Friday, October 23, 2020

How Is Your Relationship With Money?

Things that have never happened before happen all the time – Scott Sagan

A book review this time – The Psychology Of Money by Morgan Housel. It is the only book I have read twice, just because I enjoyed it so much and there was so much wisdom in it. Must read for everyone. Let’s look at three stories from the book (out of many) that really appealed to me and I hope will be of interest to you as well.

Story 1 -

Ronald James Read was an American philanthropist, investor, janitor and a gas station attendant. He fixed cars at a gas station for 25 years and swept floors at JC Penny for 17 years. He died in 2014, aged 92 with a net worth of more than $8 million leaving $2 mn for his stepkids and $6 mn for charity. A fortune made with meagre savings put into blue chip stocks and being patient.

Richard Fuscone was a Haward educated MBA at Merrill Lynch and was so successful that he retired at 40 to become a philanthropist and was on the “40 under 40” list. In the 2008 crisis high personal debt and illiquid assets made him bankrupt.

Ronald Read was patient, Richard Fuscone was in a hurry. That is all it took to eclipse the massive education and experience gap between the two. Only in investing outcomes can a janitor beat the most qualified people. Financial success is not an outcome of hard science but a soft skill, where how you behave is more important that what you know. Luck plays a large part in the final outcome as well.

When things are going well, realise it is not as good as you think. You are not invincible and if you acknowledge that luck brought you success then you also have to believe that lucks’s cousin risk is around the corner and can turn your story around as quickly.

Failure is a lousy teacher too as it seduces smart people into thinking their decisions were terrible when sometimes they just reflect the unforgiving realities of risk. The trick when dealing with failure is arranging your financial life in a way that a bad investment here and a missed goal there won’t wipe you out and you can keep playing the game until the odds fall in your favor.

The correct lesson to learn from surprises is that the world is full of surprises – Daniel Kahneman

Story 2 -

Investment duo of Warren Buffett and Charlie Munger was actually a trio 40 years ago – Rick Guerin was the third partner. In words of Warren what happened to Rick “Charlie and I always knew that we would become incredibly wealthy. We were not in a hurry to get wealthy, we knew it would happen. Rick was just as smart as us, but he was in a hurry.” What happened was that in the 1973-74 downturn Rick was levered with margin loans. And the stock market went down almost 70% in those two years so he got margin calls. He sold his Berkshire stock to Warren at under $40 a share. Rick was forced to sell as he was levered. Taleb puts it brilliantly. Having an edge and surviving are two different things – the first requires the second. You need to avoid ruin. At all costs.  

Success is a lousy teacher. It seduces smart people into thinking they can’t lose – Bill Gates

Story 3 -

December 29th, 2008. Wall Street Journal front page. Russian professor Igor Panarin.

Around the end of June 2010 or early July the US will break into six pieces – with Alaska reverting to Russian control, California will revert back to form the nucleus of the “Californian Republic” and will be part of China or under Chinese influence. Texans will be a part of the “Texan Republic” a cluster of states that will go to Mexico or fall under Mexican influence. Washington DC and New York will be a part of the “Atlantic America” that may join the EU. Canada will grab a group of northern states.

This was at the height of the financial crisis and only in these times a story like this could appear at the front page of the most prestigious financial newspaper in the world. Pessimism just sounds smarter and more plausible than optimism. Tell someone that everything will be great and they will shrug you off or offer a skeptical eye. Tell someone they are in danger and you have their undivided attention. Assuming that something ugly will stay ugly is an easy forecast to make. And its persuasive since it does not require imagining the world changing. But problems correct and people adapt. Threats incentivise solutions in equal magnitude. That is a common plot of economic history that is too easily forgotten by pessimists who think in straight lines.

Progress happens too slowly to notice. Setbacks happen too quickly to ignore.

The psychology of money is actually our psychology, which is shaped by many things including our personalities, past experiences, relationships, outlook of the future and hence as unique as our fingerprints. Like our other important relationships, our relationship with money is never perfect and evolves with us and (hopefully) gets better with time.

Friday, October 9, 2020

The Powerful Banker

A light hearted satrical this time. A work of fiction. Any resemblance to a living person is purely coincidental. 

Pessimism is logical, cold and calculating. Optimism is warm and uplifting, a leap of faith. Pragmatism is nuanced. Choose well.

Now lets get to business. This powerful banker. Lets call him Mr U. You think of him when you think of investments. The complete man. The consummate relationship guy. Everyone who knows him knows that he knows everything. Even he knows that he knows everything. That has made him the richest banker not only in the milky way, but the entire universe.

Bankers are conservative. He is a super banker. So that makes him super conservative. We all know the story of the bunny that kept telling everyone that the sky is falling. Well Mr U can play that role very well, but he will be the lion in this story and not the bunny, as he is the king of this jungle. The lord of the rings.

He is called upon to fix broken things. He is tasked with fixing a big problem but has made little progress in over two years. Maybe there is too much on his plate. Maybe things are so broken that they cannot be fixed. Maybe the longer things remain broken the better for him. The one eyed king in the kingdom of the blind is still a king.

He can take on the regulator and emerge victorious. His investor calls start with a grim reminder of how bad the situation in his home country is and how his empire is the shining example of exemplary work. Either he believes only he has the foresight to see these things, or only he has the guts to say these things, or only he can say publicly what others say privately. Anyways he has been saying all this for so long that he is hoping all these come true. You see the longer you keep repeating yourself the more you reinforce your own beliefs.

The last time he was so confident was in 2008 after the Lehman collapse. All his PMS were on record cash and did magnificently while the markets melted. The strategies remained liquid (reference stock market meltdown) and missed the big rally of 2009 so badly that the schemes had to be wound down. In 2008 you were driving a car. Now you are driving a bus. Your organisation size and stature have changed and you need to change as well.

In Dangal before the final bout the encouraging words of Mr Phogat to his daughter were “if you win tomorrow, you will become an example (misaal). And examples are never forgotten, they are always given as a reference”

JP Morgan became JP Morgan when he displayed his grit and character in tough times, standing up to deliver when times were the toughest. That is why he is still considered the greatest. Otherwise all bankers think they are the centre of the universe and are forgotten as soon as they retire. Hope is a good thing. Don’t take it away from people, if you can’t give it to them. You are in a country which is marching towards its “tryst with destiny.” Do not make fools of people who have taken risks by starting a business or taking a mortgage or any other loan. Everyone does well if the country prospers. We should keep our worst fears to ourselves and not make grand business plans around the possibilities of the nightmares coming true. Maybe the sky will fall. Maybe the world will come to an end. After all, we are all dead in the long run. But when that time comes, you may not be happy to say “I told you so”.

Mr U is also a gifted cricketer. When destiny gave him a full toss, he ducked as if it was a hand grenade. Not everyone is lucky to have a second chance. There are still some balls to go and the innings are in your hands. So play well. And if you can’t let others come and steady the innings.

There is still time to become a misaal. Grab it with both hands, while destiny is still kind. There is a big difference between intelligence and wisdom. Choose well.

Saturday, September 26, 2020

The Devils Advocate

Real risk is what remains unknown after everything known has been considered.

The world respects the intelligence agencies of Israel. Their country is surrounded by people who hate them (India comes a close second in neighborhood hostility) but Israel has prospered with help of its intelligence agencies and their bold actions.

Things were very different years ago. In 1973 Israel was attacked simultaneously by its neighbors and was taken by surprise. In spite of having a lot of actionable intelligence that the attack would happen the decision makers did not take any action. Israel did win the war and then went on to find out why all the intelligence was ignored. The culprit was Group Think. All the people in the decision making group, in spite of acknowledging the intelligence reports, chose to ignore them only to be surprised later. This led to the principal of the Tenth Man or Devils Advocate. The logic is that if 9 people of the group agree on something, the tenth man has to compulsorily take an opposite view and point to loopholes so that all angles can be discussed and a better decision can be taken.

What Am I Missing Here?

Is a good question to keep asking to keep us alert, even paranoid. Being aware of the fact that there is always the unknowable and unforeseen that will disrupt the best plans will help us create better plans with higher margins of safety. History teaches us that trying to be efficient in everything is futile. Margin of safety is a cost until it becomes a life saver. That is why plan B and Plan C are as important as Plan A, which will work most of the time but some times back up will need to be called.

Why is dissent so difficult? Dissenters get labelled and ousted. Conformity kept us in tribes and safe in groups. Being contrarian is painful most of the time. The label of Devils Advocate itself has negativity attached to it.

If everyone agrees with us on something, we need to find dissenters and then listen to them or become one ourselves. It is very difficult to acknowledge a counter view and even more difficult to act on it. It is best to keep an open mind and listen to potential problem areas one may have overlooked, so that the plan can become better.

It Is equally important to come to a decision and once done, the group should whole heartedly back it. Dissenting and agreeing should not become political tools to win points or settle scores. Ideally, the devils advocate should try to see all the follies and the overlooked aspects and then get aligned to the final decision of the group. The idea is to make the final decision stronger and not sabotage it. Real sabotage is in seeing the folly and not pointing it out.

Friday, September 11, 2020

Find time to relax

Don’t underestimate the value of doing nothing – Winnie the pooh

It is important to work hard but it is equally important to rest, relax and recover from hard work so that we are ready for it the next day. All of us want to be productive, efficient and do more in less time. Nothing wrong in that. However we need to understand that even machines have a scheduled downtime and we need the same.

It was easier pre Covid to plan for downtime. When WFH started it looked like a lot of downtime. Now we have got into a zone where there is a lot of work and a loss of sense of weekdays and weekends. Earlier one could “switch off” as there was office and home. Now homes have become offices so the boundary has blurred. With many establishments still closed, activities like dining out and movie watching which were downtime earlier are now out of bounds. Vacations are out too. Being holed up at home has also increased screen time in a big way. Hence downtime has become even more important.    

Downtime is more relevant for a break for the mind rather than the body. The body rejuvenates itself in sleep. It’s the mind that needs some time off. A full-throttle lifestyle can chisel away at productivity, creativity, and happiness, says Stew Friedman, Ph.D., the director of the Wharton Work/Life Integration Project at the University of Pennsylvania and the author of Leading the Life You Want. "The mind needs rest," he says. "Research shows that after you take a mental time-out, you are better at creative thinking and coming up with solutions and new ideas, and you feel more content."                

Some ideas to get it done –

Non demanding tasks like gardening, doing dishes (WFH special) allows your mind to relax

Yoga, walk in the park, jog, swim or any other mild physical activity

Anything that you like to do – read, going to the movies, playing a musical instrument or with your kids and pets, sketching, painting  

There should be only one rule for the downtime – ignore your phone. Checking social media does not count as downtime!!

It’s ironical – the busier we are, the more downtime we need. As the rested fields give the best crops, the rested mind brings more productivity. Do more by doing slightly less.

Sources –

Friday, August 28, 2020

When Nature Inspires

We have a symbiotic relationship with nature. Not only does it provide for us but also inspires us. People find answers when they are in the lap of nature. Creative people swear by it. Apart from the indirect inspiration by being in nature, there are many examples where we have taken direct inspiration from animals around us. After all, nature has been solving problems for millions of years and only the best ideas thrive in the natural world. Let us look at some of them.

Woodpeckers inspired better black boxes that survive mechanical shocks that come with airplane crashes

Kingfisher inspired scientists in Japan when they were struggling to deal with the sonic boom (which leads to noise pollution) caused by the high speed of the bullet train

Mosquitoes are inspiring us to make pain free (almost) injections

Camouflage techniques

Termite colonies on efficient heat distribution and ventilation in dense populations

The fins of humpback whales helped us design efficient turbines and pumps

Velcro was inspired by tiny hooks on the burrs surface that latch on to any surface

Bird safe glass that was inspired from the spider’s web

Fireflies inspired brighter LED bulbs

The ability of mussels to attach themselves on wet surfaces inspired a better adhesive

Humming Birds are inspiring better helicopter technology

Butterfly wings are inspiring anti counterfeit technology which is better than holograms

Camel toes are inspiring better tyres for use in sand and on Mars  

The shark skin and its ability to stay clean inspired better ships

The most popular story has been how birds have always fascinated us and inspired us to take flight.

There is a very good podcast from BBC – 30 animals that made us smarter with many more amazing examples like these.

It is said that if you want a better answer, you need to ask a better question. We should also add that we need to look around us, not only for inspiration but for the solutions to our problems as well.

Sources –

Friday, August 14, 2020

The Gospel Of Wealth

 This is the amazing story of Andrew Carnegie (1835 – 1919), one of the four “robber barons” of the USA and the richest man in the world at that time. His autobiography was written over a century ago but makes for a fascinating read even today as the basic principles on which he built his business are even more relevant now.

He lived the classic American dream – a poor immigrant who went on to become an industrialist with passion, hard work and risk taking. His empire was in steel, railroads and construction. By education he only went to school for a couple of years but he rode the waves of modern technologies of his times – telegraph, mining (coal and oil), construction (railroads and bridges) and iron and steel.

Its fascinating to read about Carnegie’s journey. Most of his ventures were partnerships with like minded people who were forward looking, experimental in their approach and were specialists in their fields. They were the first ones to back the modern Bessemer furnaces from England (which only a century ago was the Industrial capital of the world). They had modern book keeping in their factories that allowed them to keep a track of the cost of goods being produced on an (almost) real time basis. Till then most of the steel industry did not know the status of their P&L till the books got tallies at the end of the year. They had a system where workers were rewarded for suggestions in process improvement and some of them rose to the level of partners and plant managers. Most importantly, they developed a process of determining the level of ferrous content in the ore using chemistry and began paying mine owners accordingly. As things were, some mines who had a very high iron content did not produce good results if treated normally and hence found no takers. Carnegie steel works was able to modify their process in such a way that they could use this better ore and pay a lesser price for it as no other mill would buy the ore (thinking it was inferior) and produce the best steel in the world at the lowest cost. The sellers were thankful to them for being the only buyers of their ore and the Carnegie mills enjoyed this arbitrage for a long time. They were backward integrated by owing the coal mines, railroads and ships from transportation of their goods.

Most importantly was his fixation for a solid balance sheet and staying away from projects where the margin of safety was low. The economic and stock market cycles were vicious a century ago (central banks were yet to discover their true power) and the reason Carnegie always had funding available was his fixation on the solidity of their balance sheet. There is a mention in a couple of places in their following the “spirit of the law” and not just “letter of the law” and avoid “cuteness” so that the business had a rock solid reputation. Because of his reputation he also underwrote a number of public issues of stocks and bonds as capital was getting raised to establish large industries.

The best part – The Gospel Of Wealth. He exited the business at the age of 65 (to a JP Morgan controlled entity, another “robber baron”) and focussed the rest of his life in giving away all his wealth. Libraries (2800 approx) and public places were the favourite subjects of their attention along with universities (Carnegie Mellon). Many trusts were also established – the one to support teachers post retirement was close to his heart. What stood out for me was the “heroes fund” that he set up with an objective of helping the families of people who lose their lives in a heroic act that they could have chosen to be a bystander in. Marvellous isin’t it?

He travelled the world and had a great equation with his workers, although he is also infamous for one of the big strikes that took place in one of their plants. He had a big social circle and also was an advisor to politicians on matters of foreign affairs. The book also details the role that parents can play in shaping their children and how his life was shaped by the people around him.

If you are looking for some inspiration you will definitely find it in the life of Andrew Carnegie beautifully captured in his autobiography and Gospel of Wealth. He was the original “Man Of Steel”  (sorry Superman).

Saturday, August 1, 2020

Circle Of Competence

Let us keep our minds open, by all means, as long as that means keeping our sense of perspective and seeking an understanding of the forces which mould the world. But don’t keep your minds so open that your brains fall out! There are still things in this world which are true and things which are false; acts which are right and acts which are wrong, even if there are statesmen who hide their designs under the cloak of high-sounding phrases.

Walter Kotschnig

When facts change I change my mind. What do you do sir?

John Maynard Keynes

Let’s start with the most successful investor of our times - Warren Buffett. He is a legendary value investor, an icon and role model for his wisdom, philanthropy and simple lifestyle. He owns Berkshire Hathway which is the holding company for all his investments. Since 2002 the S&P 500 has outperformed Berkshire stock by 2% annualised, in spite of him being very active in the 2008 financial crisis and in spite of 20% of his portfolio being Apple which was bought only 4 years ago (stock is more than 3X in last 4 years). One thing explains the underperformance to a large extent – the absence of technology stocks in the portfolio. Warren became legendary by avoiding tech stocks leading to the dot com crash of 2000 He has continued to avoid technology as the tech giants became more and more ingrained into our daily lives over the last twenty years. There is a link in the sources below for a brilliant article on the subject.

Buffett is public about technology being a hole in his “circle of competence” What makes this even more striking is that Bill Gates is one of Buffetts close buddies. Let us see some successful examples of managements expanding their circle of competence -    


UltraTech for Birla

HDFC group successfully seeding and then building several large businesses

WIPRO would still be in the vanaspati business if it had not transformed itself into a software powerhouse

Ajay Piramal from Textiles to Pharma to Financial Services

Reliance from petrochemicals to telecom

Berkershire itself was originally a textile company

Google from search to android to maps to autonomous vehicles to AI

Edelweiss from Investment Bank to Broking to NBFC to ARC to Wealth and Asset Management

To be fair, there are numerous examples of disastrous diversifications and conglomerates becoming too big and unwieldly to manage, but that does not take anything away from the fact that one of the best ways to successfully manage atrophy is to continuously expand your circle of competence.  

We start with some basic ideas and a limited world view. With time if the view does not expand enough to challenge the prevailing conventional wisdom, we have done disservice to ourselves. How can one expand the circle of competence – organically through lifelong learning or inorganically by hiring and empowering competent people. The distinction between the “hype around the shiny new thing” and a new mega trend is indeed difficult to make.     

It is certain that the world will be very different in the next 10, 20, 50, 100 years. The longer the time period the greater the change. However in day to day the world seems the same with minor changes year on year. That is why it becomes important to keep the core principles intact and be flexible about most things. The core principles should not become the excuse not to change. The other certainty is that only those who are able to constantly able to expand their circle of competence will thrive.

Source -