Tag Archives: Select best scheme

The Thor knows where to hit the Hammer.

Dear Patrons,

The Thor knows where to hit the Hammer.

A giant ship’s engine broke down and no one could repair it. The ship company hired an expert Mechanical Engineer with over 40 years of experience.

He inspected the engine very carefully, from top to bottom. After seeing everything, the engineer unloaded the bag and pulled out his set of hammers and delicately took one large sized hammer.

𝗛𝗲 𝗸𝗻𝗼𝗰𝗸𝗲𝗱 𝘀𝗼𝗺𝗲𝘁𝗵𝗶𝗻𝗴 𝗴𝗲𝗻𝘁𝗹𝘆. And soon, 𝘁𝗵𝗲 𝗲𝗻𝗴𝗶𝗻𝗲 𝗰𝗮𝗺𝗲 𝘁𝗼 𝗹𝗶𝗳𝗲 𝗮𝗴𝗮𝗶𝗻. 𝗧𝗵𝗲 𝗲𝗻𝗴𝗶𝗻𝗲 𝗵𝗮𝘀 𝗯𝗲𝗲𝗻 𝗳𝗶𝘅𝗲𝗱!

7 days later the engineer billed the ship company that the total cost of repairing the giant ship was $20,000.

“What?! You did almost nothing. Give us a detailed bill.” said the owner.

The answer was simple:

Tap with a hammer: $2

Know where to knock and how much to knock: $19,998

In investing, data and information is available plenty and free of charge with everyone. However, the importance is of appreciating one’s expertise and experience…because those are the results of struggles, experiments and even experiences out of huge losses.

𝗜𝗳 Experts do 𝗮 𝗷𝗼𝗯 𝗶𝗻 𝟯𝟬 𝗺𝗶𝗻𝘂𝘁𝗲𝘀, 𝗶𝘁’𝘀 𝗯𝗲𝗰𝗮𝘂𝘀𝗲 they 𝘀𝗽𝗲𝗻𝘁 𝘆𝗲𝗮𝗿𝘀 of 𝗹𝗲𝗮𝗿𝗻𝗶𝗻𝗴 𝗵𝗼𝘄 𝘁𝗼 𝗱𝗼 𝘁𝗵𝗮𝘁 𝗶𝗻 𝟯𝟬 𝗺𝗶𝗻𝘂𝘁𝗲𝘀. 𝗬𝗼𝘂 𝗼𝘄𝗲 them 𝗳𝗼𝗿 𝘁𝗵𝗲 𝘆𝗲𝗮𝗿𝘀, 𝗻𝗼𝘁 𝘁𝗵𝗲 𝗺𝗶𝗻𝘂𝘁𝗲𝘀.

Don’t build it to last, build it to adapt 

Dear Patrons,

Have you heard of The Choluteca Bridge?

It’s a 484-meter-long bridge over the river Choluteca in Honduras, in Central America, A Region notorious for storms and hurricanes. A Japanese firm was contracted and built a solid bridge in 1996 over river Choluteca which can withstand the extreme weather condition.

In Oct 1996, Hurricane Mitch hit Honduras. There was 75 inches of rain in four days. There was devastation all around, river Choluteca flooded the entire region, 7000 people lost their lives. But the new Choluteca Bridge remained unaffected with a problem. Bridge was intact but the roads leading to it were both swept away. And that’s not all. Flooding forced the river Choluteca to change course. It created a new channel, and the river now flowed beside the bridge, not under it. While the bridge was strong enough to survive the hurricane, it became a bridge over nothing.

The Choluteca Bridge is a terrific metaphor which can happen to us as the world is changing in ways we may have never imagined. Adapt to change. We get focus on creating the best solution to a given problem while the problem itself might change. Think about that too. ‘Built to last’ might have been a popular mantra. But ‘Build to Adapt’ could be the way to go.

The same goes with Investments. Investors do long term investments proudly pronouncing it as wise decision. This will definitely last of long but will not be adaptive. Investors invest in Fixed Income instruments for long term which can fetch them 0.5% extra. However, problem is not solved with that extra return. Real challenge is to fight the inflation and earn over and above it.

Your investment is may be for long term but must be adaptive with changing scenario. Else, you could be left with a Choluteca bridge. A superb bridge. Over nothing. To nowhere.

S.O.S.: Slower, Older and Smarter.

Dear Patrons,

S.O.S.: Slower, Older and Smarter.

“An Airbus 380 is on its way across the Atlantic. It flies consistently at 1000 kmph at 35,000 feet, when suddenly a Eurofighter Typhoon fighter jet appears.

The pilot of the fighter jet slows down, flies alongside the Airbus and greets the pilot of the passenger plane by radio: “Airbus, boring flight isn’t it? Now have a look here!”

He rolls his jet on its back, accelerates, breaks through the sound barrier, rises rapidly to a height, and then dives down almost to sea level in a breath-taking dive. He loops back next to the Airbus and asks, “Well, how was that?”

The Airbus pilot answers: “Very impressive, but watch this!”

The jet pilot watches the Airbus, but nothing happens. It continues to fly straight, at the same speed. After 15 minutes, the Airbus pilot radios, “Well, how was that? Confused jet pilot asks, “What did you do?”

The AirBus pilot laughs and says, “I got up, stretched my legs, walked to the back of the aircraft to use the washroom, then got a cup of coffee and a chocolate fudge pastry.

The moral of the story is: When you’re young, speed and adrenaline seems to be great. But as you get wiser, you learn that comfort and peace are more important.

A young investor may find it exciting and thrilling by investing in smallcap stock tips, equity derivatives, crypto currencies etc. But a wise investor has learnt from the experience that thrill and excitement is temporary so they prefer consistent and long term investment which my sound boring at first but it is the most suitable of all.

Achilles Heel

Dear Patrons,

Achilles Heel

In Greek Mythology, the King of Phthia – Peleus, falls in love with Thetis, daughter of the Sea-God Nereus and marries her. They are blessed with a son who is destined to be one of the greatest warriors in the history. The parents were told a prophecy about their son that their son would die at a young age. Worried about the well-being of her son, Thetis, takes the newborn to the river Styx. She performs a ritual to evoke the magical powers of the river water that are supposed to make her son immortal. She dips her son in the river and all the parts of his body that are immersed in the water, are blessed. Unfortunately, the heel from which Thetis held her child did not touch the water and was left vulnerable.

Time passed by and the son was than named Achilles and he indeed grew up to be the greatest warrior of his time. He was the key warrior who won the Trojan War for the Greeks.

At the end of the war however, Prince Paris of Troy shoots a poisonous arrow at Achilles that hits him at the heel and that causes the death of Achilles. The term, Achilles Heel, is hence used to describe a vulnerable point or a key weakness in an otherwise strong constitution.

For investors, Achilles Heel = Investors Ears. Metaphorically speaking, vulnerable point for any investor is their ears. All good investment ideas and plans are vulnerable to investment noise. Noise can be simply viewed as data or information flow that does not help in good decision-making process. It infact deters us from it. Every investor likens the noise to music and keeps on listening it until they realize that there is no significant gain from this data but it may be too late to realize that.

Data << Information << Experience << Knowledge.

No matter how much you feed your brain with data or information, they are only useful with enough experience. Again metaphorically speaking, Noise is to an investor what kryptonite is to Superman! It drains their powers (intellect) and makes them vulnerable.

THE EMPATHY GAP

Dear Patrons,

THE EMPATHY GAP

There are two states of mind,

The Cold state: when our mind/thinking is calm and comfortable

The Hot state: when state of mind overrun with emotions and act with impulse

Imagine you are at the supermarket on a Saturday, buying ingredients for dinner you are planning to prepare on Wednesday. If you are starving while you are shopping, you will tend to shop more than your average food quantity. This is because when you are hungry, you imagine to be starving on Wednesday too.

In the same way, if you are shopping after a meal, you will tend to shop a bit less. You will feel stuffed and cannot really imagine being starving hungry on Wednesday.

When we are in the cold state, it is difficult to imagine how we will feel and behave when we are in the hot state vice versa. We are unable to empathize with our opposite state of mind. This is called the Hot-Cold Empathy Gap.

In the cold state, we make good investment plans. We plan to buy more when the market is down, stay away from temptations, invest for long term etc. But the “Doer” in us, many a times, in the hot state of emotions does the exact opposite. We give up againsts the greed, fear and other biases that lead to inferior investment outcomes.

The investment strategy is like a diet. If the Doer in us gives up to temptations of junk and undisciplined food habits, we are not getting any healthier.

Missing the Forest for the Trees!

Dear Patrons.

Missing the Forest for the Trees!

Belgian surrealist painter Rene Magritte is one of the painting which creates lot of curiosity among the viewers. Name of it is “THE SON OF MAN” (Google it). There is an encrypted message in it. (Read further only if you have google the image).

At first glance, most people would naturally be curious about the face that is hidden by an apple. One can see the face partially but it’s still quite difficult to identify the man. What does the apple signify? What exactly the painting trying to convey for human behavior? For most people, the mind initially focused only on the face. The face is the only thing which is “visibly hidden’.

It is about the psychology of attention and how important it is in the field of investing. Investors often focus on the high frequency short term news / noise and miss out on the long-term goals.

The artist wants to decode a message from the painting which is The closer you look… The lesser you see!!!

Attention is scarce and there is enough noise in the financial markets to keep investors distracted from their core investment process. Here I use ‘noise’ as representative of data / news flow /small events which ideally should not have a significant impact on the investors’ decision-making process. However, noise does take focus away from long term investing and leads to shrinkage of investment horizons. Noise creates excitement and anxiety; and induces participants to trade more. That is the reason for us to remain focused to disciplined investment and control behavior in volatile times.

Procrastination is idiotic.

Dear Patrons,

Procrastination is idiotic.

Psychologist Roy Baumeister did a clever psychology experiment on his students. He has put a group of students in front of an oven in which delicious pizzas were baking. Delicious scent cheese blew around the room. Students expected that they will get to eat those pizzas. However, Roy then placed a bowl filled with mashed potatoes and told students that they could eat as much of these as they want, but they cannot eat the pizzas.

Students in a second group were allowed to eat as many pizzas as they wanted.

He then left the students alone in the room for thirty minutes.

Afterward, both groups had been invited to solve a tough math problems. The students who were forbidden to eat pizzas gave up on the maths problem twice as fast as compared to those who were allowed to eat freely on pizzas.

The period of self-control had drained their mental energy which they now needed to solve the problem.

Same way the more you procrastinate about a task, the more energy you are actually wasting in it because no project completes itself.

Many tax payers delay / procrastinate investing in tax saving instruments of 80C till the last possible day of March of any financial year. It actually bears no fruits as the efforts and stress one gives on last moment could have been easily saved by just investing the same amount in the beginning of the year. For any investment, simplicity is more important than complexity.

Outcome Bias

Dear Patrons,

Outcome Bias

A story to start with,

Say one million monkeys speculate on the stock market. They buy and sell stocks like crazy. What happens? After one week, about half of the monkeys will make a profit and the other half a loss. The ones that made a profit can stay; the ones that made a loss goes home. In the second week, one half of the monkeys will still be riding high, while the other half will have made a loss and are sent home. And so on. After ten weeks, about 1,000 monkeys will be left — those who have always invested their money well. After twenty weeks, just one monkey will remain — this one always, without fail, chose the right stocks and is now a billionaire. Let’s call him the success monkey.

How does the media react?

They will get hold on this animal to understand its *success principles* and even if there is none, they will find reasons to support it: perhaps the monkey eats more bananas than the others. Perhaps he sits in special corner of the cage. He must have some recipe for success, right? How else could he perform so brilliantly perfectly for twenty weeks? – Impossible!

The monkey story illustrates the outcome bias. We tend to evaluate decisions based on the result rather than on the decision process.

Never judge a decision purely by its result, especially when randomness or ‘external factors’ play a role. In current uncertain scenario where result is completely non predicable. Every day is unfolding with new set of challenges. We have only one line to say to investors in this scenario,

Market wants you to act, but don’t react.

Uncertainty is certain.

Dear Patrons.

 

Uncertainty is certain.

 

No investor can predict the future. If you think you are an exception, would you have been able to predict any of these events that impacted the stock market over the past two decades?

 

  • 9/11 terrorist attacks in USA (2001)
  • War in Iraq (2003)
  • Global Financial Crisis (2008)
  • European debt debacle (2010)
  • Greece on the brink of expulsion from the euro (2015)
  • China’s stock market crash (2015)
  • BREXIT Event (2016)
  • Demonetization (2016)
  • Global pandemic induced lockdown (2020),

 

Financial markets are out of our control. Earthquakes are out of our control. Pandemics are out of our control. Floods are out of our control. Droughts are out of our control. Technological change is out of our control. Mostly everything is ultimately out of our control.

Than what we can control?

BEHAVIOR

In Investments, We have to control our own emotions and sentiments. We have to control our greed and fear.

 

Combat UNCERTAINTY by developing CONSISTENCY.

Illusion of Control

Dear Patrons,

On a busy city cross roads, a man waves his red cap during rush hours. That creates lot of disturbance to vehicle drivers. A policeman comes up to him and asks: ‘What are you doing?’ The man replies, ‘I’m keeping the giraffes away.’ ‘But there aren’t any giraffes here.’ Said the policeman.  ‘Well, I must be doing a good job, then.’ The man replies with authority.

This is ‘Illusion of Control’

On many busy cross roads in Europe, you can stop the traffic and cross the road at the press of a button. Actually, the button’s real purpose is to make us believe we have an influence on the traffic lights, and thus we’re better able to endure the wait for the signal to change with more patience. Such ploys are called ‘placebo buttons’.

Nobody understands why international events or some random statements of politicians can have such an effect on the market, but everybody reacts on it as they can control it. They are merely sounds waves. It is a real wake-up call if we realize the truth- that the world economy is a fundamentally uncontrollable system.

An investor putting extreme efforts in managing his investment is no better than the man with the red hat. He is trying to control something which is not even taking place. Therefore, focus on the few things of importance that you can really influence. For everything else: Destiny has its on way.

Nishit Siddharth Shah