Contrarian Position

Is it safer to take contrarian position in stock market? In one of the Dilbert comics, the supposed technology prima donna will keep putting down all the ideas. He will justify his tactics thus... People will forget your wrong predictions on things that everyone got right. However, when any of the ideas expected to be right go wrong, you will be remembered as a genius who predicted the right wrong right. When I first heard of holding a contrarian view in the market, I thought on the lines of Dilbert's prima donna. On further reading, I realised that my understanding is incorrect.

In value investing, contrarian position is to pick good stocks that crowd deemed worthless. The success of such a method of investment is glaringly obvious. isn't it? Pick cheaper stocks and reap the benefits when it surpasses everyone's expectation. Is it as simple as it sounds? Definitely no.
The golden standard of stock market investment, Berkshire Hathaway, has utmost one great idea per year (as per Charlie Munger). Now, we must imagine our expected hit rate. Good news is that we don't need many great ideas in our life time. We need to invest a lot of time and patience in identifying rare good stocks and keep faith in them against market noise. If we can do this, we can emerge victorious.

Stock market is often compared to Pari mutuel system. Here is an excellent write-up on it. Given the huge house commission costs of pari mutuel betting system, even with good analysis it is difficult to avoid losses. The only people who successfully beat it are the ones who wait for the mispriced gambles and bet on it. Of course, stock market doesn't have huge transaction costs. Still the lessons from pari-mutuel-system is applicable for stock market.

WAIT FOR THE MISPRICED GAMBLE.

Gone with the wind

I came across a news - "Man travelled from France to UK in just 22 minutes, Future is here".
Being in investment game, we would be bombarded with such blown-out-of-proportion positive and negative economic news. It is important to keep a level head and read between the lines. Regarding the news, the man did really travel in hoverboard from Calais,France to Dover, England. But the distance is somewhere under 100km. Don't get me wrong, this is a great achievement and might lead to more innovations in long distance private travel. However, the achievement is blown out of proportion. We can imagine a parallel in economics world. GDP jumped from 7 to 8% etc. It is really important for investors to do proper research and understand the extent of any news being positive or negative. It will serve us well.

Value Investor's CheckList

Deviation from any of the points below means risk of not being a value investor.

1. Focus on company's intrinsic value - what a company is actually worth
2. Define circle of competence and search for ideas only within it
3. Conduct in-depth fundamental research and analysis and not rely on tips
4. Focus on company's business and not on macro-economic forecasts
5. Understand business will have cycles and immediate past performance will not necessarily show the future
6. Be a contrarian in choice after careful analysis
7. Think long term
8. Be patient for the right pitch since great investment ideas are rare
9. Focus on avoiding permanent loss compared to minimising stock price volatility
10. Focus on absolute returns and not on relative performance compared to index or anyone else's portfolio
11. Admit to mistakes and actively seek to learn from them

Closet Indexing

Closet indexing is a strategy used to describe funds that claim to actively purchase investments but wind up with a portfolio not much different from the benchmark. This essentially means investors are not actively seeking out good stocks. They rather run behind the stocks making the index.

Different drawbacks for different players
1. When a retail investor does closet indexing, he is not doing due diligence in picking stocks.
2. Fund managers are expected to beat or atleast secure draw with the index. If managers are not taking the risk of finding good stocks, they would tow index's line. In such cases, fees that investors pay for the manager becomes unnecessary. Retail investors are better off buying index funds with much lesser fees.
3. Going blindly with stocks representing the index would invariably reinforce the idea that those stocks are good stocks. This positive spiral will bloat the stock prices of the index stocks.

Investor Or Speculator

1. Are you an investor or a speculator…or are you both?
Till date, I have been purely a speculator relying only on tips given by magazines and friends. I want to be both, an investor for achieving bigger financial goals and a speculator for making quick small profits.
2. Which was your last stock purchase that qualified as a Graham-styled investment- (1) It was based on thorough analysis, (2) promised safety of principal and (3) a satisfactory return?
I haven't made any such investments.
3. Which was your last stock purchase that qualified as a speculation? Why do you think it was a speculation?
BlueDart. It's a speculation because I am not worried by the underlying value of the asset. I bought purely to gain some money during its price upswing.

Stock Market - Entrance exam

1. What is my biggest fear of being a stock market investor?
2. What would happen if that fear came true?
3. Would it stop me from trying again?

1. Watching my capital getting erased slowly while I don't get the courage to exit my favourite stocks.
2. If the fear became true, then I had truly failed as an investor. I would take a break from investing and do retrospection.
3. If I don't fix the faults that I identify, I would not return to stock markets again.

Digital Overdose

My wife borrowed a book for reading. Instead of checking the contents directly, I went to "Amazon" to "look inside".
Quirk#2

Queen vestige

I read "Notes from underground" and "Crime and Punishment" in English. It didn't occur to me, the work is Russian and I could have bought Tamil translation.
Quirk#1