November 6, 2016
by calminvestor

Mean Reversion: The Value Investor’s secret weapon

 The Calm Investor | Mean Reversion

Successful Equity Investing

To become an equity investor, you need three foundational elements:

  1. to tell a fundamentally strong company from one that is not based on it’s financial statements, it’s business model, and the dynamics of it’s industry
  2. to put those fundamentals in the context of the prevailing market price and how those prices are subject to variation based on swings in the nebulous concept called market sentimentand
  3. to recognise, and protect against the potential influence of those market sentiments on our decision-making i.e. our susceptibility to behavioural biases when making investment decisions

These elements are common sense, but they take a lot of conscious effort (learning) to understand and even more effort to implement. Most investors aren’t able to.

Ryan Shmeizer, in his post on “Cached thoughts” drew a parallel between how we typically think about any topic to a computer retrieving data stored in it’s RAM, or cache. He says, when a concept is spoken of, our mind dips into it’s memory cache to access precomputed thoughts instead of computing our opinion or understanding of the topic based on the facts available to us at the time.

If our information diet consists only of a twitter stream of borrowed quotes by Buffett, Munger et al, we’ll be able to readily access phrases like “buying for less than intrinsic value”, “buy stocks like you would buy groceries, not like perfume” thinking we really understand value investing, but our investment results will suggest otherwise.

We need resources rich in insight, that will help us build understanding of those foundational elements to keep learning, unlearning and relearning.

What has worked in investing

One such resource, is a paper “What has worked in investing – Studies of investment approaches and characteristics associated with exceptional returns” by Tweedy, Browne Company LLC. It is a compilation of the findings of over 50 major quantitative studies over 50 years, some academic, others by investment companies about the returns from various schools of investing.

The key findings of the paper, as to what works in investing according to Tweedy, Browne are:

  1. Low Price in relation to Asset Value: Stocks bought at less than book value or even more conservatively, at less than Net Current Assets (cash, receivables, inventory minus liabilities)
  2. Low Price in relation to Earnings: Stocks bought at low Price / Earnings offer high earnings yield when considering their potential dividend payment to prevailing stock price
  3. Insider buying: Inside information on likely improvements, not a tough one to imagine
  4. Significant Price decline: Poor recent performance resulting in lowered expectations
  5. Small Market Capitalisation: Smaller base, higher growth rates and therefore more price appreciation

These findings  apply to studies done for markets outside the US, a couple included India.

The full paper is available at the end of this post.  Continue Reading →

November 4, 2016
by calminvestor

Latest News and impact on Online Trading (Sponsored Post)

This is a sponsored post

It is a truth universally acknowledged that a man (or woman) wanting to be in possession of a good fortune needs the services of a reliable spread betting brokerage company. Yes, I’m paraphrasing Pride and Prejudice but with the current state of the Sterling, savings rates at their lowest since 1960, the continuing volatility of the stock market, “hard Brexit” seeming to be the preferred government option and to top it all the possibility (albeit increasingly remote) of a Trump presidency choosing profitable forms of investment has become like Harry Potter chasing the golden snitch.

How low can it go?

The pound, since that June day has plummeted to its lowest exchange rate with the US dollar since February 1985 when it bottomed out at $1.05. The current predictions by spread betting companies such as CMC Markets is that Sterling won’t stabilize during the remainder of 2016. Mark Carney, governor of the Bank of England, however, continues to be perceived as a safe pair of hands who when he speaks inspires confidence in the pound.


The annual average saving rate is the lowest it has been in the last fifty years and with such a fragile economy the Bank of England may hold off raising interest rates for longer than planned. Employing a wait and see policy there is a chance that if there is no sign of stabilization then interest rates may indeed be lowered.

Stock Market Volatility

The continued uncertainty is placing some pressure on the UK’s top companies resulting in a stock market which although strong in comparison to the currency is still not in the best of places.

Hard Brexit

It was sometimes thought that although the UK had voted to leave the European Union it would still want to keep its place in the single market accepting a degree of free movement in exchange for this concession. As time has gone on and positions have become more entrenched this degree of rapprochement is looking exceedingly unlikely. The “hard brexiteers” seem happy to forego the benefits of the single market in exchange for maintaining the sacrosanctness of the UK borders.

President Trump?

Brexit would be a ripple in the pool compared to the hurricane which could hit the financial markets if Donald Trump was elected to the White House. Where Hillary Clinton could be regarded as a safe pair of hands the loose cannon which is Trump could throw everything to the four winds.

Why spread betting?

What is the difference between spread betting and the more conventional trading? When a conventional trader buys shares, currencies or any other type of asset they are speculating that the price will rise enabling them to sell at a profit. A spread better trader recognizes that they have the potential to profit from both rising (going long) and falling (shorting) prices as long as they correctly predict which it will be, providing many more opportunities for trading. For instance, a company such as Talk Talk is about to publish their annual report and the spread better trader considered opinion is that the information contained in the report will be detrimental to the share price. They can place a trade based on their opinion and have the added advantage that spread betting is tax free. The degree of accuracy in the prediction determines the potential profit or loss.

A further advantage is that since spread betting is a leveraged product it can allow the spread better trader to make a deposit of as little as 1 to 10% of the total trade value. It should be remembered however that while this does allow for any potential profits to be much higher than those gained by more conventional methods of trading the same holds true for any losses incurred. The importance of choosing a reliable spread betting broker or company which adheres to a regulatory authority and with a competitive range of commodities therefore cannot be over emphasized.

October 22, 2016
by calminvestor

Five great free value investing resources

The Calm Investor | Value Investing Resources

“In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time – none, zero.” – Charlie Munger

And so, here’s a short list of valuable value investing resources that I’ve found, offer insight into developing that mindset essential to successful investing. You’re much better off spending your time absorbing the content from resources like these than seeking out ‘Buy’ and ‘Sell’ recommendations in the pink papers.

Farnam Street

Named after the street in Omaha, Nebraska where Berkshire Hathaway keeps it’s headquarters, Farnam Street is run by Shane Parrish, who apparently worked with an intelligence agency with a three-letter acronym before enrolling and almost dropping out of an MBA course because of the lack of insight into decision-making. He persevered and started this valuable site.

The best place to start on this site is the helpfully titled “Best Articles” link.


Monevator is a UK-based site, run by two bloggers with slightly differing perspectives on investing as evinced by their handles; ‘The Investor’ and ‘The Accumulator’. The underlying theme of the site is to “get rich slowly” as opposed to offering “sure-shot strategies”.  Some of the content is relevant only to UK citizens but there are still tons of articles to help develop your investing personality.

Best of Monevator here

Musings on Markets – Aswath Damodaran

He’s the professor of Corporate Finance and Valuation at the NYU Stern School of Business and literally wrote the textbook: Damodaran on Valuation. His ability to break down the most complex valuation questions to arrive at a number for any company is legendary, an example, his techcrunch article on why he believes Uber is overvalued.

He posts on contemporary issues, like his latest post is about the ailing Deutsche Bank. While the companies he discusses are not necessarily of relevance to Indian investors, they provide hints on how to think about breaking down a seemingly complex task to arrive at a fair value for any business.

Jason Zweig

Jason is a personal finance columnist with the Wall Street Journal. His articles appear in many prominent publications including Time, Money magazine. What is likely to really get your attention is that he’s the editor of the revised publication of The Intelligent Investor by Ben Graham published in 2003. His articles are similarly insightful, while staying away from financial jargon.

A compilation of his responses to the most frequent investment questions here

Michael Mauboussin

A veteran of the investment management industry, Michael is the author of The Success Equation, He’s even better known for the lucid papers he writes in his role as Head of Global Financial Strategies at Credit Suisse which have been compiled into a book More Than You Know – Finding Financial Wisdom in Unconventional Places and named as “The 100 Best Business Books of All Time” by 800-CEO-READ, one of the best business books by BusinessWeek (2006) and best economics book by Strategy+Business (2006).

A link to some of his best papers is available here helpfully compiled on

Bonus resource: The writings of Charlie Munger

One of the legends of the value investing world, Charlie’s work on mental models is considered path breaking and gives insight into applying different frameworks to understand pretty much anything and to apply it to investing. Problem is his book Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger is not in publication and can only be obtained at significant cost. To meet this unmet demand, a host of copy cat publications and sites using various combinations of the phrases “mental models” and almanack have sprung up. Hence I was exultant to find a resource with some of his best speeches and writings compiled here (hat tip to Indraneal twitter id @omnilogist for pointing me to this resource)

My suggestion, explore these sites, click through the various source links, immerse yourself in the insight, think about how it might apply to you, then apply and assimilate into your investment philosophy. Become a calm investor, untroubled by the noise.

What are the best resources you’ve come across? Send me a note and I’ll add them to this post here.

October 2, 2016
by calminvestor

So many stocks…So little time

This is a practitioner’s post for someone looking for help to develop their own investment process, using a freely available resource:

The Calm Investor | Stock picking in India

Rule #1: Don’t f*** up

The financial newspapers have a section on them everyday – top ‘Buy’ and ‘Sell’ recommendations from brokerages. Financial news channels have a segment called something like “Top Trading Ideas for today”. During other segments, every interviewee, whether head of research at a brokerage / mutual fund house / hedge fund gets asked this question about top stock picks to invest, in India. They all oblige, with a fresh set of stocks (companies), every day, that will benefit from some overnight development, be it auto stocks with GST, export stocks with rupee devaluation, oil marketing stocks with oil price declines and so on.

Those new to investing, get swept up in the barrage of information, trying to keep up with what the “experts” say. Those who’ve been at it longer, know not to drink from the fire hydrant. If you’re a successful professional investor, you know the flurry of information is so damaging, you relocate to a different country and set clear rules of value investing for yourself.

As a broad rule, to not f*** up, Do not buy something because financial news media told you to.

While this awareness helps with the preliminary hurdle of not reacting to the whims of Mr. Market, it doesn’t solve the value investor’s problem.

If the stocks everyone is talking about are the wrong stocks given they are likely to have run up in price already, and if the right stocks are those that no one is talking about right now, how does the value investor develop his own list of stock picks?

Developing your investing “technique”

All unsuccessful investors are alike; every successful investor is successful in her own way – The Calm Investor

The first stock I ever bought was recommended to me by my father. I then added stocks from an industry sector I had worked in previously, thinking my superficial familiarity would be an advantage. But I knew this was really like a drunk man looking for his keys under the streetlight because it was too dark to look where he had actually dropped them.

What followed was the quest for the ideal process, from going top down (picking sectors then companies), going contrarian (looking for stocks at 52 week lows), even using price movements (gasp! technical analysis), to name a few. I was unable to develop any conviction in any of these methods, thus rendering me susceptible to switching back and forth, a sure recipe for disaster.

This was the time I came across the traditional investing tomes by Ben Graham – The Intelligent Investor and Security Analysis. These books provide the essential foundation of being able to think about the company behind the stock symbol, essential to be any kind of successful investor, and especially one that looks to buy low and sell high.

Books by Graham, annual letters sent to Berkshire stockholders are immensely valuable in equipping you to arrive at an opinion on the value of a given company and the pitfalls to watch out for. Taking the principles from those and applying the fantastic lessons from surgeon Atul Gawande’s The Checklist Manifesto : How to Get Things Right, I devised my checklist for evaluating potential investments; The checklist approach to investing

However, in a investment universe of thousands of companies, they do not give you the tools to know where to look to begin with.

Where / How to look

Peter Lynch’s One Up On Wall Street offered a way to think about potential investments from what you already know. Which led to this framework for thinking about buying your first stock, in the Indian market.

While the “buying what you know” framework is a great way to get started, it is limited to consumer-facing sectors, thus leaving out large parts of the investible universe. It also works mostly for companies you’ve already encountered, often, for a large part of your life.

What I felt I needed was a quick and dirty way to classify companies into the “Maybe” and the “Do not touch” pile. Only companies in the “Maybe” pile warranted further analysis and a deeper look at their business. For example, if a company’s interest payments have been increasing and account for the bulk of its pre-tax profits, as an equity holder, I have no interest joining the very back of a long line of those having a claim on the company’s earnings, irrespective of whether it is the next hot thing.

Unable to resist using catchy monikers, I called it the TCI Rapid X-Ray, outlined in a previous post with a similar theme: So many stocks, so little time – an approach to stock selection. I received a flurry of emails on this post asking to share the tool. However, the problem was this was a very manual process, involving importing financial statements into a google sheet template with formulae. However, this is an error-prone process and the output is not easily shareable. Also, when moneycontrol, the site from where I imported the financial statements changed their format, it meant having to rebuild my scoring template from scratch.

That was until I discovered the Continue Reading →

September 24, 2016
by calminvestor

What bad design can teach us about investor behaviour

Shower controls and Jet Lag

I am currently reading a book on design called The Design of Everyday Things by Don Norman. As opposed to the usual sources of reading recommendations from friends, websites top 10s or the ubiquitous Amazon recommendation engine, I came across this book when letting off frustration on google. Let me explain.

For a long time, my professional designation was “management consultant”, a profession that gets its fair share of eyerolls and wisecracks, not unlike…

“If you see a consultant on a bicycle, why should you never swerve to hit him?

It might be your bicycle.”

A regular part of my job meant flying to various client locations and spending large parts of work weeks in hotels. Now, I didn’t mind hotel rooms for the most part, except when it came to the showers, to be precise, hotel shower controls. Bleary eyed from waking up in a different time zone, I’d go into the shower, to then stare blankly at the gleaming polished metallic contraption on the wall, not unlike this one.

How was one to figure out the right setting to avoid being blasted by a jet of scalding hot or freezing cold water? When the water flowing from the tap still feels cold after I set it to what seems right, is it because it takes a while for the heating to kick in? Am I the problem? Should a comfortable shower need a PhD.?

I’d mostly get it with a bit of trial and error, but there was this one time, that I just couldn’t. No matter what I did with the various knobs, freezing cold water kept gushing out. The prospect of not washing off remnants of a 10 hour plane ride made me steel myself and shower in the ice cold water. Later that day, I punched irately into google “Why are shower controls so badly designed?” which took me to an article referring to Don’s book.

The three levels of cognition

I started reading the book recently, several years after adding it to my mental reading list, and quickly saw why it’s considered necessary reading for anyone building products or services for other people, i.e. an understanding of how the human mind thinks, feels and reacts is essential to building great user experiences. And how there are implications for investors, from how our minds react to information.

There are different models about the working of the human mind, my all-time favourite being the seminal piece of work Thinking, Fast and Slow by Nobel winner Daniel Kahneman. The design of everyday things puts it as three levels of cognition:

  1. Visceral: the “lizard brain” – basic protective mechanism – quick judgments about the environment – good / bad, safe / dangerous – enables quick response without conscious awareness
  2. Behavioral: home of learned skills – triggered by situations that match appropriate patterns – largely unconscious actions, like picking up a cup, balancing a tray
  3. Reflective: home of conscious cognition – deep understanding and conscious decision-making takes place – cognitive, deep and slow

The author goes on to summarize the significance of the distinct thought process:

“Reflective memories are often more important than reality. If we have a strongly positive visceral response but disappointing usability problems at the behavioral level, when we reflect back upon the product, the reflective level might well weigh the positive response strongly enough to overlook the severe behavioral difficulties”

How financial news hijacks the Investor’s mind

Continue Reading →

September 17, 2016
by calminvestor

Don’t Ask, Can’t Tell

The Calm Investor | Perspective Matters

Our (lack of) self-awareness

Let’s do a quick quiz to determine what makes you happy. Rate the following on a scale of 1 (very little) to 5 (a great deal) depending on how much each item causes your mood to fluctuate on any given day:

  1. How well your work day went
  2. Amount of sleep you got the preceding night
  3. How good your health is
  4. How good the weather is
  5. Whether you had sex
  6. Day of the week

Now, if I were to then on a daily basis, ask you, how your day went, your response should have a relationship with your ratings to the previous question. Simple enough?

Except, there seems to be very little to indicate that your answers to the first question (how important are these factors in determining your mood) are accurate. Here’s why.

In a study at Harvard, psychologists asked students to report their mood, at the end of the day, for two months. They also reported answers to the questions above (quality of work day, amount of sleep…). The women reported an additional factor, the stage of their menstrual cycle. At the end of two months, participants were asked, how they thought, each of the factors tends to affect their overall mood.

This data gave the researchers two things:

  1. how much participants thought each factor affected their mood
  2. how well each factor actually predicted their mood

Turned out, the participants were not accurate at all. Meaning, if someone said the amount of sleep was important to how their day went, the actual association between sleep and mood at the end of the day was equally likely to be low as high.

Assuming we’re not blessed with greater self-awareness than the research group in the study, it’s safe to say that we’re ignorant in large part, to what drives our own emotions, attitudes and behaviours.

Continue Reading →

August 25, 2016
by calminvestor
1 Comment

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 🙂