Tag Archives: How to invest

The Wonders of The Future

Thomas Edison did not invent the first light bulb. He just greatly improved upon what others had already built. Actually 1802 – three quarters of a century before Edison’s lightbulb – a British inventor named Humphry Davy created an electric light called an arc lamp, using charcoal rods as a filament. It worked like a lightbulb, but it was impractically bright. One would nearly go blind looking at it and could stay lit only for a few moments before burning out, so it was rarely used. Edison’s contribution was moderating the bulb’s brightness and longevity. That was an enormous breakthrough. But it was built on the back of dozens of previous breakthroughs.

Faraday did experiments with copper disks. It looked like a scientific play with laboratory equipment. Well, it eventually gave us the modern-day dynamos and trolley car.

Same thing today. Maps, Instagram and all of internet wouldn’t be possible without ARPANET. It was a 1960s Department of Defense project linking computers to manage Cold War secrets, which became the foundation for the internet.

And that’s why all innovation is hard to predict and easy to underestimate. The path from A to Z can be so complex that it’s nearly impossible to look at today’s tools. That’s always how it works.

One takeaway here is that it’s easy to always feel like we’re falling behind. Progress is made step-by-step, slowly over time, you realize that tiny little innovations that no one thinks much of are the seeds for what has the potential to compound into something great.

Coming exactly to same point of investment where journey is more important than the start of it. The journey is in the process and not in the identifying the best funds today.

Investment journey is a process not a number. Checking start point of investment is important but periodic review has far more important than everything else.

Casualties of Perfection

Evolution has spent 3.8 billion years testing and proving the idea that some inefficiency is good. The key thing about evolution is that everything dies. The best species can be good at some things but then it dies because of the things it’s not good at.

A century ago, a Russian biologist named Ivan Schmalhausen described how this works. A bigger lion can kill more prey, but it’s also a larger target for hunters to shoot at. A taller tree captures more sunlight, but becomes vulnerable to wind damage. The lion could be bigger and catch more prey; the tree could be taller and get more sun. But in general, they’re all normal and not bigger or taller, because it would backfire.

Many people strive for efficient lives, where no hour is wasted. But an overlooked skill that doesn’t get enough attention is the idea that some amount of inefficient time can be a great thing.

Psychologist Amos Tversky once said that “the secret to doing good research is always be a little underemployed. You waste years by not being able to waste hours.” A little inefficiency is wonderful.

Same in investing. There’s an investing pun that it’s better to be approximately right than precisely wrong. But where does the investor intellect effort go? Toward the pursuit of decimal-point-exactness of prediction that misleads people into thinking they’re investing in best portfolios.

Just like evolution, the more perfect you try to become, the more vulnerable you are.

Precisely for that reasons, market is not perfect. It is always little inefficient and hence there are bull phase and bear phase.

No one can possibly find 100% perfect investment scheme. So we have little room always available in every portfolio. In the end the odds that the economy will become more productive over a good long period is pretty much same for most of the market rather than finding best funds.

Engineering vs. Psychology

During the post-WWII economic boom of the mid-20th century, skyscrapers began shooting up across major U.S. With taller buildings came a massive spike in daily traffic on the elevator systems. Building managers and real estate companies faced a crisis. Tenants and office workers were absolutely furious about “slow elevators.” Large corporate tenants were even threatening to break their leases and move out.

Desperate for a fix, the engineers investigated found solutions which were not possible as the buildings were already built. These physical modifications were either structurally impossible or very expensive. The engineers essentially gave and said, “The elevators are running at their maximum safe mechanical speed. People just have to live with the wait.”

Management approached the problem from a different angle. They brought in industrial psychologists. They analyzed the situation and realized the engineers had been solving the wrong problem.

The True Problem was not about the elevators were “slow”, it was the wait time. The real problem was boredom and anxiety. When people stood in a metal box with absolutely nothing to do, that two-minute ride felt like twenty minutes.

Psychologists suggested to install mirrors in the elevator.

People loved looking themselves in the mirror. This gave them something to do while waiting. All complaints evaporated overnight. The mirrors didn’t make the elevators move faster, but they hacked human brain psychological.

Similarly in Investment decisions, Instead of expending all your energy to find the perfect investment option, make sure you explore the multiple options with framing the right problem.

Even if one get best investment product, there is no use unless if solves the real problem with it. Investment is not about best funds or stocks or best returns, it is about improving the process.

Doing transactions online is not only solution for better investing. It is more about behavioral and psychological stability.

Pocket size scale Scale, Mountain Size Impact

The Tenerife airport disaster in 1977 is the deadliest aircraft accident in history. The error was stunning. One plane took off while another was still on the runway, and the two Boeing 747s collided, killing 583 people on a runway on the Spanish island.

In the aftermath authorities wondered how such an extraordinary catastrophe could occur. One post-mortem study explained exactly how: “Eleven separate coincidences and mistakes, most of them minor… had to fall precisely into place” for the crash to occur. Lots of tiny mistakes added up to a huge one.

It is intuitive that we factor high impact, low probability event and discount low impact, high probability events. It is very easy for us assume the world will break at once as we have been shown in movies and shows. The actual impact happens through low-probability events, so it’s common to discount their happening.

Similarly, the most astounding force in the universe is ‘Evolution’. The thing that developed single-cell organisms into humans who can read this article on an iPad with a terabyte of storage. Evolution is best example of basic math of compounding. It is about compounding of favorable traits over the period of 3.8 billion years. Minuscule changes compounded them for 3.8 billion years and we are result of this compounding.

You do not need extraordinary change to deliver extraordinary results.

Investor Howard Marks once mentioned. Some investors whose annual results were never ranked in the top quartile, but over a 14 years period he was in the top 4 percent of all investors. If he keeps those for another 10 years, he may be in the top 1 percent of his peers.

The most important question is not “How can I earn the highest returns?” It’s “How can is consistently earn better returns for the longest period of time?”

Correcting investment course at every juncture of investment journey is crucial which adds positively to compounding.

Tiny but Magnificent

In 1961, The Soviets once built and tested a nuclear bomb 1500 times stronger than the one dropped on Hiroshima. Called Tsar Bomba (king of bombs), it was ten times more powerful than every bomb dropped during World War II combined. When tested, its fireball was seen six hundred miles away. Its mushroom cloud went forty-two miles into the sky.

The first nuclear bomb was developed to end World War II. Within a decade after World War II, the world had enough bombs to end the world —all of it. Countries were unlikely to use them in battle because they raised the stakes so high. It would wipe out an enemy’s major city and the enemy country would do the same to other country sixty seconds later.

Big bombs were mass destruction units and neither country would start a war with a big bomb. So in 1960, The USA built smaller, less deadly nuclear bombs called Davy Crockett, which were less powerful and could be fired from the back of a Jeep. These tiny nukes felt less risky without ending the world.

But this idea backfired. It changed the game for the worse.

The risk was that a country would “responsibly” use a tiny nuclear weapon in battle, starting a retaliatory escalation that opened the door to launching one of the big bombs.

Soviet missiles in Cuba during the Cuban Missile Crisis were four thousand times less powerful than Tsar Bomba. But if the Soviets had launched even one of them then there would have been a “99 percent probability” that America would have retaliated with its full nuclear force, according to Secretary of Defense Robert McNamara.

Small risks aren’t the alternative to big risks; they are the trigger.

Investors also take risk so seriously sometimes where they consider taking the small risks more often than taking big risk at once. A Fixed Income investor is avoiding volatility but taking reinvestment risk and taxation risk so high that inflation erode all the returns generated.

Every investor must check their Risk Profile where they may improve. Assessing risk is more important than asking for rewards.

Tragedies of Miracles

Dwight Eisenhower ate a hamburger for lunch on September 23, 1955. Later that evening he complained of chest pain and told his wife the onions gave him heartburn. Then he began to panic. The president was having a massive heart attack. It could easily have killed him. If it had, Eisenhower would have joined more than seven hundred thousand Americans who died of heart disease that year.

But since then with advancement of healthcare, the age-adjusted death rate per capita from heart disease has declined more than 70 percent since the 1950s, according to the National Institutes of Health. Had the rate not declined since 1950s, twenty-five million more Americans would have died from heart disease in last 70 years. So cutting the fatality rate by 70 percent led to a massive number of lives saved that is hard to comprehend – Twenty-five million Lives!

Why are we not shouting in the streets about how incredible this is and building statues for cardiologists? – Because the improvement happened too slowly for anyone to notice. The average annual decline in heart disease mortality between 1950 and 2014 was (just) 1.5 percent per year.

If the headlines read ‘Heart Disease rate decline 1.5% last year’, you would yawn and move on. But this tiny number saved Twenty-five million Lives. Compounding takes a while but cannot ignore it.

Healthcare has interesting compounding history. Historian David Wooton says it took 200 years for discovering to the medical acceptance that germs cause disease, another 30 years to discover antisepsis and another 60 years to research and put penicillin into the use.

Compounding has always been boring and long term process.

Remember the race of a hare and a tortoise, even in real life tortoise would win just because he is steady and advancing to the goal. While the hare runs but often gets distracted with surroundings and stops its journey.

Millions of examples have been given and thousands of time it has been experienced that Investors those who sail through volatile time in market, emerges as very successful investors. Purpose of an SIP is only to keep investment journey ongoing even in most negative market where it becomes easy and automatic to purchase units at lower cost. If investors breaks this continuity, the whole purpose of SIP gets defeated.

Stability is Destabilizing

In mid-2010, California was hit with an epic drought. Drought remained for 6 years. Then 2017 came dropping a preposterous amount of moisture. Parts of Lake Tahoe received more than sixty-five feet of snow in a few months. The 6-year drought was declared over.

Local residents rejoiced. But it backfired in an unexpected way.

Record rain in 2017 led to record vegetation growth that summer. It was called a superbloom, and it caused even desert towns to be covered in green.

A dry 2018 meant all that vegetation dried and became dry brushwood. That led to some of the biggest wildfires California had ever seen. So record rain directly led to record fires.

What people cheered as drought over brought a scary wildfire.

The 50 years period prior to 1960 was a period of scientific optimism. The world has gone from horse and buggy to rockets, and from bloodletting to robotic surgeries to organ transplants.

This advancement caused a push among economists to try to eradicate the curse of recessions. If we could launch intercontinental ballistic missiles and walk on the moon, surely we could prevent two quarters of negative GDP growth.

However, this gives birth to Destabilization.

When an economy is stable, people get optimistic.
When people get optimistic, they go into debt.
When they go into debt, the economy becomes unstable.

Investors often argue and postpone their investment citing unstable market. They often seek stability whether market is volatile or political disruptions happen. Assuming stability from equity market is like childish demand which is fundamentally not possible. In order to be correct in this judgement, investors often start predicting market and gets fooled by randomness.

Bring stability to market is not in anyone’s control. But managing Inherent behavior of market is only task to ride through this volatility.

Exactitude (Exact + Attitude)

In his 1946 story ‘On Exactitude in Science’, Jorge Luis Borges described an ancient empire obsessed with creating the perfect map. Their ambition led them to create a map so detailed it matched the empire on a one-to-one scale. Fields were covered with fields, cities with cities, until the entire landscape lay beneath a colossal map.

But this pursuit of precision came at a cost. Its citizens realized that such a map offered no insight. It merely duplicated reality what they already know. Resources were diverted from vital needs to maintain the map, infrastructure crumbled, and the empire eventually collapsed. Over time, the map itself began to disintegrate. The empire’s obsession with complete accuracy of the map — eventually vanished.

This story isn’t just a philosophical metaphor; it’s a cautionary tale. This is a subtle point that we often fall into the delusion that more information guarantees to better decisions

Many of us scroll endlessly through Maps, rotate streets, zoom into neighborhoods, and still feel unsure. We shortlist a hotel online instinctively like one option, yet spend hours reading reviews and watching videos, only to finally choose the same hotel we liked in the first place. The additional information rarely changes the decision, it only consumes time and confidence.

Daniel J. Boorstin, an American historian has put it right in his book perfectly, “The greatest obstacle to discovery is not ignorance – it is the illusion of knowledge.”

If you want to punish your enemy, Give Him Information

In investing, gathering information, and considering it as research can be costly. Endless data, research reports, bombarding by news data, and market noise often distract more than they guide. Merely zooming in and out of past performance data is not research, it is an illusion of knowledge, which is worthless.

Advanced investing is not colorful graphs and charts but understanding advance concepts of behavioral investing.

Spreadsheets won’t decide answer

Historian Will Durant once said, “Logic is an invention of man and may be ignored by the universe.” The world is driven by forces that cannot be measured.

Robert McNamara was hired by Henry Ford II to help turn Ford Motors around after World War II and needed someone to run business as an operations science, driven by the truth of statistics.

Later, McNamara took that skill to Washington when he became Secretary of Defense during the Vietnam War. He decided that everything be quantified, with daily, weekly; and monthly charts tracking the progress of every imaginable wartime statistic.

McNamara’s strategy of statistics worked at Ford had but had flaw when he applied the same at the Department of Defense. In a conversation, Edward Lansdale, head of special operations at the Pentagon, said “Something is missing.”

“What?” McNamara asked.

“The feelings of the Vietnamese people,” Lansdale replied.

That feeling couldn’t reduce that to a statistic or a chart. This was a central issue with managing the Vietnam War. The difference between battle statistics brought to Washington and the feelings among those involved were million miles apart.

Ho Chi Minh once put it more bluntly, allegedly stating: “You will kill ten of us, and we will kill one of you, but it is you who will tire first.”

Decisions aren’t made on a spreadsheet

Many time a lot of things don’t make any sense. The numbers don’t add up, the explanations are full of holes. And yet they keep happening. Because decisions aren’t made on a spreadsheet, where you just add up the numbers and a clear answer pops out. There’s a human element that’s hard to quantify and explain.

By now some must have taken the idea how does this story relate to investing. Brain initiates the idea of investment, churns all the numbers, takes loads of information, gets cozy with colorful charts but in the end, it sends it to heart to decide with emotions and sentiments. That is the reason for many investors for not having successful investment journey. Investment has always been a game for those who are fundamentally strong with their behavior.

Wise investor don’t get immersed in past data or colorful charts. Their belief system revolves around managing behavior and handholding through their investment journey.

Wild Minds

In 2021 Tokyo Olympic Games, Eluid Kipchoge, World’s best marathon runner won Gold medal in Marathon. After the run, he was in a staging room with two other runners – Bashir Abdi from Belgium and Abdi Nageeye of the Netherlands— all were waiting to receive their Olympic medals after the marathon race, which Kipchoge won for the second time.

Logistics of the awards ceremony meant the runners would have to wait for several hours in a cramped, dull room with nothing to do but sit. Abdi and Nageeye later explained that they did what anyone else would do they pulled out their cell phones, found a Wi-Fi network, and scrolled social media.

Kipchoge didn’t. He just sat there, staring at the wall, in perfect silence and contentment.

“He was not Human”, Abdi joked. Abdi meant how can a person stare at wall for hours?

Some successful people with unique minds are full package. They do their task so well that we admire them and we wouldn’t see ourselves thinking of it.

Elon Musk is that ‘Wild Mind’. What kind of person is he to take on with GM, Ford, NASA at the same time? An utter Maniac.

Steve Jobs was also that ‘Wild Mind’. He not only changed technology, he actually changed future of everything.

And many more such minds…

Our normal constraints don’t apply to these people. They are determined, optimistic don’t take “NO” for an answer, and relentlessly confident in their own abilities.

Some Investors are Wild Minds. They generate extraordinarily high investment returns, but majority investors hustle in uncertainty. Even a slightest mind-set change can help investors at large extent. ‘Wild Mind’ Investors are extremely clear goal based investors, not getting into trap of obligations, staying away from gossips, tips and noise..

Better to keep ourselves stay focused. Returns are not generated through transaction but through consistency in behavior.