Monday, September 16, 2019

Book reading - Factfulness

This is my review and notes after reading the book "Factfulness" by dr. Hans Rosling.

https://www.amazon.com/Factfulness-Reasons-World-Things-Better/dp/1250107814/ref=sr_1_1?crid=18W9S39AE1GMJ&keywords=factfulness&qid=1568676676&s=gateway&sprefix=factfulness%2Caps%2C182&sr=8-1

The book is very concise and divided into self contained chapters. The book mainly deals with the realities of economic disparity and the growth seen in countries of the lower economic strata. The author does his best to dispel myths about the (imagined) agony and (mythical) despair that commonly accompany narratives of poor countries and societies. He has shown his passion in every page of the book. Although the book is similar to a TED talk given by the author, the book has additional clarity and perspective to make sure we understand the concepts better.


The book is easy to read.It is highly recommended for equity investors in the developing markets.
The book helps the reader to avoid hyperbole in modern news and information media about developing world. Equity investment is about growth and returns from a growing future. Reading this book will help investors understand how the world is chnging, and how they can position their portfolio towards countries and companies that will grow during this ecenomic growth phase. it will also help investors who are solely invested in developed and mature ecenomies to get awareness and exposure about the opportunities in the developing countries.







Monday, August 19, 2019

Bubbles - driven by jealosy

Bubbles are excessive, irrational pricing of stocks. Are bubbles restricted only to the stock markets? They are ound in other areas of human activities, but since the stock market has a large number of participants, and easy entry norms, bubbles are very prevalent in the stock markets.

 How are bubbles created?

There are many reasons for bubbles to be created. A new technology, a new buzz word is the story used to sell it. However, there have been bubbles even in seemingly mundane items - commodities, tulips, roads, etc.



One of the main reasons for the creation of an asset price escalation beyond its intrinsic value is - Greed. Greed makes us confident of the future returns of a stock. It shows the posible returns, and pleasures that are available for an investor if he follows the path. it is the trigger that causes the "Fear of missing out". It builds a narrative to

The unpleasant and often undiscused factor that causes asset prices to go up is jealousy. One of the worst of the seven sins, it is jealousy that brings in the late comers to the asset price bubble. There is a constant barrage of news about how other people have become rich and how they are enjoying the gains from their new wealth.

When a person is reminded of how his neighbors have become rich by investing in something, he will become desperate. Desperate minds are raw material for rash investment decisions. It is easy to make a high pricced investment, blinded by jealousy and the desire to match up to someone's wealth.

Every aspiring investor should be aware of envy and jealousy driving their decisions, and try to avoid falling into this trap.

One person who has highlighted this behavior's effect on investors in Charlie Munger.

“Envy is a really stupid sin because it’s the only one you could never possibly have any fun at. There’s a lot of pain and no fun. Why would you want to get on that trolley?” - Charlie Munger.

Thursday, August 8, 2019

A slowdown in Indian stock market

August 8, 2019

It is now apparent that there is a slowdown in the Indian economy and the stock market.

While there are many reasons attributed to this market movement, one thing we should remember is thatnot many people saw this coming. Just a few months back, the India growth story was taken for granted, and no price seemed too high. Today the mood is on the other end.

I am now convinced that money is lost in bull markets, where we pay up front for growth that may never happen. When stocks are attached to narratives - India growth, retail, monsoon, etc - it is easy to pay. It makes us more gullible. However, there is a set of narratives peddled to make the fear easier to believe.

We read many times to buy when everyone is fearful. Maybe this is the season to buy. We will see in a few years how it pans out.


Thursday, May 30, 2019

Kelly criterion

I recently read the book The Dhandho Investor. It is a classic and I was always wanting to read it.

Here is a link to the book.

The book was good, but the most important thing I learnt from this book was the Kelly criterion.

In short, Kelly Criterion is a formula for bet sizing. The operative word here is sizing.


We all think of risks in terms of a Yes/No decision. When I analyze a company's stock, my thinking is usually in terms will this company perform well or not in the future.

This thinking is incomplete.

Evaluating probabilities of risk alone is not enough. We need to evaluate the impact or magnitude of loss/gain due to the risk.

If I have $10,000 in cash and I plan to invest $100 in a stock, the company's extreme performance, even if the stock doubles in a year or goes bankrupt and stock goes to zero, will have very limited impact on my overall portfolio.

However if I invest $1000 in this new investment,the impact on my overall wealth is much higher.

Thus we can see:

Actual Risk = Impact of risk  *  chances of risk.

Lets assume that there is a bond that gives an interest rate of 2% with a minimum investment of $10000. There is a 1% chance of the bond issuer defaulting. Is the impact on my wealth small, if I buy this bond?

No. Because even though the risk is low, the impact of the loss is higher for me since I invest the whole $10000 in this bond.

Position sizing has been a weak spot in my approach to investing. I have always invested very small amounts, to minimize the loss. However, this has limited the upside, and my overall performance has been

I have also invested a large amount in some low-risk cases, and the losses have been high.

So the first thing an investor should do is to realistically calculate the odds of an investment in its extreme cases (good and bad). Then using that he should find out the position size based on the Kelly Criterion.

Assuming that the payoff is limited by the investor, i.e, the investor has a stop loss at -X% and books profits at +X%, the simplified formula to find the fraction of the cash to invest ("bet", "risk") on an investment is 
2p -1, (where p = probability of profit).

For example, if I feel that a stick has a 60% (0.6) probability to increase in price, I should limit my investment to:

Fraction of cash= (2 * 0.6)  - 1 = 1.2 - 1 = 0.2 (20%).

The key metric here is not the probability of success, but the limit of portfolio to invest. The investor should ideally see the upper limit (20%) with a margin of safety and can invest about 10%, or 5%, to feel more safer.

There are many online calculators for applying the Kelly Criterion to find a position size for gambling & sports betting. I have not yet found a good calculator for

This blog covers this topic in much better detail.

Thanks for reading.











Wednesday, May 22, 2019

Bubbles - The shining new thing

One of the popular statements heard when there is a bubble is "This time it is different".

It is fashionable to look back at these statements and think how foolish these statements were. But what if it is true?

During the Bitcoin boom, I actually said it afew times, when talking about Bitcoin. "This is a different asset".

A bitcoin is not a stock. It had not been seen before. How would I value something that has only existed for a few years, that was made up of complex software and that kept coming up in the news everyday?

I think back to previous bubbles that I have lived through and remember vividly - the housing bubble in the US, the dotcom boom, and a real estate bubble in India, etc. I realize it is true that every bubble has a novelty effect. During the start of every bubble, there is something new and shiny.

A shiny new thing is hard to quantify and evaluate in terms of risk. If there is an entirely new phenomenon, there is limited data to predict its risk. Our in-built optimism will make us focus on the upside and not focus too much on (as yet) invisible downside.

Here are some bubbles and the shiny new things that were so new that most people had no idea of how to value them.

(Note: There are many factors at play during a bubble. I am only thinking about the "new and shiny" aspect of bubbles).

  1. The internet - While it seems normal and ubiquitous today, the internet was terrifying and awe inspiring during the 1990s. There were daily articles of what the internet could do, and how it will change the world. In my opinion the Internet in 1998 was equally as complex as Bitcoin was in 2017.
  2. US housing boom around 2004 - There was financial "innovation" that bewildered people. Buying homes "easily" was the new thing. The speed of loan processing and the packaging of loans into mortgage backed securities.
  3. Bitcoins - it is the shiniest thing I have ever heard of so far.
  4. Historically, the South Sea bubble is also similar. In 12th century England, the new unexplored colonies would have been a shiny new thing, that cannot be reasonably valued and risk profiled.

Another aspect on a shiny new thing causing a bubble is that people focus excessively on the "shiny new thing" from the past. The reasoning is - "Didn't tech stocks cause the collapse in 2000? So maybe the tech stocks of today - FAANG - may cause the next bubble burst?". Or something like, "The Great Financial Crisis of 2008 was because of the collapse in housing prices. So housing prices going up now is a sign of a bubble".

I believe the next bubble will be something we haven't seen before and something that makes us say "We know the past risks....But this this is different".


Thursday, March 28, 2019

Suerpower of a small/retail investor

In today's financial markets, technology and expertise are concentrated in Wall Street. The large institutional investors have more access to information and tools that they can deploy in scale. It is, at first, intuitive to a small investor that he cannot go up against a large investment firm and aspire for better gains that them. This blog post is for those investors.

A small investor, someone with less that $100,000 to invest, has one great advantage over the institutional investor.

Independence

An retail investor has control over his decisions. He can take decisions at his own pace. He can learn and invest with complete freedom. This is the ultimate power in investing.

Everyday, more  esoteric assets are available to the small investor.

The transaction cost, which used to be very high for a small investor, has now been reduced to almost zero, with the advent of zero brokerage trading apps (https://robinhood.com/).

Many research sources are online, allowing the individual investor to read and follow any school of investing.

The original power of the individual investor is still intact. It is being his own master. (source - https://www.poemhunter.com/poem/invictus/)

It matters not how strait the gate,
How charged with punishments the scroll.
I am the master of my fate:
I am the captain of my soul.


I first came across this poem in an online lecture by Prof. Sanjay Bhakshi. (https://fundooprofessor.wordpress.com/ )

So if you are a retail/small/individual investor, freedom is your superpower.

Wednesday, March 27, 2019

Journal of an aspiring investor

Hello. Welcome to my website. I am an aspiring investor. I am passionate about the stock markets and investing.

I invest in good companies that add value to the their customers and stakeholders. I started investing in 2003, telling everyone it was my "hobby". I was just fooling myself. I have spent so much time reading and thinking about books, annual reports, financial blogs, etc, that I now believe that it is more than a hobby.

I use this website as my journal and as a means of communicating with other investors.

Book reading - Factfulness

This is my review and notes after reading the book "Factfulness" by dr. Hans Rosling. https://www.amazon.com/Factfulness-Reason...