Friday, March 26, 2010

Confessions of a Value Investor

I just got this good read from a good friend of mine, David Lau. Thanks.
It is a good start to this blog and I shall attempt to summarize what Mr. Sanjay Bakshi has expressed

  • Direct vs vicarious learning (we learn better from extremes)
  • Reflective vs reflexive thinking (former being more logical, slow & less erroneous
  • We should focus on avoiding foolish behavior rather than on being smart
  • The brain tend to work with whats easily available (recent, vivid, measurable experiences).This causes the inability to recall, resulting in memories blocked by certain bias or experiences. Ex focus on price and not value as price is something we see regularly. Buying a stock because its cheap vs. thinking about what mistakes can be made, a value trap? fraud? or bubbly markets?=>Solution? Try to kill you own ideas
  • I let perpetual contrast misguide me High and low contrast. A $5 stock may not be cheaper than a $50,000 stock.An event with low contrast may not mean it is safe, example averaging down when "It has fallen so much"..It can fall more! Low contrast events such as evolution of internet, digital photography can vastly change the way things operate.=> Solution? Be aware of trends of low contrasts
  • Failure to promptly resolve cognitive dissonance Self justification and confirmation bias. Zero based vs. traditional based budgeting. Sunk cost fallacy - I have too much invested to write it off ..."Maybe you can!" Endowment effect - Items once owned becomes more valuable even though nothing has change => Solution? Change your mind in light of new facts which may change the odds
  • I gave into social proof
    Relying too much on people around us for cues on how to think act and feel.
    This is most evident in 2 cases, uncertainty/doubt and in cases of similarity (drawing parallels)
    Herd mentality - bargain prices comes when public is most pessimistic but yet most chose safe and low returns =
    > Solution? Stay away from the herd
  • I became a dope addict
    Exciting new things gives dopamine, IPOs, tech stocks or fake value fads etc
    " Severe change and exceptional returns usually dont mix, but most treat them as if the opposite was true." Warren Buffett
    => Solution? Avoid the fast track
  • I became foolishly overconfident
    optimism leads to one being "larger than life" and "omnipotent".
    "2 types of forecasters, those who don't know, and those who don't know they don't know" - John Galbraith.
    Range of values is more important than an expected, average or over aggregated value.
    "The worst case scenario is often more consequential than the forecast itself" - Nassim Taleb.
    People react to available worst case scenario by overreacting (Ignore frequency, overweight magnitude)
    and to unavailable worst case scenario by neglecting (frequency =0, therefore ignore magnitude)
    => Solution? Focus on frequency, magnitude and expected values. Expect the unexpected
  • I did not think carefully about losses
    Deprival super reaction syndrome - depriving/losing results in super reaction.
    Loss aversion - a $10 loss is more painful than a $10 gain.
    Risk assessment becomes flawed when we have near misses.
    => Solution?
    Embrace failures, sell losers and bet big when the odds are in your favor
  • I became a Parlovian dog
    Mis-association and tendency to connect irrelevant or unrelated objects or thoughts.
    You don't learn how to win by looking and reading about the winners. C
    umulative advantage - people tend to like what others like even though one is only slightly more popular.
    => Solution?
    Learn from the mistakes of others and understand small differences can lead to huge impacts
There are experiments in the article which brings out the errors well when you attempt it.
I would like to also attach this link HERE which happens to be a modified version of the Becklan and Cervone (1983) experiment demonstrating limitations of the human brain when you do not expect the unexpected.


Zhiyou said...

Buffett still does it via phone. In a room, with a morningstar (or equivalent) book

It was very interesting when he brought such a book on Korean stocks while we were eating and randomly flip through the book to evaluate stock.

I guess there is a lesson here. Value investing most of the time dovetails with contrarian thinking. You buy stuff with a large margin of safety. You enter when noone really wants the stuff you are buying.

I guess the last thing you really want is getting shifted in your opinion by whatever is blaring in CNBC.

I guess you can chalk it up to one of the way "Slow" really beat "fast". And through beats reactionary.

It is important to make decision only in a objective state, and that having limited stimuli (not a fast flowing stream of data or information) makes it easier to focus only on the fundamental first and evaluate them.

Although it is probably necessary to take advantage of that for entrance and exit, you don't want to have the same herd mentality, and most definitly not believe your own propaganda. ;)

"When you stand still, you must be as still as a mountain; when you move, you must be as fast as an avalanche" - Sun Tzu

I guess all I'm saying is you cannot stay away from the herd (your point 4). The best thing I believe is that have your own view, and bait and CRUSH the herd when you need to move by knowing its position.


Mervyn Teo said...

Agreed it is easy to make that statement which I was did as well.

However, reality does not work that way. Much of our emotions and thoughts are deeply wired within us as hunter/gatherer type of beings including herd mentality and loss aversion as a bid to stay alive.

So for myself, the best solution is to stay away from the herd, but of cos perched atop a hill watching where the herd is heading occasionally, in case its towards a cliff.


Great confessions

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