Friday, October 28, 2005

Intrinsic Value of Money

What blood is to Human Body, Money is to Trade.
Where Human is in food chain cycle, Trade is in Economy.

Concept of money is the best invention of all time because it helps us realise the value of everything, except love. Think for a moment how many hands may be exchanging money now & why?


"Poverty makes you realise true value of money." If that is the case why is there a growing disparity between prosperity & poverty. Then the poor of past should be the of present. But it is not what history tells us.What poverty makes you realise is, what I call, Utility Value of money. It is different from True (or) Intrinsic value of money.

Utility Value of Money:

When money is valued as a means to acquire materialistic means (ie) food, clothes, luxuries... , the intrinsic value of the money ceases to exist. The limitation of utility value of money is that it cannot be higher or lower than the subjective utility of the utility sought. This can be the reason as to why a poor regains poverty even if he wins a lottery ticket.

Intrinsic Value of Money:

The utilization of money to create money through economic activity is the intrinsic value of money. This is where individual expertise play a vital role. When I am able to deploy Rs.100 in an activity & use some expertise to make (say 10%) money on it, I have realised Intrinsic value of money (the 10%). Does it not look very much like a process which rich people carry out day in & day out.

My take on Time Value of Money:

Many a times people have money but no expertise & vice-versa. Hence to balance the demand-supply inequilibrium there is attributed a certain intrinsic value to money (say 6% on Government securities), which is the cost of money you pay to make the money work for you in the area of your expertise. It is determined by the liquidity & ease of carrying out economic activity in general.


I do not intend to say that utility value is bad (or) intrinsic value is good, all I mean to say is basic understanding of the advantages & limitations of money & our expertise can help us allocate it in a better way.

Sunday, October 23, 2005

Active Waiting

Buffett has said, "Mr. Market will throw stocks at you everyday. Only if the stock lies in your circle of competence, you throw your bat at it."(From memory)

But is it not in contradiction to the very nature of human beings to keep it simple, to be inactive.
That is the precise reason as to why I think that many people are ready to buy stocks when everybody is buying and not buy when other people are not.(It is better to die with people than be left lonely...syndrome) This feeds on itself. Contrary to this there are guys who actively wait for bad times & start swinging.

In the words of Peter Lynch,

"When everybody is exiting, you enter the supermarket and when everybody is entering you exit." (again from memory, I am wondering if my memory is bad or good!!!)

When you plan to buy & sell stocks you have nobody to imitate but follow your conviction. It pays to be a contrarian but you have to be your own counsel. I will try to list out 2 approaches that can be used & disadvantages therein. As far as advantages are considered, if one can overcome the disadvantages, you have a home run...

Much like Munger, "Just tell me where I am going to die & I will not go there"

Stock Based approach:

I define this as a situation where we calculate the value for a company & wait for the stock market to quote it that value. (Akin to Buffett's Grocery list approach). This has its own (Psychological) drawbacks.

  • Excessive Self Regard Tendency: We have put in all the effort and made up the mind to buy it at a given price. Why can this be bad? Because we can stop being a rational being & become a rationalising animal to prove ourself right by finding or making reasons in discounting the changes that may have taken place since our default price. Commitment Bias, Hindsight Bias, Anchoring Bias, Deprieval superresponse syndrome(If it takes much time to get to our listed price) are the results of this tendency and can have an effect on our decision making process.
In short, when you are made to wait for something, you can get possesive about it when you finally are on the verge of having it.

Theme Based Approach:

Every now & then to keep looking at the selected group of stocks based on Financial & price variables. (LOW PE, DIV YIELD, Beaten Up in the last Few months & things like that) & evaluate them.


  • Method gets tested here, in that sense it becomes very important that we don't put unnecessary presure on ourselves by attributing failures to the method when they may not be the culprit.


I think that each one of us have varying degree of psychological reaction pattern. Thus, it becomes a matter of what suits you rather than "this is the right approach" kind of thing.

Knowledge grows through sharing:

I welcome thoughts of the readers who have dealt with this problem and their experience therein. If sufficient responses are there may be we can discern a pattern for a possible solution!!!

Thank You in advance.

Monday, October 17, 2005

Ruminations Over Ten-Baggers

Charlie Munger has said, "There is always somebody who will do things better than you."

Understanding this is very important (I feel from my personal experience) The reason is Human mind is a system programmed to get feedback from things that are around it or variables of the same system, in this case, human beings . In the process the degree to which it gets influenced is erratic. This is the cause for various types of misjudgements or biases, I feel.

Last week I was in Mumbai. I asked somebody whom I know if I can sit at BOLT (Equity Trading terminal) for 3 hours. He agreed and it was there that I learnt an important lesson and I would love to share it with you.

What Led to The Lesson:
The room comprised of mainly day traders (Speculators). The BOLT also had a Technical program. They ran through the charts of stocks that had in essense proved to be Ten-Baggers in the last year or so. They were all also ruminating over the fact that they were in it until it was a double bagger and things like that. The fact that struck me was that they did not care about value at all. What was it worth? That was not on their minds and yet the ruminations!!!

Lesson Learnt:
Coming back to Munger's words, understanding those lines eradicates deadliest of seven sins, Envy. What has envy got to do with Investing? Much to do I feel. Because the returns that we are going to make are to be seen in relation to that of markets and people whom we like or envy(compare to). When we try to compare only the results we miss on the causes and concentrate on the effect. Thus we end up comparing two different variables that constitute a system but in essense have no connection between them.

I think is the best way to deal is to compare our result with the result we intended to seek out, based on the intrinsic value & the purchase price of our stock.

We should seek to recieve what we deserve rather than what we desire. This applies to everything we do, but more so importantly in Investing. Because markets honours humility over the long term, nothing else.

All said and done, Habits dont go away easily and also nothing comes easy. So it is either we learn to change ourselves to the need of the system or contradict the system to find ourselves removed from the system. When ever I am made to choose between contradiction and harsh reality, I have reminded myself

"Contradictions Do Not Exist"(If interested read the article on contradiction & one liners)

I posted this article in the noon, I came across the following words in the Security Analysis (1934) that seemed relevant to the current topic, hence the update:

"The potential profit to be taken into account is not the maximum figure which might conceivably be reached in the market, but merely the highest figure which the operator is likely to wait for before he closes his position. Once a given profit is taken, the additional profit which might have been realized becomes of merely academic interest"

Thursday, October 13, 2005

The Reminiscences of an Infant Investor

Just as children learn new things everyday I remember the childhood of my investment career and the best lessons that I learnt. I would like to recollect them and share with you all. Today I am 21 and these things are chronologically arranged from age of 18.

What lead to Investing?

I dropped out of engineering college in the first week itself. It was not easy to discard something for which you had worked hard 2 years. I managed to get the seat for half of what others were paying, based on marks. But I knew that it was not worth the money and most importantly time and it was like I take the decision now or end up here for the next 4 years. What next? Was the big question that loomed large before my eyes. But I knew that just because one does not know the way to heaven he should chose the one available to hell. My family has always believed that decisions are to be taken by yourself and thus no problem on that front also.

It was then that I also took charge that I have to learn by myself. Be my own master (It is a different thing that I did found my dream master 2 years down the line at 20). My love for books started then. I remember reading Jack Welch: Straight from gut & Losing my virginity by Richard Branson. I was very much impressed and realized that I want to become a business man. I went to my maternal uncle’s shop to learn something from his pharmaceutical wholesale business. I was there for 1 year and learnt the importance of working capital, competition, capital intensiveness without realizing that I have learnt those lessons. It was also then that I started to read Economic Times. I don’t actually remember about when I decided that I want to become an investor but it was around that period.

A baby is born:

Much like a 9 month incubation period I remember my uncle mentioning that one of his friend is starting a BOLT (equity trading house) after like an year or so after I had decided to become an investor. I said can I work there for sometime. He was not sure mentioning that it was more like clerical job and I don’t think they will even pay you. I reasoned out that sweeping once in a while does not make you a sweeper; moreover it makes you learn to keep your place clean. And as far as money is concerned a kid cannot ask his mother to pay him when all she does is to teach him to walk. I met his friend and next day I was at his office.

My encounter with Mr. Market:

My job was to handle Day Traders (in other words Speculators). I did not know the drawbacks of being a speculator or advantages of investors. I came across Buffett & Graham a little while later. But I knew that I want to invest in businesses rather than take cue from prices, but...

What I did was feed trades for the day trades in the computer and all I can make out was most of them were losing money but they were there day after day because once in a while they made a profit.

Reason:They attributed mistakes to something external and profits to their abilities.”

Lesson 1: "One cannot beat the markets by predicting prices.” (I mean speculating).

This meant I need to learn what works. My knowledge of fundamental investing was limited to the fact that I learnt about P/E’s, EPS, BV, Financial Statements from books that the BOLT had. The place at which I lived had no good library but had one lending bookstore. What I did was enrolled into it and read all the 20-25 books on stock markets they had. Most of them were about Options, derivatives, and of course “Benjamin Graham On value Investing”. I had heard that Buffett learnt his skills from Benjamin Graham, so was very much excited to have spotted that book. That introduced me to Graham & in short Buffett.

But the important thing is I tried to see if the strategies that options book had, were plausible or not. So what I did was started to think as a speculator- yes speculator. Then I was the first person who carried out an options transaction at the BOLT (of course it was my uncle’s account). The worst thing that can happen happened, I made 1000 bucks. What happened was I started believing that I can beat markets by predicting markets. I hope I had read John Kenneth Galbraith’s “There are 2 types of predictors: those who can’t predict and those who don’t know they can’t predict.”

Because I lost money big time 10,000 on the next option contract.

Lesson 2: “You are not as smart as you think you are

Back to the basics:

Though shattered I managed to recoup and continue my devotion to stock markets. The loss gave enough reasons to my maternal grand father to remind me “Stock market is like making money in the water. It slips even before you grab it”. But I managed to convince him that I have learnt a lesson and initial setbacks do happen. I don’t think they believed me but I did not care. Moreover I did pay heed to his words by becoming risk averse (10,000 is big money as far as I was concerned)

Now I dedicated myself to first learn and then start investing. In the mean time I carried on with my stint at BOLT. It was here that I learnt the few mistakes that most of the speculators make. I will run through them

Lesson 3:Don’t be a part of a herd

I was surprised to see that people just based on a phone call from head office at Mumbai bought shares and just sat being certain that they have made money. No thoughts on what if that slides instead and sure they did most of the times.

Lesson 4:Cutting the flowers and watering the weeds

I came across this term in Peter lynch’s book much later but the essence I was able to see that day traders booked profits as early as possible and kept averaging the losers. At the end of the day there net result was inevitable losses.

Lesson 5:Tomorrow is always a new day---think twice

Everybody believed that they lost money because of somebody else’s wrong recommendations and tomorrow they will have great tips from their favorite brokers. I was like if you are a sweets vendor how could you hope to survive if it is somebody else’s services that you hope to survive on.

Lesson 6:People don’t manage to learn from the mistakes—hope we manage to”

What I was confused the most about during my stint was they did the same thing day in and day out yet never tried to reason why did they lose money. There was always that third person culprit or bad luck as they call it if not anything else.

What of all these Lessons:

So during these 2 months I had my first profit, my first loss and lots of valuable lessons. I left the job because I needed to move on. I reached a basic conclusion “I wanted to become an investor not a speculator”.

This is one hell of an important lesson to learn and learn it at 19. It has been almost 2 years since I left this job and started my journey to become an investor. Last week I was in Mumbai. I requested somebody whom I know if it will be possible if I can sit at a BOLT just watching people trade for say 3 hours. He arranged for it and I again learnt an invaluable lesson which I will share with you in the next article, “Ruminations over Ten Baggers”

Sunday, October 09, 2005

Why do people lose out to Nature and Markets…

On the October 8, 2005 an earthquake of magnitude 7.5 on the ritcher scale hit South Asia. Thousands of people lost their lives and few lucky who managed to survive are shattered to have lost their loved ones. Suddenly I felt that of late natural calamities are happening more than ever before. Tsunami, Floods, Hurricanes, Earthquakes. All the intellects in the worlds, as to be expected, are trying to rationalize why is it happening what is happening. And they will come out with some reason or the other because people are rationalizing animals. If that reason is correct or not is not the subject of this write up.


I am of the notion that “Nature has nothing to contradict our survival rather it is we who think of ourselves as infallible and take nature for granted” We should understand the fact that all that nature asks people to do is reserve some space for it. We need to understand nature. How? That is the big question. We cannot understand nature per se. It is elusive. (Don't you feel I am also showing signs of a rationalizing animal).But we can take into consideration the effects that a given course will have on the nature.

Nature works as a perfect self balancing loop. The more the water on the surface of the earth, the more the evaporation, the more the evaporation, the more the rains, the more the floods and this cycle will go on. I think this is what they mean by Global warming. That is not the issue. The issue is what could have possibly caused Global warming. Here lies the purpose of my write up.

Instead of naming pollution, depletion of ozone layer, I would say that Human mind set caused global warming. Nothing objective is going to come out if I blame the whole group for which this write up is intended for. But If we can learn from it and apply this to our work something useful can come out. And I would try to see if this can help us in understanding what causes most of the investors or speculators lose out.

Understanding Markets:

Only small percentages of people are able to beat the markets. Why is it so? Is markets corrupt in a sense that it leaks the stock that it will quote higher to all these people, Certainly not. Then it is certainly got to do with the fact that the people who are beating the market consistently are doing the right thing. What is this right thing?

But first we need to understand another breed among investors—Speculators. They lose out in the long run to markets. They may make money for some time. Over the long run it is the market that beats them hands down. Why? I think because they underestimate markets. They start taking markets for granted. And market has got a self esteem of its own.

Markets & Success:

Now I will try to answer the question: What is the right thing that successful investors do? They reserve some space for the markets (ie) Margin of safety. What do I mean by margin of safety is that they are conservative in making their assumptions, expectations, and buy the stock with a considerable margin of safety. They consider all the factors that can possibly affect the outcome of their investment but never ever forget that markets are unpredictable. In the process if anything can go wrong it is from there side.

They never blame that market betrayed them. They attribute their failures internally and always consider the fact that they have no control over external circumstances, in this case—markets. And when they do that they win in the long run


I wanted to point out that most of the investors lose out, as we lose out to nature, because they try to overestimate themselves and underestimate markets. In short they behave like “Dam Fools.” (Please read this story over Mr. Bakshi Blog.)


Just because I have thought the above write up it does not give me the right to feel that I am infallibly right. In other words I firmly follow Munger’s word

An idea or fact is not worth more because it is readily available to you.”

So please feel free to criticize me if you have reasons to. I would welcome that.