The Interview

The market is similar to an ocean, there is just too much information to assimilate, process and analyze, an investor needs to make sure he/she is on the right kind of a boat while traversing the rough ocean waters.

Recently, I was re-reading some of the very insightful interviews of reputed investors which Vishal (Safal Niveshak ) has been gracious enough to share with. This gave me an idea to conduct a small experiment

So my friend and I decided to conduct mock interviews of each other, to better understand our thought process, I have listed some of the questions we covered:

  • Why do you invest in the stock markets? Isn’t it too risky?
  • What stocks do you usually invest in?
  • Where do you find good investment ideas?
  • How do you decide which ideas to buy and which ones to let go?
  • What are your return expectations from the markets?
  • What???? Just 20% P.A, don’t you think you should be making more, at least wanting more?
  • What percentage of capital is allocated to each idea of your portfolio?
  • Do you buy into the full position at one go or in stages?
  • How do you decide when to add more to your existing holdings vs adding new positions?
  • When do you sell? What factors do you consider before selling?
  • Do you sell the entire holding together or in stages?
  • How do you handle your emotions when stocks you own are losing or appreciating in value ?
  • How do you develop conviction to hold on to stocks in spite of a huge up/down move?
  • What is your typical holding period?
  • Do you meet management of your portfolio companies?
  • What has been the worst performing stock idea for you?
  • How do you ensure downside protection, prevention of capital loss?
  • How do u handle and process the constant stream of information? How do you cut down the noise and clutter?

And so on…

To my utter disbelief I flunked this interview big time, I realized, I had no objective and concrete answers to most of the questions above.

This was a great learning experience, it forced me to think these questions through, I sat over the following weekend and wrote down the answers to each and every question, not only did I feel more confident but it made me more aware of my temperament and inherent personality as an investor.

The future is unknown and unpredictable, however managing risk is something we can control and influence, writing and documenting in detail, your entire investment philosophy and process can take you one step closer to that, it forces you to acknowledge the chinks in your armor and rectify the errors in your decision making process.

Go ahead, see if you can pass this interview, if not introspect. Repeat.

Greed is good?

 

Would you sell your house in exchange for a few flower bulbs? , No? If I had put this offer across 375 years back in Netherlands (Holland), you probably would.

For those who don’t know, I’m referring to Tulip mania”, one of the first economic bubbles in recorded history. Tulips were originally introduced to The Dutch by the Flemish botanist ~ Carolus Clusius in the late 16th century, It was unlike any other flower known to Europe at the time, it soon rose in popularity and became a status symbol among the rich and affluent.

It usually takes between 7-12 years for the seeds to grow into flowering bulbs, so you can imagine the scarcity in production in contrast to the prevailing demand.

Combined forces of their demand, rarity and time taken to grow these beautiful and exotic flowers caused prices to rise dramatically over a period between 1600’-1636’. This hike in prices was fueled by speculative trade, traders and merchants entered into formal futures contracts to buy and sell bulbs at the end of the season, what is more surprising is that neither party paid any margin money or mark-to-market margins, only a paltry deposit- “Wine money” prior to entering into a contract.

Things got out of hand when at its peak a single tulip bulb sold for more than 10 times the annual salary of a skilled craftsman, sometime around 1635, 40 bulbs were exchanged for 100,000 florins which equates to 2500 florins for a single bulb, For that amount  you could buy all of the following:

2 Lasts of wheat 448 f
4 Lasts of Rye 558 f
4 fat oxen 480 f
8 fat swine 240 f
12 fat sheep 120 f
2 hogshead of wine 70 f
4 tuns beer 32 f
2 tons butter 192 f
1000 lb. cheese 120 f
A Bed 100 f
A Suit of clothes 80 f
A Silver drinking cup 60 f
Total 2500 f

 

*Courtesy Wikipedia

By 1636, it wasn’t just the traders and merchants involved in this rampant speculation, the common masses  joined in too, so much so that people ignored their primary occupations and participated in Tulip trade. In the last few months leading to the subsequent crash of this irrational euphoria, the prices of tulip bulbs rose by close to 20 times.

Tulip trade reached its peak during the winter of 1636’-37 and had attention of the entire nation. February 1637, tulip bulb contract prices suddenly began to fall, and no deliveries were made to fulfill any of the contracts, this lead to free-fall in the prices of these bulbs, the market for “Tulips” evaporated overnight, there were simply no buyers for any contracts any more, only sellers. There was widespread panic and merchants turned to the government for help. Tauntingly, the Government announced that anybody could pay a 10 percent fee and void the contracts; the courts of law wouldn’t help either as they termed this activity as “Gambling” and declared that these contracts weren’t enforceable by law. This led to further fall in Tulip prices, any attempts to reach an agreeable solution failed and they couldn’t find any brakes to halt or even slow down this continued fall in prices.

The mania finally ended and People were left with flowers, worth a fortune just a few weeks back, now fetched a fraction of that amount. The Dutch economy was in recession for a few years following this event. The market values of various commodities was questioned, people were now fearful and more cautious than ever.

Think about it, Prices of these bulbs which took years to appreciate and rise in value were beaten down to almost nothing in just a few weeks.

At the crux of this incident lies a very basic human instinct and emotion ~ Greed. It’s a drug which you simply can’t afford to abuse.

 

* Primary source of facts and figures – Wikipedia. 

 

The reading dose -3

Here’s another one in this series:

1. The “Bubble” in quality (Click here): This one is really insightful, it makes you think about what kind of expectations are built into the stock price and what returns you are willing to settle for as an investor

2. Holding companies (Click here): Interesting article from Neeraj, whose blog I follow regularly, this one throws light on how one can go about investing in holding companies

3. Conviction to hold (Click Here): This one is a must read, it gives a very good insight into how one can and should develop conviction to hold companies they own

4. Jealousy & Envy: (Click here): This one is a very good read written by Vishal at Safal Niveshak, do make it a point to read this

 

Alpha & Luck

Consider this, there are over 4000 (*) listed companies in India alone, if you are in a position to invest in international markets then you have to choose from over 15000 (*) probable companies across the many liquid and popular exchanges available.

If you invest based on fundamentals you would understand that as the number of securities in your portfolio increase, it gets harder to keep track of them and monitor them efficiently to generate positive alpha

A decent portfolio would on average have anywhere between 10-25 stocks above which the benefits of diversification would largely be exhausted

Further, a reasonable target from equity markets is to be able to compound capital at around 20 CAGR over the long term

Now, an aspiring investor needs to figure out which stocks does he have to hold at different times out of the available thousands in order to compound capital at desirable rates. No matter which kind of analysis you apply, you are going to have quite a handful to choose from.

This is why luck plays such an important part in determining your investing results

You can easily build a well analyzed and researched portfolio and a bulk of them could probably not do a thing for years or a black swan like event could hit a few of them and take you completely by surprise

The only way to protect yourself against all of these risks of capital loss and stagnation is to invest in high quality businesses with a reasonable dose of margin of safety, sit tight and allow luck to work in your favour.

Happy Investing!

(*) This is just an approximation.