Cognitive myopia is the concept of recent past playing a unpropotionally significant role in making judgments.
Remember the last time you were pretty angry about someone close to you about something they did. Did you think about all other good things that he or she did over the years or you just are consumed about the last thing that he or she did that made you angry ?
Remember the last time you thought stock market would be going up and up and did not sell stock. I bet its right after you have seen the stock market going up. Remember the last time you thought the stock market will never end going down and sold stock - its the time after it went down and down. You actually bought high and sold low. Even if you knew the stock market was up long ago before it went down recently or viceversa that did not enter into your judgmental analysis ?
Remember the last time when you ate a lot even though when you are diet. The recent past of happiness played way significant role in your judgement !. We will all be happy when we recognize and control cognitive myopia don't we ;)
Wednesday, February 7, 2007
Investing - Demystified
Investing principles are very simple and yet following them requires the will and determination of a rock, yes a ROCK, sit where you like, stay there and not be a smart ass.
First, Definitions.
I want to make sure you know I am talking about investing and not speculation or betting or arbitrage. Speculation is buying something anticipating some other fool will buy it at a higher price. Betting is trying to beat a random walk market with your data analysis. Arbitrage is trying to cash information/market inefficiencies, buying low at one place, selling high at another place. Money can be made in speculation, betting and arbitrage but I beleive nobody can make that money consistently over long periods of time.
Investing is getting returns in the long run consistent with your risk level.
Now to Principles.
1. What to look for ?
I like Buffet's principle on this one. Its the business, the people and the price. The business prospects should look good in the long run. Here is a crazy thumrule that I use, if that business goes bust, the end of the world is nearing. Softdrinks, clothing, chewing gum, automobile, insurance are all examples. Next the people. I beleive its the people you are investing in, businesses encounter challenging problems all the time and its the people who make decisions to steer it in the right direction. Ofcourse they should be smart, but more importantly they should be honest. The thumb rule on this one - they should be people with whom you want your daughter to get married (not the Indian father, for him having money is one of the top criteria).
2. Diversification.
Sure but what is it ? The goal is to ninimize risk - If you want to diversify business risk (risk for a particular business) then owning a sector or multiple sectors is fine. If you want to diversify for market risk, you have to get into fixed income securities.
For diversification, as academics say, the goal is to select investments which are inversely correlated with each other. Turst me, it is going to be very hard to find such investments in an increasingly global interconnected economy (remember Chinese stock market crash causing US stock market crash ?)
Interestingly, the best investment I found which is has minimum correlation with the whole set financial instruments is investment in a utility (food, medicine etc) company. not stock of that company but as a limited partner, where I would get to take out the cash flows annually.
3. Invest in what you know
If you want to invest in individual stocks or comapanies, invest in what you know. If you know a sector but cannot pick individual stocks, ETFs are there for you.
My Ideal Portfolio
low tens % - ETFs of what I like (Green, Emerging markets, REIT and high yeilds)
low tens % - Stocks (big cap and small cap)
low tens % - Public company stocks that I like and admire
mid tens % - Ownership in a private companies that produce good cash flows
single digit % - Fixed income securities
First, Definitions.
I want to make sure you know I am talking about investing and not speculation or betting or arbitrage. Speculation is buying something anticipating some other fool will buy it at a higher price. Betting is trying to beat a random walk market with your data analysis. Arbitrage is trying to cash information/market inefficiencies, buying low at one place, selling high at another place. Money can be made in speculation, betting and arbitrage but I beleive nobody can make that money consistently over long periods of time.
Investing is getting returns in the long run consistent with your risk level.
Now to Principles.
1. What to look for ?
I like Buffet's principle on this one. Its the business, the people and the price. The business prospects should look good in the long run. Here is a crazy thumrule that I use, if that business goes bust, the end of the world is nearing. Softdrinks, clothing, chewing gum, automobile, insurance are all examples. Next the people. I beleive its the people you are investing in, businesses encounter challenging problems all the time and its the people who make decisions to steer it in the right direction. Ofcourse they should be smart, but more importantly they should be honest. The thumb rule on this one - they should be people with whom you want your daughter to get married (not the Indian father, for him having money is one of the top criteria).
2. Diversification.
Sure but what is it ? The goal is to ninimize risk - If you want to diversify business risk (risk for a particular business) then owning a sector or multiple sectors is fine. If you want to diversify for market risk, you have to get into fixed income securities.
For diversification, as academics say, the goal is to select investments which are inversely correlated with each other. Turst me, it is going to be very hard to find such investments in an increasingly global interconnected economy (remember Chinese stock market crash causing US stock market crash ?)
Interestingly, the best investment I found which is has minimum correlation with the whole set financial instruments is investment in a utility (food, medicine etc) company. not stock of that company but as a limited partner, where I would get to take out the cash flows annually.
3. Invest in what you know
If you want to invest in individual stocks or comapanies, invest in what you know. If you know a sector but cannot pick individual stocks, ETFs are there for you.
My Ideal Portfolio
low tens % - ETFs of what I like (Green, Emerging markets, REIT and high yeilds)
low tens % - Stocks (big cap and small cap)
low tens % - Public company stocks that I like and admire
mid tens % - Ownership in a private companies that produce good cash flows
single digit % - Fixed income securities
Tuesday, February 6, 2007
Investing in India - Jan 2007
I have one word to say after completing my trip to India (the first after completing my business school) - "irrational exuberance".
I saw irrational exuberance all over the place. I saw it in real estate. A view of Hyderabad area from the air exemplifies it. All you see from the flight when you are landing in Begumpet airport is squares and squares of land. Every empty piece of land you can see is fortified with walls of bricks around the plot to fend off people forcefully claiming the land. My native place, a village in south India is well known for its rice produce, farming has been the occupation of 99% of the people in that area for generations. Now, farming land (err ... real estate) is being treated like a stock market. Land which has been in one hand (the farmer) for decades has changed more than half a dozen hands in the last 2 years. You visit any land in the place and you will be swarmed with real estate brokers all over you !. Here's one more - The AP government announced some land in Anantapur district as a SEZ (Special Economic Zone) and the land basically is acres and acres of desert with no water or infrastructure. The next day, you can see dozens of Sumos and Innovas (the latest Toyota van which you can see all over the place now) filled with real estate brokers trying to buy the land at exorbitant prices.
There is irrational exuberance in the stock market. My brother owns a small stock brokerage (the only one for about 50 villages around), It was dumbstruck to see people who are farmers, probably have stopped their studies at 10th grade (I have known some of them for years) talk about puts and calls. No wonder, the BSE has been going up like crazy, almost 5 times up since July 03.
I saw irrational exuberance in the students there. One of my friends in Tirupati (the town that I live, probably the second tier city in my state) was trying to recruit students with ASP and flash knowledge from about a dozen local MCA (Master of Computer Applications) schools and he would not get a response when he posted 10K rs salary per month. I visited IIT Bombay's research wing for half a day, talking to professors and students. Granted the graduate students there are from second tier schools in India but the research going on there is sub par to the second tier schools in US.
The power cuts have gone worse. I never saw power cuts in the month of December and January in AP, I experienced power cuts for at least couple of hours a day in Visakapatnam and Tirupati. The roads have gotten much better though.
My gut feeling is that India is going towards a hard landing. Granted, I visited there for one month and I visited only couple of states. Granted I am not following all the major economic indicators in India and the underlying currents. Personally, I am scared to death to invest any money in India now. Personally, I am scared that India will remain a BPO center and will fall apart like a pack of cards if something happens to the foreign capital inflow.
I saw irrational exuberance all over the place. I saw it in real estate. A view of Hyderabad area from the air exemplifies it. All you see from the flight when you are landing in Begumpet airport is squares and squares of land. Every empty piece of land you can see is fortified with walls of bricks around the plot to fend off people forcefully claiming the land. My native place, a village in south India is well known for its rice produce, farming has been the occupation of 99% of the people in that area for generations. Now, farming land (err ... real estate) is being treated like a stock market. Land which has been in one hand (the farmer) for decades has changed more than half a dozen hands in the last 2 years. You visit any land in the place and you will be swarmed with real estate brokers all over you !. Here's one more - The AP government announced some land in Anantapur district as a SEZ (Special Economic Zone) and the land basically is acres and acres of desert with no water or infrastructure. The next day, you can see dozens of Sumos and Innovas (the latest Toyota van which you can see all over the place now) filled with real estate brokers trying to buy the land at exorbitant prices.
There is irrational exuberance in the stock market. My brother owns a small stock brokerage (the only one for about 50 villages around), It was dumbstruck to see people who are farmers, probably have stopped their studies at 10th grade (I have known some of them for years) talk about puts and calls. No wonder, the BSE has been going up like crazy, almost 5 times up since July 03.
I saw irrational exuberance in the students there. One of my friends in Tirupati (the town that I live, probably the second tier city in my state) was trying to recruit students with ASP and flash knowledge from about a dozen local MCA (Master of Computer Applications) schools and he would not get a response when he posted 10K rs salary per month. I visited IIT Bombay's research wing for half a day, talking to professors and students. Granted the graduate students there are from second tier schools in India but the research going on there is sub par to the second tier schools in US.
The power cuts have gone worse. I never saw power cuts in the month of December and January in AP, I experienced power cuts for at least couple of hours a day in Visakapatnam and Tirupati. The roads have gotten much better though.
My gut feeling is that India is going towards a hard landing. Granted, I visited there for one month and I visited only couple of states. Granted I am not following all the major economic indicators in India and the underlying currents. Personally, I am scared to death to invest any money in India now. Personally, I am scared that India will remain a BPO center and will fall apart like a pack of cards if something happens to the foreign capital inflow.
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