For the next great investment story

We are wired for stories The human brain is an awe-inspiring feat of evolution. According to biologists, it has approximately 90 billion nerve cells which are linked together by, literally, trillions of connections called synapses. Taken together, this system of elaborate connections within the brain provides “hundreds of trillions of different pathways that brain signals travel through. Our internal and external senses transmit almost four hundred billions bits of information per second through these pathways. “In an effort to mimic this digitally, scientists a few years ago needed more than 82,000 processors running on one of the world’s fastest supercomputers to mimic just 1

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Difference between ROCE and ROIC and does it matter

Financial metrics and investment quality Deciphering financial ratios can be daunting for investors looking to differentiate potential investments on quality. But if you’re set on picking your own investments, then you need to be able to understand and interpret them. If there are better ways you could be spending your time, then leave it a mutual fund manager in spite of its drawbacks or even just buy a low-cost index tracker, which tends to beat most active investors anyway. When it comes to financial metrics, it’s important to understand the spirit more than the letter of the metric, i.e. what the

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The simple question you should ask your advisor

An introduction to incentives:  A true short-story It was the year 2001, I was a few months into my first job out of college, just getting used to the idea of being able to make discretionary purchases with a magical piece of plastic. Hoping to address my obvious lack of awareness of concepts like compounding and investing for the future, my dad introduced me to an old friend of his, ‘S Uncle’. With his salt and pepper hair, ramrod posture and polished leather briefcase, ‘S’ uncle was a successful agent for India’s only life insurance company at the time and

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Which value metric works best?

I recently undertook a quick and dirty backtest on NIFTY stocks to verify whether buying a portfolio of the cheapest index stocks and rebalancing annually would beat the broader index. In spite of the fairly short period under test (nine years from 2008 to 2017), if you’re a value investor, the results are encouraging. From Sep 2008 to Aug 2017, ignoring transaction costs and dividends, a 10 stock value portfolio returned 18% annually compared to 9.8% for the NIFTY. The details of the test and outcomes are in the post ‘Can buying cheap NIFTY stocks beat the index‘ For this test,

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Can buying cheap NIFTY stocks beat the index?

Legendary value investors, past and present, and the best value investing blogs offer this as the one consistent message. Focus on buying stocks trading at relatively lower valuations to the market and the returns will take care of themselves. Ironically, the most-quoted “value investor” in the world, Warren Buffett deviated from this simplistic strategy a long time ago when he started buying “wonderful businesses” (brand, pricing power, future ability to generate cash with minimal capital) at fair prices over fair businesses at “wonderful prices” (current low price to book / other earnings multiples”. The term “wonderful business” has since then

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What is rare is not always valuable

Continuing the series on common cognitive biases that impact investors. In case you missed it, read the introduction and first in the series: neglect of probability here What is scarce is valuable – Scarcity Error In a research project in 1975, Prof. Stephen Worchel split participants into two groups. The first group received an entire box of cookies and the second group just two to taste. Both groups were then asked to rate the quality of the cookies. This was repeated several times. The 2nd group rated the quality of the cookies much higher than the other. Gallery owners place

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The difference between Possibility and Probability

Investor Cognitive Biases: Neglect of Probability In a classic experiment in 1972, participants were divided into two groups. Members of group 1 were told they would receive a small electric shock. Members of group 2 were told there was a 50% probability that they would receive a small electric shock. After this information was provided, researchers measured physical anxiety (heart rate, nervousness, sweating) shortly before starting. The result: Absolutely no difference in the anxiety levels of the two groups. Puzzling. Next, researchers announced a series of reduction in the probability of getting shocked to group 2, from 50% down to

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5 things not commonly known about the NIFTY

Earlier this week, NSE announced effective Sep 29, 4 stocks (ACC, Bank of Baroda, Tata Power, Tata Motors DVR) will be dropped and 3 (Bajaj Finance, Hindustan Petroleum, UPL) will be added to the NIFTY. When analysts talk about the performance of the “Indian Stock Market”, they are typically talking about the NSE NIFTY Index, and the BSE Sensex Index (to a lesser extent). Most investors know the NIFTY consists of 50 stocks (currently 51), of the largest companies by market capitalisation trading on the Indian markets. 5 things not commonly known about the NIFTY: 5. How the NIFTY 50

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