SOME VALUABLE EXCERPTS FROM PARAG PARIKH'S BOOK VALUE INVESTING AND BEHAVIOURAL FINANCE.

SOME VALUABLE EXCERPTS FROM PARAG PARIKH'S BOOK VALUE INVESTING AND BEHAVIOURAL FINANCE.

·         …is it because of the inconsistent performance of business behind the stocks of is it because of the behavior of the market participants, who as a result of greed and fear get excessively optimistic and pessimistic about the future resulting in bull nd bear phase?

·         …a conclusive study done on Sensex which highlights that it is not the inconsistent performance of companies constituting Sensex but the follies of crowd behavior which make investing risky.

·         IPO investing is not for a value or a contrarian investor. Value found in bear market and IPOs are a product of bull market.

·         …we have created financial markets where such insanity works.

·         Research on the Indian indices high lights some important drawbacks of passive investing.

·         Failure is as predictable as success because it is the strength of characters which separates the winner from the loser.

·         Economists say that the inability to delay gratification is the primary reason for economic failure in life.

·         Ninety percent of what we do is dictated b habits.

·         When a habit is formed, we become comfortable with it, and then we strive to remain consistent with what is familiar, even if our habits are leading to failure.

…we are always striving to be consistent with what we have done and said in the past.

·         The study of the economics of all human actions and the study of economics itself is the study of allocation of resources to get the greatest possible output per unit of input. This is rational, sensible and appropriate human behavior.

·         …in this sense, we are all ignorant. Bo matter how much we learn we must still act with some uncertainty. Some ignorance of the facts often with great ignorance or sometimes complete ignorance.

·         This is the deepest of all subconscious cravings. We want to feel that we are fulfilling our potential and becoming everything that we are capable of becoming.

·         So the human race is made up of people-you and I-who are basically lazy, greedy, ambitious, selfish, ignorant and vain. All of them are striving for the same things: comfort, leisure, love, respect and fulfillment.

And here is the key point. The basic law of human nature is that people always tend to seek the fastest and the easiest way to get the things they want.

          …the vast majority of people act immediately to get the things they want at that moment. Brian Tracy calls this the ‘expediency factor’.

          The ‘E’ factor explains most of the failures in our lifes. Only those rare few men and women-less than five percent in each generation-who consciously master them and resist the gravitational pull of the ‘e’ factor ever really succeed in the long run.

·         …self discipline-the will-power to force yourself to do what you know you should do.

…the ability to exert self discipline on oneself is the key to riches.

Every act of self discipline strengthens the habit of self-discipline.

·         IQ is used to define the competence in terms of cognitive abilities, IQ relates to the mental compousure of a person.

·         In reality, the factor of inflation makes the fixed income securities much riskier.

·         Equities have returned 19.67% per annum over the period of 1979 to 2007, while the returns on PPF have been just over 10.4% per annum.

·         There are two types of returns: (1) fundamental return (2) speculative return

The speculative element can be simply calculated by the earnings multiplied by changes in PE ratio and that number divided by the price paid, expressed as percentage.

The fundamental element concerns the earnings behind the enterprise along with the dividend paid out during the holding period.

·         …the ratio of speculative to fundamental returns in 2005-2007 is quite balanced and not as skewed as we saw in returns in 2005-2007.

·         The negative speculative elements and positive speculative elements results into PE contraction and PE expansion in the market.

·         …during the 16 year period under consideration, corporate earnings have shown a steady growth resulting in a compounded rate of return of around 16% as reflected in the EPS.

…the fact is reflected in the compounded return of 18% delivered by the Sensex during the same period.

·         Being disciplined in your investment approach is very important. You don’t get opportunities everyday and one must be prepared and ready with the money when opportunity come.

·         Going against the crowd is the way to earn high investment returns.

·         …the current volatility in the markets is the result of too many people trying to invest following the physically difficult way. Life is simple, we make it complicated. Investment success comes from following the emotionally difficult path.

·         With stock markets being colatile in nature and the end results being all about making or losing money, our emotions become volacanic. Money ignites our greed and fear.

·         …most common of these mistakes involve selling winners too soon and holding onto losers, buying enxpensive stocks, getting anzious on seeing our investment quote at a discount to our purchase price translating into notional losses, buying when others are buying and selling because others are selling.

·         ‘It is only when you combine sound intellect with emotional discipline that you get rational behaviour’ Warren Buffett

·         …in fact asset allocation is the first step an investor should take before  even choosing how to invest. The ability to understand the risk-reward ratio discounted in various asset is critical in designing an asset allocation strategy.

·         …financial planning is all about asset allocation.

·         Too few managers take the pain and the trouble to analyze the fundamental characteristic of portfolios that produce long-term beating results and develop a set of investment principles and strategies based on such studies. This requires hard work and a lot of patience. This is value investing.

·         In the stock markets, a small percentage of people end up being successful in the long run whereas a majority of people in spite of being successful in the short run, end up losing money in the long run…the reason is that people follow the outcome rather than the process. For e.g. The confirmation that ramesh has made a fortune last Friday by buying stocks before noon and selling at 3 pm is enough to convince a majority of the people that it is the right path.

·         On major distinction on value one should bear in mind is between ‘value in use’ and ‘value in exchange’. Water has good value in use while gold has good value in exchange. This is the trap where investors bought technology stocks only to lose forcunes. Softwares was usdful, but did not command much value in exchange.

·         The three integral source of value are assets, earnigs and growth.

·         …along with the hard work, patience and discipline are integral attributes of a value investor.

·         Value buying is more of a philosophy of buying what is out of favor.

·         …it is this fear and the general market trend that makes value investor a scarce species.

·         …the pain of a loss is three times more than an equal amount of pleasure.

·         Heuristics are simple efficient rules of the thumb which have been proposed to explain how people make decisions come to judgement and solve problems, typically when facing complex problems or incomplete information. These rules work when under most circumstances, but in certain cases lead to systematic cognitive biases. – Daniel Kahneman.

Heuristics are the short cut the brain takes when processing information. It does not process full information. This leads to cofnitive biases.

·         One noticeable misconception is that a low PE stock is a cheap stock and a high PE stock is an expensive stock…

·         Various types of Heuristics:

·         Stock prices reflect expectations and the key to fenerating superior returns is to successfully anticipate expectations revisions (an important thing to understand is that neigher a good high return business nor a bad low return business is inherently attractive or unattractive. Investors need to assess the stocks of all companies versus expectations)

·         Studying growth in isolation of economic return is an invitation to failure.

·         Contratian investors are looking to exploit areas where consensual opinion is not wrong per se in its stand, ut has led to an exaggeration of problems at hand.

·         If you can not stand 50% paper loss on your stock, stay away from the markets. Warren Buffett.

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