Right way to make good decisions

'Good decisions are made by gut feeling'

'Good decisions are made by thorough analysis of the problem and consequences of each decision made'

There has been war between the two thoughts. Both make sense. In the book 'Blink', Malcom Gladwell makes a compelling argument to make decisions through gut feeling; he proves that gut feeling is a decision actually made by inner mind which has processed all the data over the years. The first gut feeling is right, but once you try to rationalize your gut feeling, your inner mind cannot give you all the details that it used to make the decision.

Game theory argues otherwise, that you have to have a flow chart of the decision alternatives and their consequences.

Now there seems to be a consensus, at least for me. Usually you won't be pressed to take a decision through gut feeling or you would not have time to do a thorough analysis. Here is the right way to make decision - put the problem at the back of your mind for a couple of days. Do not conciously think about the problem, let your inner brain work on it. The best decision is what your gut/first feeling says after those two days.

Framing Business Problems

Business decision making is a practice, but there is more science to it than most people think. Here, I give frameworks of issues to consider for common business problems.

1. How to increase profits


2. What to consider when increasing prices ?
3. Ways to reduce costs

Reduce funtional costs

Reduce income sheet costs
4. How can we sell more units ?


5. New market entry - considerations



6. Financial Analysis of a Project

ROI Analysis
7. Merger considerations
8. Silver bullets

How to evaluate synergy ?

How to evaluate an opprtunity ?

Business Frameworks

Business frameworks are useful for a quick analysis of a busienss problem, helpful to narrow on to specifics to concentrate.

1. Porters Five Forces
Porters five forces is used to analyze the attractiveness of an industry.





2. BCG's Product Matrix




3. 3Cs4Ps
Useful when analyzing a product

4. Value chain
Useful when analyzing the value of internal operations of a company

Investing Books

These are my favorite books on investing. These books give you solid foundation and a broad perspective on investing, they do not make you a over night prince.

The intelligent asset allocator (william bernstein)
A random walk down the wall street ((burton malkeil)
The intelligent investor (benjimin graham)
The four pillars of investing (william bernstein)
The essays of warren buffet (cunningham)

What is a good career for me ?

Parts of the book "what color is your parachute" are truly revealing to me. This is what you need to know for a successful career - What do you love to do most ?

Think about what would you do love to do now if you don't have any worries about getting paid. Think about what makes you exiciting, think about what your freinds or mother or wife has to drag you to stop doing. Continue doing that and money (enough for a comfortable living) will come.

Sounds too good to be true ? It is true. It follows these simple principles - There is some money for any job in this world. There is good money if you excel and are the expert in any particular job. They key to excel in a job is to love doing it all the time.

Now it might not work some situations. You are in the mid point of your career and cannot just stop what you are doing now, you have a family. Well you are lucky, you can use the comfortness (hey you are getting money now) of the existing platform to jump on to what you love to do most.

For people like me, there is another problem - I don't know what I love or I love too many things. For those, first write down what skills/work_sets you would love to do - Writing, giving speaches, kicking somebody, gossiping, photography, cooking, watching TV etc. Now go find careers which involves those skill sets.

Trust me, there are people who make lot of money running celebrity blogs and writing movie reviews !

Cognitive Myopia

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 ;)

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