The Calm Investor

Equities | Value investing | India

August 25, 2016
by calminvestor

Guy Spier’s Eight Rules for Value Investing

The Calm Investor | Guy Spier's Eight Rules for Value Investing

I just finished reading Guy Spier’s “Education of a Value Investor: My Transformative quest for Wealth, Wisdom, and EnlightenmentThe Calm Investor“. The author first made news when he and Mohnish Pabrai bid $650,000 for one lunch with Warren Buffett. This book talks about what led to that lunch and what he learnt from it. More importantly, it’s a tell-all autobiography of how he went from the often subtly, sometimes blatantly immoral world of investment banking to setting up his own fund, modeled on the principles espoused by the legendary Buffett. In the process he provides an unvarnished look into the arrogance, hubris and insecurities that stem from being a product of elite ivy league schools, and how, over time, with a lot of introspection and a fanatical devotion to self-improvement, he created his own version of Buffett’s environment to run a successful hedge fund (Aquamarine Fund).

After the 2008 credit crisis, Guy became particularly aware of the periodic bouts of irrationality that grip all investors, him included. He then set out to make his own process more rational and less susceptible to the next such crisis. In his words “Some of these rules are broadly applicable; others are more idiosyncratic and may work better for me than for you”

So here are Guy Spier’s eight value investing rules and my own take on how applicable I find them to the Calm Investing process: Continue Reading →

August 14, 2016
by calminvestor

Seven Life Learnings for Investors

The Calm Investor | Seven Life Lessons for Investors

I subscribe to a website called that is a beautifully curated set of articles about books on a variety of life topics. I’ve come across many excellent reading suggestions from this treasure trove. A couple of years ago, the founder of the site, Maria Popova, wrote a post called “7 things I learned, in 7 years of reading, writing, and living“. As I read through the learnings, it occurred to me how relevant they are even to something as material as wealth and its pursuit.

So, borrowing heavily from Maria’s article, here are the Seven life learnings for investors, for the worthy endeavour of building long term wealth.

7. Do nothing for prestige or status or money or approval alone

“Prestige is like a powerful magnet that warps even your beliefs about what you enjoy. It causes you to work not on what you like, but what you’d like to like.” – Paul Graham

Seemingly antithetical, but if the idea of making a ton of money is the only thing that drives you as an investor, there’s a good chance you won’t succeed. Because, in a probabilistic system like investing, even a bad process can result in good results, up to a point. The investor solely focused on the money won’t spend enough time improving her process, thereby jeopardizing long term performance. Same goes for wanting bragging rights about your latest 50-bagger to make your case for the “investing hall of fame“. The pursuit of that “party headline-grabbing stock” could do all kinds of damage to your portfolio.

6. Be generous

“…with your time, your resources and with giving credit and, especially, with your words, It’s so much easier being a critic than a celebrator.”

There is no distinguished club for “most annual reports analyzed” or a wikipedia page acknowledging the “most unique stock screening model built”. A lot of what you need as an investor is already out there, freely shared by practitioners, experts and novices alike. So absorb what’s out there and share your nuggets of wisdom. Be generous, and be amazed how it deepens your own understanding of what it takes to be a good investor.

5. Build pockets of stillness into your life

“The best ideas come to us when we stop actively trying to coax the muse into manifesting and let the fragments of experience float around our unconscious mind in order to click into new combinations.”

Financial news channels, with multi-coloured tickers scrolling across the bottom at different speeds, psychedelic graphics of company news updates of a CFO who sneezed and the fervent urgency in the voices of the “analysts” can lead you to believe investing is like trying to hit a moving target, while hanging upside down from the saddle of a wild horse that has just been hit with a high-voltage prod. Don’t believe it. Contrary to the experts on CNBC, good investing needs time, and space.

Also, sleep, because

“…Besides being the greatest creative aphrodisiac, sleep also affects our every waking moment, dictates our social rhythm, and even mediates our negative moods…What could possibly be more important than your health and your sanity, from which all else springs?”

4. When people try to tell you who you are, don’t believe them

“You’re not in currency derivatives right now?! With Brexit, there’s no way you can lose on the Dollar-Pound put!”

“Yields can only fall in emerging markets, bonds are a sure thing. How come you’re not in them?”

You will get this all the time. People trying to tell you the kind of investor you are, or supposed to be. Block out the noise, focus on your circle of competence so you can avoid acting out of ignorance or ineptitude, two primary, and controllable reasons, for why we fail. Just like “Be your own person” is good advice, “Be your own investor”.

3. Presence is far more rewarding and intricate an art than productivity

“How we spend our days is, of course, how we spend our lives.” – Annie Dillard

Think stock market investing, and we can’t help but think of the image of a Wall Street trading desk with multiple terminals lit up with stock prices and the buzz of sharply dressed Red-Bull-fuelled MBAs yelling into phones making trades worth millions in seconds. Add to that, the new-age concept of FOMO, and it’s easy to fall into the trap of feeling an investor needs to be doing something every second the markets are open. This problem exacerbates itself in times of rising markets, precisely why I feel rapidly rising markets aren’t a good thing. Remember that the trading desks of financial institutions are abuzz because they make money (commissions) every time they trade, so they are, in a perverse self-serving way, being productive. As an investor, hyperactivity is like a chain-smoking habit, terminal.

2. Allow yourself the uncomfortable luxury of changing  your mind

“We live in a culture where one of the greatest social disgraces is not having an opinion, so we often form our “opinions” based on superficial impressions or the borrowed ideas of others, without investing the time and thought that cultivating true conviction necessitates. We then go around asserting these donned opinions and clinging to them as anchors to our own reality.”

1994, A bond trading hedge fund founded. Grew from zero to over $100 Billion in assets (“B” not “M”) in three years. Run by finance veterans, PhDs, Professors and two Nobel Prize winners. 1998, over $1 Trillion in default risk across America’s largest banks. $4.4B in capital lost in one year. Shuts operations.

If some of the smartest minds ever can get it so horribly wrong, where is the shame in admitting that we’re not infallible? More important than analyzing our winners, spend time on understanding where we got it wrong – My three biggest investment mistakes. The more we’re willing to say “I don’t know”, the more chance we give ourselves to truly understand a concept. So, go ahead, admit you were wrong, learn, and improve.

And finally, 1. Expect anything worthwhile to take a long time

“…the flower doesn’t go from bud to blossom in one spritely burst and yet, as a culture, we’re disinterested in the tedium of the blossoming. But that’s where all the real magic unfolds in the making of one’s character and destiny”

This is about so much more than the concept of compounding and why it’s important to invest. It is about the first attempt at reading an annual report to distinguish a fundamentally strong company from a one that’s not. It’s about buying that first stock to then feel the pain of seeing it lose 7% in one week after your purchase. Or to watch markets tank after some macro-economic development that makes as much sense to you as a tap-dancing zebra. It’s about refining your investment approach as you understand more about what makes sound companies to invest in and more importantly, your own temperament as you discover your unique appetite for risk to develop your own investment approach, whether it’s handing it over to a fund manager or taking pleasure in building your own portfolio. Successful investing takes time, just like anything worthwhile.

What lessons have you learnt in your investing journey? As learning #6 says, “Be Generous” and share 🙂

August 9, 2016
by calminvestor

Prioritizing Health Insurance

This is one of the rare posts on this site that is not about investing, wealth building or behavioral finance. And no, it is not a sponsored post either.

I got a phone call from a friend last week. After the usual banter, he got down to the business at hand. He needed my advice given tax season was at hand. “I need to maximize my tax deduction and so need to invest some money. Can you help me identify the right life insurance policy to buy?”

The Calm Investor | Health Insurance

Image Source:

Normally I would point out that analyzing and investing in equities did not make me an expert on tax, but given this was coming from someone who until a few years ago thought tax returns were when the government paid you back your taxes, I figured I could at least add some value by pointing out that buying insurance is not the same as investing.

Buying any kind of insurance should not be about taxes but about nature of the risk of financial loss you’re protecting against. The higher the potential loss, the more important it is to manage the risk.

Having established that he already had substantial term life cover, I asked him “What do you think are the most likely risks you face that would have a significant financial impact?”

After a pause, he rattled off a few, in no particular order; accidental loss of life leading to financial difficulty for his family, serious accident leading to loss of limb, critical chronic or terminal illness, losing his owned apartment to a natural disaster, being burgled of his possessions, medical procedure for non life-threatening conditions, liability from being involved in an automobile accident

When he trailed off, I asked him to now consider two things for each of those risks, the likelihood of the risk becoming a reality and the financial impact if it did. Here, I reminded him, it’s important to consider the costs incurred but also any income lost as a result.

One way to do this exercise would be to look for detailed historical statistics on the occurrence of those risks in the general population, narrow down to people who met his demographic profile and arrive at precise figure. But given this exercise is about prioritizing the kinds of insurance a 30-something urban professional needs, getting a relative sense of the likelihood is good enough.

He spent a couple of minutes making a few notes, thinking about instances of people in his peer group, then said with conviction,

Unanticipated health problems seem to be the biggest risk to me and my family’s financial health

I agreed. “Let’s see if you can do something to mitigate that risk then, shall we?” The next step was to identify the right one from the plethora of health insurance plans.

“This is where it gets confusing” he said, there are so many companies, each with a bunch of plans. How does one identify the best health insurance policy? Surely, this is too important to decide on price alone like on a travel website.

Like any question worth answering, it needs patience in looking for the right information sources and weighing their credibility before making a choice. For example, Mint has a regularly updated feature called ‘Mint Mediclaim Ratings‘ comparing health insurance plans and scoring them on a list of clearly defined criteria like waiting periods by disease, whether they have disease-wise capping, number of years of pre-existing diseases excluded, percentage of claims settled, room rent covered and so on.

“Looks like I have some research to do” he said as we signed off agreed to meet for a drink the next weekend when he was in town.

Additional Reading:

The hierarchy of insurance needs – Deccan Chronicle

Mint Mediclaim Ratings – Detailed Calculations

Typical cost of treatment of various medical conditions –


July 3, 2016
by calminvestor

Let your baby play in the mud or the value of experiments

Expert Advice or Who to believe

Adapted from the book Mindware – Richard Nisbett

The Calm Investor: Learning from experiements

We get it all the time. Advice meant to improve our careers, our children, our bodies, our lives. Only, a lot of it is often contradictory. And unlike twenty years ago when there were three national dailies, two television channels and 1 radio station,  there’s an unending stream (literally) of tweets with links to online self-improvement resources.

It’s the same with investing. “Time to buy consumer staples” “Get out of commodities” “Cyclicals are the next mega trend” or even “Sell Everything!“, the warning from the good folks at RBS in Jan 2016. With #Brexit, there’s another rash of pronouncements about the markets and what investors should be doing.

How should you make your critical decisions, about investing or even life in general, for example whether to let your baby be exposed to germs or to deploy an antiseptic environment for her safety? Continue Reading →

April 30, 2016
by calminvestor

Have you been framed?

Nicotine addicted monks and framing

You have probably heard this one about the two trappist monks.

Monk 1 asked his abbot whether it would be alright to smoke while he prayed. Scandalized, the abbot says “Of Course Not! That borders on sacrilege!”

Monk 2 asked his abbot whether it would be alright to pray while he smoked. “Of Course” says the abbot, “God wants to hear from us at any time”

The way the same information is presented to us has an impact on how we process and react to it. This effect is called ‘Framing’.

Next time you pick up a pack of chips or a jar of yogurt with the proud label “80% fat-free”, pause for a moment and think how you’d react to it if it said “20% fat”.



Life, Death and Framing

And it’s not just the spur-of-the-moment decisions in the supermarket that are impacted by framing.

Consider two ways in which the effects of surgery as a cure for a certain type of cancer were explained to physicians. Amos Tversky, one of the seminal figures in developing the discipline of behavioral economics and cognitive bias, conducted this experiment. Continue Reading →

April 23, 2016
by calminvestor
1 Comment

Confessions of a value investor

For the longest time in my investing experience, I felt like a bit of a fraud, when calling myself a “value investor”, the phrase so prominently visible on the header of this site. Here’s why.

The definition of value investing, as introduced by the oft-quoted Ben Graham is quite simple:

The strategy of selecting stocks that trade for less than their intrinsic values.

Sounds simple enough. List all stocks along with their market prices (A). Add intrinsic value (B) as a column. Compute difference B minus A and voila! The stocks with the largest differences are your value stocks. Buy. Wait for rest of market to come to its senses so A = B. Sell. Repeat until rich.

Now for the confession, I don’t believe I have ever bought a stock that was trading at less than it’s intrinsic value in the Indian stock market. And going further down the rabbit hole, I don’t believe, I could ever really tell, with any confidence, that elusive number, called the intrinsic value of a stock.

The Calm Investor | Confessions of a Value Investor

Don’t get me wrong, I tried. Painstakingly teasing out the various heads from financial statements, making the right adjustments, honoring the tenet that only Free Cash Flow mattered. Applying conservative estimates of growth of that free cash flow into the future before applying an “appropriate” discount rate to arrive at a fair value for the stock. Flushed with a sense of accomplishment, I would look at the stock price and sure enough, the intrinsic value I had meticulously calculated would be a fraction of the market price. And this happened for stock after stock that I did this with.

I was torn. Either I declare the Indian stock markets as being hopelessly overvalued and forget about equity investing until 70-80% corrections happened or find another way to think about my investing.

That’s when I chanced upon this book called “More than you know” by Michael Mauboussin. The book is a collection of essays he wrote over the years, while in his role at the time of Chief Investment Strategist at Legg Mason Capital Management. (Not to be confused with Long-Term Capital Management (LTCM) – the hedge fund run by Nobel prize winners that lost $4.4B in one year)

Circumstances over Attributes to find value

Traditional investing theories are attribute-based. Growth investors buy companies showing rapid sales and earnings growth without being concerned about valuation. Value investors load up on “cheap” stocks and consider earnings growth a bonus.

Mauboussin says “a sound theory helps predict how actions or events lead to specific outcomes across a broad range of circumstances.” The problem, he says, is that much of investment theory is unsound because of poor categorization and is attribute-based.

A shift from attribute to circumstance-based thinking can be of great help to investors and managers. Such thinking tells you what to do in different situations.

This means while buying low P-E stocks is not a bad idea, expecting that approach to generate superior returns irrespective of context is incorrect. This explains why the investment strategies of the world’s successful investors is often described as eclectic. Mauboussin says, their strategies are more circumstance-based, not attribute-based and often get criticized for straying from that attribute-based mindset.

Why Warren Buffet is not the world’s greatest value investor – Forbes (2013) link

He ends his essay by saying

All investors use theory, wittingly or unwittingly. The lesson from the process of theory building is that sound theories reflect context. Too many investors cling to attribute-based approaches and wring their hands when the market doesn’t conform to what they think it should do.

So, instead of obsessing over why the market didn’t stick to my “model”, I developed a broader checklist based approach to identify companies and focused on reducing the time it took to zero in on potential investments . Also to not stop there and to keep revisiting how things worked or did not work, to keep refining the process. And that, I reckon qualifies as value investing.

February 20, 2016
by calminvestor

The NIFTY in 2016

A little over a year ago, I published predicting Indian stock market returns based on historical analysis of the NIFTY and the CNX500. I did this with tongue firmly in cheek, given the very concept of value investing accepts inherent unpredictability of markets, especially in the short-term (anything less than five years) as laid out in my calm investing principles.

“Anyone who says they know where the market will be a week / month / year from now is guessing (or has super powers)

Since I am yet to find evidence of my super powers, except for my ability to order the best thing on any restaurant menu, this “prediction” exercise is academic more than for any real investment decision-making. Now keep in mind, while the use of words like “predictive modeling” can stir up images like these…


the analysis I did is closer to…


I used 15 years of Nifty Price-Earnings and Price data to determine the relationship between the two. On paper, what the model does is to answer the question:

Given the NIFTY level and PE on any give date, what is the predicted Nifty level one year from that date?

With that background, since the NIFTY has gone from almost scaling 9,000 to barely holding on to 7,000 in the course of a year, I reopened my so-called model from Jan 2015 to see how it did. Continue Reading →