“Anything can happen” – says the Reformed Broker

More than a decade and a half later, once again the DotCom business is in the news in the investment world. Look at the valuation of the poster boy of DotCom – Facebook. It just surpassed the valuation of Berkshire Hathaway, the investment company of Warren Buffett.

Read this interesting blog post by Joshua Brown, the Reformed Broker.

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Heroes to zeroes and vice versa

Borrowed the following from the book, “The Money Game” by Adam Smith:

Ben Graham, the classics scholar who was the dean of security analysis, started his text with a quote from Horace: “Many shall come to honour that now are fallen, and many shall fall that are now in honour.”

The markets are more powerful that each individual player. There are reputations made and shattered especially at the time of turn of events. The market cycles have the reputation of making and breaking the reputations (and fortunes) of many.

Read the book “Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget” to know about such stories ranging from Sir John Templeton, Warren Buffett, Benjamin Graham, Prof. Irving Fisher, Mary Meeker, Alan Greenspan, Harshad Mehta, Ketan Parekh, Sir Isaac Newton, Julian Robertson, Prof. Irving Fisher ….

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Hope is a very bad investment strategy

This looks like an interesting development. Another “new” thing has cropped up. Some regional language movies are doing great – low cost and high revenues – amazing success stories and very high RoI (I mean, return on investment). Many investors are looking at the “alternative” investment to “diversify” their portfolios and at the same time earn very high returns.

Even start ups have come up to help people channelise their money into such ventures.

Regional movies are the buzz at crowd-funding startups

This seems to be great for regional movies, at least. There are many talented movie-makers, who could not compete against the mega-star, big-banner movies with deep pockets. Now, they seem to have found their source of funding.

Well, here is the caveat for the investors. This seems to be another case of “too much money, where to invest?” for the investors. Once one has run out of investment options (psychologically, at least), we start searching for newer options.

If you get success in some early investments, please be even more careful. The chances are that you might simply be lucky. However, we love to attribute all the success to our superior abilities – that is a human tendency. This would build your confidence, which eventually turns into overconfidence.

This overconfidence in one’s abilities leads to the search for even more risks. One tends to start looking at something that nobody is looking at – the spirit of adventure in us wants to seize this opportunity. And we leave the shores and dive into the deep seas.

Just as a side note, please check why did you think  of investing in movies? Is it because nobody else was doing it and you wanted to take the early-mover advantage? Or is it just that someone told you this was “exclusive”?

The combination of overconfidence, exclusivity and greed lead us to take interesting decisions.

Let us analyse this option from an investment point of view. Do regional movies make money? Well, yes they do. Do all regional movies make money? No. If we are clear on these two answers, any prudent investor should ask the next question: “How can one identify the next many-making movie? Do I have the capability? Or can I hire someone who has the capability?”

If I cannot identify the next money-spinner or if I do not know someone who can, it is imprudent to put my money on the block. That is not an investment, then. It is hope – a really bad investment strategy.

In the event of an investor recognising one’s inabilities to spot the right investments, the tendency is to look for what is cheap. This could be another trap.

Be careful. Understand the economics of the business before investing your money. If you don’t, stay away. Warren Buffett has famously said, “Invest within your circle of competence. It is not how big the circle is, it is how you define the parameters”.

 

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Overconfident Enemy In Mirror …

Came across this superb article by Larry Swedroe, titled Overconfident enemy in the mirror.

It highlights the folly of getting overconfident in a field that is full of uncertainties – investments.

Nothing can be achieved if one were not confident about one’s abilities, since lack of confidence would lead to a person not even trying new things. At the same time, it is also important to understand that success also eludes those who do not know about their own limitations.

It is for nothing that Warren Buffett says, “Invest within your circle of competence. It is not how big the circle is but how you define the parameters.” Do we even know the parameters? This is an important question to consider.

In the absence of the knowledge of the right parameters – what can lead to success, we wrongly assume the short term result to be the parameter of success. We mistakenly focus not on the process but the results – and that too short term results.

And that often leads to overconfidence if the short term results are positive, or in line with expectations. This leads to behaviour that is harmful to our own future. And that exactly is what Swede highlights in the article. Remember the words of the guru of investing, Benjamin Graham, “The investor’s chief problem and his biggest enemy is likely to be himself.

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Ben Graham’s classic books

I believe it was the experience of the boom and bust of that period, which Benjamin Graham brought out in his 1934 classic “Security Analysis” and the subsequent book “The Intelligent Investor”. Warren Buffett described the latter as the best book on investing ever written.

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Who needs diversification?

“Wide diversification is only required when investors do not understand what they are doing.” – this quote is attributed to legendary investor Warren Buffett.

However, it is important to understand that Warren Buffett knows what he knows as well as what he does not know. Most of us are not Warren. Often, we are not even aware of what we do not know. In such a case, one needs to be careful.

The study of various episodes of boom and bust suggests that in the greed to make quick bucks, investors tend to concentrate their portfolios around recent period winners (stocks, sectors or markets that have seen major outperformance in the recent past). The subsequent direction of the markets in most episodes ended up with huge negative surprises and regrets.

Diversification may be boring in good times, but would be a prudent life-time strategy for most investors.

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Leverage is not always bad, after all …

The legendary investor Warren Buffett said, “When you combine ignorance and borrowed money, the consequences can get interesting.”

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