnate in years to come, then it made perfect (obvious) sense to buy that stock.

It is same as waiting to buy clothes, shoes, etc. in annual sales where discounts are close to 50%.

If a person is ready to buy clothes at a discount, why shouldn’t one buy beautiful assets like stocks in a discount sale?

I stick to Buffett’s philosophy of operating within my own circle of competence. I have been an oil-man in past. Hence I understand this sector better than any other sector.

So it makes sense for me to look at all companies within this sector and to stay updated about the news and latest developments in this sector.

Though I consider myself to be a long term investor, I must confess that I do look for trends in long term data.

History may or may not repeat, but it does rhyme at times. Share price valuations are generally bound by irrational exuberances (highs) and graveyard like pessimisms (lows).

If I am able to understand these boundaries for a particular sector, then I think I will be able to make a well-educated guess about the good time(s) to enter stocks in this sector.

I also had a very short stint in steel industry where I learnt a lot about the business, its cycles and customers. I have recently started devoting some time to analysing steel businesses. But considering the complexities of this cyclical industry, I think it would take me a few more years to completely understand it.

And as already mentioned, I seemed to be programmed to appreciate the concept of dividends. And I am on same page as my self-appointed mentor John D. Rockefeller, when he said – “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”

Dividends give cash to be used for buying more assets. I understand that most people prefer going for growth stocks offering lower dividends. But as far as I am concerned, I prefer keeping a balance between dividend and growth stocks.

I follow a core-satellite approach where I try to maintain a core of a few dividend stocks and satellite of few growth stocks (& few short term investments).

At first, this may seem a bit difficult because dividend produced initially may only be a trickle. But as a not-so-well-known private investor Joshua Kennon* once mentioned, being a long term investor, I can wait.

And if I can wait then this trickle can become a drip. A drip can become a flow. A flow can become a stream. A stream can become a torrent. A torrent can become a deluge. That is the very nature of compounding.

*Joshua Kennon is a very capable private investor. You can follow him here.

So, when I buy stocks for the core of my portfolio, I am looking at buying cash-generating machines, which provide me with regular dividends to fund my other stock purchases rather than trying to make money by capital appreciation.

I am not looking for multi-baggers now. As Buffett says, “I don’t look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.”

SN: How do you take care of ‘risks’ while investing?

Dev: As an investor, I know that I can never eliminate the risk of being wrong.

At the most, what I can do is to be well diversified so that my one wrong investment decision does not wipe out my entire net worth.

This issue of diversification reminds me of a quote by Shelby Davis – “We feel a portfolio is like a flower garden. As portfolio managers, our job is to plant a few seeds every year and weed out a few mature plants. It is not to uproot the garden. We have a portfolio mix where we hope that something will be in bloom all the time, but we do not expect everything to flower at once.”

And like previous our TribeStar, Mr. RKC, I also prefer accumulating stocks on a regular basis rather than going for lump-sum investments.

In this way, I get time to judge my stock picks. In case, I am not convinced with the business, I can exit the stock.

In case I am convinced, I can keep on accumulating them.

SN: What have been the most challenging investment lessons you have learned?

Dev: It is really tough to be greedy when others are fearful. Really tough!

But with time and experience, one can become more comfortable with this approach.

Though people (and myself) would want a smooth, artificial upward line as returns on portfolio, the world doesn’t work like that.

We can do hours and hours of analysis and pick a stock which we feel is undervalued. But the market doesn’t know that we have put so much effort in our stock picks.

Markets are driven by fear and greed. Period.

Hence, we can never eliminate the risk of being wrong.

SN: How has your approach toward investing changed over the years?

Dev: I have been investing in stock markets for more than 10 years and I still consider myself to be an amateur and a student of the markets.

Earlier, markets seemed more like gamble. But after getting a taste of common sense based investing i.e., sticking with good companies and buying them in hard times, I have more or less remained loyal to this approach till date.

I still try to handle my stock portfolio as a whole rather than as a set of individual stocks.

I stick with dividend paying, boring and predictable businesses for the core of my portfolio.

As far as the satellite part is concerned, I try to buy companies having at least an average growth potential and a decent, predictable management.

Every now and then, I do take up some short-term positions. But these are limited to less than 5% to 10% of my total stock portfolio.

Earlier, due to my unpreparedness to handle the market madness, I used to feel a lot of pressure to buy or sell stocks. But, now I maintain a hand’s distance from the market and don’t feel the pressure to buy or sell anything.

If I can’t find anything attractive enough to buy, I continue hoarding cash in anticipation of finding something useful (this does not include my regular mutual fund investments).

Also, now I don’t feel the urge to show any activity in stock markets for the sake of activity. Though being active in stock markets is considered glamorous, I prefer my own passive ways of building long term wealth.

And to quote Joshua again, “I will only exchange cash for ownership when the price and terms put the probability of a highly successful outcome overwhelmingly in our favour.”

SN: In your personal portfolio how many stocks and mutual funds do you own on average at any one time?

Dev: I have made a conscious decision to hold less than 15 companies in my portfolio. At present, I hold investments in 13 companies, with none being more than 15% of size of the stock portfolio.

As far as mutual funds are concerned, I am presently invested in 3 schemes focusing on large-caps and multi-caps.

I follow the SIP route to invest in these schemes every month. I chose dividend payout options in the two large cap oriented schemes, as these schemes invest in stable, mature & large businesses capable of sharing their profits (in form of dividends) with shareholders.

These dividend payouts can be used to buy good quality stocks for individual stocks portfolio.

I am also planning to go for another multi-cap and a mid-cap fund. This would take my total number of schemes to five, which I consider apt for my current investment-comfort levels.

I also plan to increase my monthly contribution in at least 2 of these 5 schemes every year, till the time I retire (or join Benjamin Graham in heaven).

SN: As investors, one of the most difficult decisions we must make is with respect to selling stocks. What factors help you make “sell” decisions?

Dev: Now this is tough. I would rather say that this is a big weakness for me. Being a self confessed long term investor, it is tough to sell something when you ‘want’ your holding period to be ‘forever’.

But nevertheless, I try to bring some structure in my sell decisions.

The primary reason to sell a stock would be if I am in need of money. So, selling of stocks would be used as a last resort because I do have my funds parked in emergency funds, bank deposits etc.

Another big reason could be a negative change in the fundamental reason for which I initially bought the stock. This may be because of change (fall) in margins, rise of competitors, or a black swan event (for example, there is no point holding shares of a company managing its only asset, a toll road, which is destroyed by a freak earthquake in the region).

SN: What is the best investment advice you have ever received?

Dev: Compounding is the eighth wonder of the world. Have patience & give it a chance.

SN: What is the worst investment advice you have ever received?

Dev: Take a (personal) loan charging interest in excess of 15% and invest in IPOs. IPOs are sure shot way to double your money in a few days.

Like Graham, I feel that IPOs are an acronym for “It’s Probably (or Permanently) Overpriced.”

SN: What has been your favourite investing-related book and why?

Dev: It is got to be The Intelligent Investor.

For those who have already read the book, I think I can add nothing substantial to the list of its praise. For those who haven’t, I can only say that you are really missing out on something really worth reading, at least once in the life of an investor.

I personally like the book and regularly read parts of it because it is one of those books which are grounded in reality.

It does not tell you that you can get astronomical returns in markets. It tells you that in market, you can be successful if you are able to take care of the controllables, i.e., your own emotions, actions and reactions.

One of the key ingredients of stock market success is to avoid making huge mistakes and manage at least average results. And this book lays down a framework which reduces the risk of making big mistake in markets.

The book had such an impact on me that I immediately adjusted the way I managed my money and equities portfolio.

SN: If you had one piece of advice to share with other tribesmen, what would it be?

Dev: I have three.

One, reinvest your dividends and interest incomes. It is only when you reinvest your passive earnings that the magic of compounding begins.

Two, always be prepared. You never know when the market might offer you some great opportunity. It really does pay to show some COURAGE by using CASH in times of CRISIS.

Three, while calculating future returns from stock markets, don’t use figures like 15% or 20% in your calculations. A number around 10-12% is more saner and no-nonsense one.

SN: Thanks a lot Dev! Your insights have been amazing, and especially for someone who is starting out on his/her investing career. I hope other tribesmen take a leaf or two from your investment life.

And by the way, congratulations for your engagement! Hope this becomes the most valuable investment of your life and pays off huge dividends

Dev: Thanks Vishal! It’s been a pleasure sharing my learning as an investor. I hope the tribe is able to benefit in some ways out of it.

About Dev: Dev Ashish is an engineer and MBA and has worked in a Fortune 500 organization in oil refining sector of India. Dev is also a co-founder of a site dedicated to long term investing – Stable Investor. His hobbies include travelling, photography, wealth management & blogging.

You, TribeStar?
Well, you can become the next Safal Niveshak TribeStar!

You don’t need to be a super successful investor to be a TribeStar. All you need to have is a sound investment philosophy, even if in a development phase, and the willingness to share it with the Safal Niveshak Tribe.

Then, if you are willing, download this file, fill up the answers, and email them to me. As simple as that!

Email 1: I have 300 HUL bought at Rs 400. Given the confidence the parent has shown in the Indian business, do I buy more?

Email 2: Given an MNC’s confidence in the Indian consumption story, does it makes sense to buy other FMCG companies as well, despite their high valuations?

First, a couple of disclaimers…

1. I don’t write on specific stock actions (and may not do in the future), but this is an exception given the size of the action and because I have something to say here (it may be nonsense to you!).
2. I own HUL’s shares.

Anyways, here are “my” views.

Email 1: Should you buy more of HUL?
Promoters raising stakes usually signals good prospects for the company and its investors.

And when promoters are willing to pay a huge premium to buy more stake, it’s great news.

What is more, Unilever is supposedly spending its entire free cash flow of last year to acquire the additional stake in HUL, which contributes only 7.5% of its sales and 11% of its profits.

This should make me, as an investor in HUL, very happy.

But should I buy more of HUL at almost the price Unilever is willing to pay?

Not really! It’s important to understand the concept of “opportunity cost” in investing.

Opportunity cost is basically the cost of an alternative that must be forgone in order to pursue a certain action. In other words, it signifies the benefits you could have received by taking an alternative action.

Importantly, opportunity costs differ for different investors. So, the opportunity cost for Unilever (cost of an alternative forgone by it when it invests in HUL) will be different than yours’ (cost of an alternative forgone by you).

Maybe, Unilever has no other alternative to use its cash than to buy stake in HUL at such a premium.

Your decision to buy more of HUL is dependent on whether you have another better opportunity to invest or not.

It also depends on how attractive you see the opportunity in HUL in isolation, not what you see through the eyes of Unilever.

When faced with such situations, always remember the three big lessons taught by Graham in The Intelligent Investor:

1. Think of a stock as a part ownership of a business – Okay, HUL is a good business.
   
2. The market is there to serve you, not instruct you – Should I buy more of the stock at Rs 600 just because the parent is buying at Rs 600? No! Please avoid anchoring bias.
   
3. Always require a margin of safety – Is there sufficient margin of safety at Rs 600, when HUL’s P/E will be very high at around 35x? Doesn’t seem to me, but please do your own homework!

Simply put, in such situations – or in any situation while investing – go by the value of the business instead of the stock price.

So my answer to the first email is…

If you think that the current price – that reflects the premium that Unilever will be paying – is more than the value of HUL’s business, you should avoid buying the stock and instead (maybe) sell out irrespective of whatever anyone else (including Unilever) is saying or doing.

Email 2: Should you buy other FMCG stocks?
The answer here is simpler!

Here is what Howard Marks has to say on investing success…

Investment success doesn’t come from “buying good things,” but rather from “buying things well.”

What Marks effectively says is that “price” has to be the starting point for any investment decision making.

No stock (or any asset) is so good that it can’t become a bad investment if bought at too high a price.

So when someone says, “I only buy ABC kind of stocks” or “ABC is a superior stock,” that sounds a lot like “I would buy ABC at any price.”

This kind of thinking is dangerous!

No stock has the birthright of a high return. It’s only attractive if it’s priced right.

So, does it makes sense to buy other FMCG companies as well (like people were buying yesterday after the Unilever announcement), despite their high valuations?

No!

As Marks would tell you…

Investing is a popularity contest, and the most dangerous thing is to buy something at the peak of its popularity. At that point, all favorable facts and opinions are already factored into its price, and no new buyers are left to emerge.

The safest and most potentially profitable thing is to buy something when no one likes it. Given time, its popularity, and thus its price, can only go one way: up.

What do you say?

Just before the Titanic was about to embark on its maiden journey in 1912, one passenger asked a ship’s agent for extra insurance on some valuables in her luggage. The agent replied, “Ridiculous. This boat’s unsinkable.”

Captain Smith himself was asked about the safety of the Titanic. He answered – “I cannot imagine any condition which would cause a ship to founder. I cannot conceive of any vital disaster happening to this vessel. Modern shipbuilding has gone beyond that.”

Then, after the ship had struck the iceberg, a passenger asked her employer if they should do something about it. He replied, “Go back to bed. This ship is unsinkable.”

Ask me. As an analyst in 2008, I asked my friends and relatives to hold on to “great stocks” expecting that these cannot fall more than 20-30%, whatever the markets did!

As a team at my ex-employer, we were asking clients to hold on to stocks, and “buy at every dip”, despite sensing a greater danger with every “breaking news” coming out of the financial system.

Then, and this has been the hottest topic on Safal Niveshak so far, you know about my experiment with a company named Opto Circuits.

Having had a good experience with the management in the past, and having seemingly discounted the ills of the company in the valuations, I thought it was a good stock to buy at the right price.

The rest, as they you know, isn’t history…but reality!

Anyways, if you have sensed by now, there is a common thread that binds all the above situations and events.

If not, let me tell you that that common thread is of…

Arrogance!
If we’re repeatedly successful – like Napoleon, or fund managers and analysts prior to 2008 – we’re tempted to believe that we’ve found the formula for success and are no longer subject to human fallibility.

This is devastating, especially in a world that is continually changing, and where every right idea is eventually the wrong one.

With an arrogant attitude, we cease paying attention to different points of view and information that contradicts our beliefs.

Even if the world around us is expected to fall under its weight, we believe we’re not subject to the same constraints as others.

“I have done my homework,” I would tell myself after analysing a stock threadbare and finding its valuations attractive. “Now let me act on it!”

But I might be wrong
Now, that’s something Napoleon didn’t tell himself before the Battle of Waterloo.

That’s also what Captain Smith didn’t consider before sailing out with his “unsinkable” Titanic.

That’s also the point I did not bother to understand after completing my research on Opto Circuits and thinking that, despite the business’s ills, the valuations were compelling.

What was it if not ‘arrogance’ on my part?

Here is what the legendary Seth Klarman wrote in his shareholder letter in 1996…

We regard investing as an arrogant act; an investor who buys is effectively saying that he or she knows more than the seller and the same or more than other prospective buyers.

This statement contains a big truth that I, as an investor, ignored all these years.

So I bought a stock because I thought my analysis was right. I thought my calculation of the stock’s intrinsic value was right. I thought my decision to buy the stock was right even when I always wondered what could be the reason someone else was selling the same stock.

All in all, my arrogance – of being right – made me buy several stocks over these years.

While I’m satisfied with my long term returns, I consider a large part of my performance a result of luck than my own aptitude of picking up the right stocks.

“Why do you say so?” you may ask.

Well, the reason is that in considering myself the most right (and thus the most arrogant) investor in the world, I often failed to tell myself the most important thing that an investor must tell himself before buying or selling a stock.

That thing is – “But I might be wrong!”

This statement now lies at every major decision point of my investing checklist…

• After I’ve done my research on a company
• After I’ve calculated a stock’s intrinsic value
• Before I make the final decision to buy a stock

After providing for a numerical “margin of safety” to my intrinsic value estimates, this statement serves as an extra layer of margin of safety – a check on my arrogance…because it leads me to do a review of my analysis and assumptions before I go ahead with my final decision.

Here is what Klarman said in an interview with Charlie Rose in 2012…

You need to balance arrogance and humility…when you buy anything, it’s an arrogant act. You are saying the markets are gyrating and somebody wants to sell this to me and I know more than everybody else so I am going to stand here and buy it. I am going to pay 1/8th more than the next guy wants to pay and buy it. That’s arrogant. And you need the humility to say ‘but I might be wrong.’ And you have to do that on everything.

This is an interesting concept, and one that I, like most investors, did not fully consider when purchasing a stock (though I’ve now learnt my lessons).

Risk is not in our stocks, but in ourselves
Jason Zweig, in his commentary for Chapter 20 of Benjamin Graham’s The Intelligent Investor, wrote…

Risk exists in another dimension: inside you.

If you overestimate how well you really understand an investment, or overstate your ability to ride out a temporary plunge in prices, it doesn’t matter what you own or how the market does.

Ultimately, financial risk resides not in what kinds of investments you have, but in what kind of investor you are. If you want to know what risk really is, go to the nearest bathroom and step up to the mirror.

That’s risk, gazing back at you from the glass.

Staying humble with your analysis and forecasting powers will keep you from risking too much in a view of the future that may well turn out to be wrong.

So, by all means you should lower your expectations – but take care not to depress your spirit.

For the intelligent investor, hope always springs eternal, because it should.

I’ve learned these important lessons by being an arrogant investor in the past.

Now, I’m practicing to be humble…by telling myself this before making an investment decision – “But I might be wrong” – and double-checking my analysis and assumptions.

What about you?

The tribe would love to hear your story (or stories) of arrogant and/or humble investing in the past and the consequences you faced. Please shoot in the Comments section below.