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All greed starts with an innocent idea: that you are right, deserve to be right, or are owed something for your efforts. It’s a reasonable feeling.

But economies have three superpowers: competition, adaptation, and social comparison.

Competition means life is hard. Business is hard. Investing is hard. Not everyone gets a prize, even if they think they’re right and deserving.

Adaptation means even those who get prizes get used to them quickly. So the bar of adequate rewards move perpetually higher.

Comparison means every prize is measured only relative to those earned by other people who appear to be trying as hard as you.

And economies crave productivity. Getting more for doing less. It’s a universal and relentless force.

The feeling that you deserve a prize, even when success is hard, content is fleeting, and rewards are measured relative to others, combined with an economy that constantly wants more prizes for doing less, is the early seed of greed. It fuels both the push for more (great) and the lack of satisfaction when you get more (potentially dangerous).

Once people get a taste of reward – especially an above-average one – delusion can creep in. Sometimes it’s luck misidentified as skill. Or an inflated sense of the value you produce. Or overconfidence in your ability to find another reward.

Delusion compounds, because it feels good. Recognition feels good. Attention feels good. Rewards feels good. They’re addictive. It gets back to the first innocent idea: People want to feel like they’re right, doing well, and owed something for their efforts.

So they keep pushing. For more money, by demanding raises. Or more profits, by using more leverage. Or for more attention, by acting ridiculous. It’s a drug: You quickly require an increasingly larger hit just to stay satisfied, in a doom loop that pushes you closer to the ledge.

Greed is what happens when you delusionally justify your willingness to push to get back more than you put in. It is driven by your desire to think you’re worth it, and the economy’s ability to push back on whether you’re actually worth it.

And then it spreads, because people take their cues from the behaviour and actions of other people. The combination of “I’m worth it” and “If they’re doing it, I can and should too,” turns crazy behaviour into something that feels appropriate.

That’s why greed is pervasive: It’s self-justified. People believe in the crazy stuff they do. It’s different when you know you’ve pushed past the boundaries and don’t care. That’s psychopathy. Greed is a blinder to how much risk you’re taking and how much collateral damage your actions have. And it can be blind as a bat.

But reality can’t be outrun. The economy can tolerate outliers, but just barely. And outliers who don’t deserve their rewards have the shelf life of a banana.

The first response to risk backfiring is often to double down. The world turning against you feels like an opportunity, especially when you’re blinded to the realities of your skill and contributions.

Then comes victimhood. When your results are terrible but denial about your contributions remains intact, someone else must be to blame. Bosses who don’t understand you. Manipulated markets. Short-sighted politicians. At this point greed is all but dead, but denial about your contributions to society is at its highest.

At some point, the last vestiges of greed give way to the seeds of fear. Victimhood shifts to self-doubt. Not much of it; you don’t question your knowledge. But you begin to wonder whether you missed something along the way.

Next comes ignorance. You change the subject when your friends ask you how things are going. This is more than external; when you know you’re wrong but don’t want to admit it, thinking about something else is the easiest path to mental calm.

Doubt then spreads faster than the optimism that got you here in the first place, because people evolved to respond to threats faster and more seriously than opportunities. Once you see a morsel of truth about your lack of contributions or abilities, the floodgates are open. You can’t ignore it anymore.

You then try to fix the problem. Sell part of the investment. Apologize to those you offended. “Take a little off the table.” At this point you know you screwed up, but are confident you can fix it.

Before long, optimism takes its last breath. You haven’t given up. But memories of the mental buzz you got when risk worked in your favor are now gone. Your light at the end of the tunnel is snuffed out.

Now you’re in survival mode. Your goal shifts from winning your way back to not falling further behind.

After risk keeps smacking you around long enough, you capitulate. First slowly, then a collapse. You begin to doubt everything you thought you once knew. Were you duped? Was everyone duped? Do you know anything? Are you capable of learning anything? Do you have to start over?

Embarrassment creeps in. You avoid people, which walls you off from the ability to take feedback and gain context on your situation. You’re now stuck in your own mind, which is a feedback loop of fear and doubt.

Social comparison reenters the picture. Why isn’t everyone else suffering as much as you? Maybe you’re truly worse than all of them? What do they know that you don’t? You can’t get this thought out of your head.

Fear peaks when you start fearing what else you have to fear. You become as blind to what positive things might happen as you were to negative things happening when you were greedy.

Greed has now done a 180. You go from taking risks you never should have, to avoiding opportunities you shouldn’t pass up.

The clouds eventually pass. In a post-mortem of what happened, you recognise your faults and what you did wrong. It looks so obvious in hindsight.

You vow to never do this again. It was too painful. Wasn’t worth it. Going forward, you want to be rational. You want to be right. You’re smarter now. You’ll be right next time.

Because you deserve to be right. Isn’t that an innocent idea?

And now we’re back at square one.

The original post is penned by Morgan Housel, appears on collaborativefund.com and is available here.

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Sensex and Nifty surged on the final day of a volatile week on Friday with both the benchmark indices gaining over a per cent each ahead of exit polls outcome on Monday.

Kotak Mahindra, ICICI Bank, HDFC twins, and ITC were the biggest contributors in Sensex’s march to the north.

The benchmark Sensex zoomed almost 1.5 per cent, up 537 points, to close at 37,931, with Bajaj Finance, Hero MotoCorp, Maruti Suzuki India, Kotak Bank, and Bajaj Auto registering the biggest gains. Market breadth remained in favour of buyers with the advance-decline ratio at 3:2.

The broader Nifty50 also surged 1.33 per cent, or 150 points, to end the day at 11,407. About 1,029 stocks advanced and 723 shares declined on National Stock Exchange.

Among sectoral indices, only three indices remained in the red, with Nifty Media gaining the highest 3.53 per cent. Nifty Bank, Nifty Auto, Nifty Finance Service, Nifty FMCG and Nifty Private Bank all rose more than 2 per cent.

In the broader market, the S&P BSE MidCap gained 153 points, or 1.08 per cent, at 14,308.36, while the S&P BSE SmallCap also rose 70 points, or 0.51 per cent, at 13,887.

Delta Corp shares hit 22-month low of Rs 156, plunging 17 per cent, in intra-day trade on the BSE on Friday on the back of heavy volumes in an otherwise strong market. The stock was trading at its lowest level since July 7, 2017. In comparison, the benchmark S&P BSE Sensex was up 389 points or 1 per cent at 37,783. The trading volumes on the counter more than doubled with a combined 5.85 million shares, representing 2.2 per cent of total equity of Delta Corp, changing hands on the NSE and BSE.

Procter & Gamble Health (formerly Merck) shares were trading higher for the sixth straight day, up 4 per cent in early morning trade at Rs 4,389, also its new high on the BSE, after the company reported strong net profit growth in March quarter (Q1CY19). The pharmaceutical company’s profit after tax rose 79 per cent at Rs 40.7 crore in Q1CY19 driven by high interest income and operational efficiencies. Total revenue grew 22.2 per cent at Rs 249 crore against Rs 204 crore in previous year quarter.

Bajaj Finance shares hit a fresh all-time high of Rs 3,262, up 5 per cent, in early morning trade on the BSE on Friday after the company reported a better-than-expected profit and net interest income (NII) in March quarter. The firm recorded a strong 57 per cent year-on-year (Y-o-Y) growth in net profit at Rs 1,176 crore in March quarter. while NII grew 50 per cent at Rs 3,394 crore on YoY basis. Analysts, on an average, had expected profit of Rs 1,062 crore and NII of Rs 3,271 crore for the quarter.

Aurobindo Pharma shares fell 6% to Rs 682 in early morning trade on the BSE on Friday after the drug firm announced that the American drug regulator classified the inspection of the company’s API intermediates facilities of Unit I, IX and XI as Official Action Indicated (OAI).

Praj Industries was up over 2% on healthy Q4 nos. The consolidated net profit was up 24.5% at Rs 33 crore versus Rs 26.8 crore, revenue was up 34.1% at Rs 368.2 crore versus Rs 274.5 crore, YoY

After close to two months of intense corporate battle, engineering and construction major L&T on Thursday crossed the critical stake holding mark of 26 per cent in Mindtree, making it the single-largest shareholder in the Bengaluru-headquartered IT services firm. Post reaching this threshold, L&T will not only be able to induct its nominee on Mindtree board, it will also be able to block future resolutions relating to capital structure, dividend and acquisition passed by latter’s board. It will also have a say in appointment of whole-time directors on board apart from induction of managing director.

Here are some picks from the week gone by.

Company: State Bank of India CMP: 321.00 Mastermind

Company: Dhanlaxmi Bank CMP: 17.50 Mastermind

Company: Balkrishna Industries CMP: 790.90 Mastermind

Company: UPL Limited CMP: 972.00 Mastermind

Company: Hero Motocorp CMP: 2625.00 Mastermind

Please read our disclaimer here.
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When it comes to bad ideas, finance certainly offers up an embarrassment of riches – CAPM, Efficient Market Hypothesis, Beta, VaR, portfolio insurance, tail risk hedging, smart beta, leverage, structured finance products, benchmarks, hedge funds, risk premia, and risk parity to name but a few. Whilst I have expressed my ire at these concepts and poured scorn upon many of these ideas over the years, they aren’t the topic of this paper.

Rather in this essay I want to explore the problems that surround the concept of shareholder value and its maximization. I’m aware that expressing skepticism over this topic is a little like criticizing motherhood and apple pie. I grew up in the U.K. watching a wonderful comedian named Kenny Everett. Amongst his many comic creations was a U.S. Army general whose solution to those who “didn’t like Apple Pie on Sundays, and didn’t love their mothers” was “to round them up, put them in a field, and bomb the bastards,” so it is with no small amount of trepidation that I embark on this critique.

Before you dismiss me as a raving “red under the bed,” you might be surprised to know that I am not alone in questioning the mantra of shareholder value maximization. Indeed the title of this essay is taken from a direct quotation from none other than that stalwart of the capitalist system, Jack Welch. In an interview in the Financial Times from March 2009, Welch said “Shareholder value is the dumbest idea in the world.”

James Montier: A Brief History of a Bad Idea

Before we turn to exploring the evidence that shareholder value maximization (SVM) has been an unmitigated failure and contributed to some very undesirable economic outcomes, let’s spend a few minutes tracing the intellectual heritage of this bad idea.

From a theoretical perspective, SVM may well have its roots in the work of Arrow-Debreu (in the late 1950s/early 1960s). These authors demonstrated that in the presence of ubiquitous perfect competition and fully complete markets (neither of which assumption bears any resemblance to the real world,1 of course) a Pareto optimal outcome will result from situations where producers and all other economic actors pursue their own interests. Adam Smith’s invisible hand in mathematically obtuse fashion.

However, more often the SVM movement is traced to an editorial by Milton Friedman in 1970.2 Given Friedman’s loathing of all things Keynesian, there is a certain delicious irony that the corporate world is so perfectly illustrating Keynes’ warning of being a slave of a defunct economist! In the article Friedman argues that “There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits…”

Friedman argues that corporates are not “persons,” but the law would disagree: firms may not be people but they are “persons” in as much as they have a separate legal status (a point made forcefully by Lynn Stout in her book, The Shareholder Value Myth). He also assumes that shareholders want to maximize profits, and considers any act of corporate social responsibility an act of taxation without representation – these assumptions may or may not be true, but Friedman simply asserts them, and comes dangerously close to making his argument tautological. Following on from Friedman’s efforts, along came Jensen and Meckling in 1976. They argued that the key challenge when it came to corporate governance was one of agency theory – effectively how to get executives (agents) to focus on maximizing the wealth of the shareholders (principals). This idea can be traced all the way back to Adam Smith in The Wealth of Nations (1776) where he wrote:

The directors of such [joint stock] companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master’s honour, and very easily give them a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.

Under an “efficient” market, the current share price is the best estimate of the expected future cash flows (intrinsic worth) of a company, so combining EMH with Jensen and Meckling led to the idea that agents could be considered to be maximizing the principals’ wealth if they maximized the stock price.

This eventually led to the idea that in order to align managers with shareholders they need to be paid in a similar fashion. As Jensen and Murphy (1990) wrote, “On average, corporate America pays its most important leaders like bureaucrats.” They argued that “Monetary compensation and stock ownership remain the most effective tools for aligning executive and shareholder interests. Until directors recognise the importance of incentives and adopt compensation systems that truly link pay and performance, large companies and their shareholders will continue to suffer from poor performance.”

This article appears on valuewalk.com and is available here.

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Jesse Stine is not the regular stock guru you see on the Internet selling services. Nope.

And he’s not a hedge fund manager trading other people’s money either. Nope. Jesse Stine is an independent stock trader, just like you and me, trading his own hard-earned money.

And Jesse Stine produced a mind-boggling (and fully audited) 14,972% returns in the markets, turning $46K into $6.8M… in 28 months.

Yes, you read it right.

On top of becoming a self-made millionaire through his trading, Jesse also realized another dream of his a couple of years, which completely changed my life forever.

He wrote the book “Insider Buy Superstocks: The Super Laws of How I Turned $46K into $6.8 Million (14,972%) in 28 Months” in which he not only shares his life story, but also the trading strategy he used, as well as many invaluable lessons he learned through his 16 years of experience (at the time the book was publish, in 2013) as an independent trader.

I’d like to now share with you 13 lessons I gathered from his book.

8- Emotional Intelligence is of Utmost Importance in Trading

“It is oh-so-easy in hindsight to analyze a successful stock that you never owned. The ability to control your emotions is 90% of investing. Emotions never enter into the equation when you analyze stocks you never owned“

“Since the stock market is nothing more than global psychological warfare, and human emotion is reflected in the form of market prices, learning to master your emotions is absolutely essential to compete effectively“

If intelligence was the key to success in trading, there would be a lot more people making tones of money in the stock market. The truth is that emotional intelligence is much more important to succeed in the markets. You need to be able to master your emotions in order to follow your plan and not be tempted to buy or sell too early or too late. And being able to understand not only yourself, but also understand how other investors think, will give you an edge.

9- Discipline is Key

“Despite its appeal, very few traders achieve resounding success in this business. The boundless freedom the trader is faced with requires the utmost in self-discipline which very few people possess.“

“My approach is based on the principles of hard work, focus, and determination. It is not an approach that will hold your hand. It also requires the super human ability to delay gratification. Such method simply goes against our emotional tendencies. That is precisely why it works so well.“

If there is a Holly Grail in trading, or in any other endeavour, it is discipline. With discipline, you can achieve almost any goal. With discipline, you can study whatever you put your focus on, you can follow any trading strategy that has a positive expectancy and make money over time.

But unfortunately, discipline is a very rare commodity. In trading, unlike any other jobs, you are on your own. No one will be there to remind you or force you to do anything. No one will take your hand and make sure that you learn what needs to be learned, that you to respect your stop loss, that you cut your losses short and let your winners run.

The level of freedom we are faced with as traders is unlike anything most people have experienced in their lives. And if you lack self-discipline, it will be extremely difficult to succeed as a trader.

10- Drawdowns are teachings

“Extreme account drawdowns could almost be considered as prerequisite for massive trading success.“

“Without hitting rock bottom, it can be difficult to cultivate the necessary passion within.“

Losses are just part of the trading game. Whether you are just starting, or you’ve been trading for 50 years and are the best trader in the world, you will suffer losses along the way.

But the way you see losses and how you react to them will determine whether you’ll succeed or fail in the long run. If you can see losses as opportunities to learn, you will not only be less negatively impacted by them, but you will also put yourself in a position to continuously improve your trading and be on your way to trading success.

11- Patience

“Unlike a casino, by being highly selective when picking stocks, you can stack the odds heavily in your favor thus vastly increasing your likelihood of success“

“Every time I was fortunate enough to experience a seven-figure portfolio advance, it was entirely because I sat and did nothing“

The market, the news, social media, your broker, your friends, your level 2 quotes, and even your recent losses will constantly try to trick you into trading as much as you can.

Successful trading though, is about being patient. It’s about waiting patiently for the trades that fit all the entry criteria of your strategy, and dismissing any other trades, even if you haven’t found any trade for a while, and even if you see some other stocks that do not match your criteria making big moves. And then, it’s about waiting some more for a sell signal, letting your trades run as long as possible, even when you are scared of losing your paper profits.

In order to be more patient when in a position, Jesse recommends to step away from the markets during market hours. Once in a position, just delegate the decision making to your stop loss. By watching every tick, your irrational mind will start rationalising and try to find meaningless reasons to sell.

12- Use the Media instead of being controlled by it

“You must make a difficult choice: to be entertained by mass financial media or to ignore its lunacy to your advantage. The choice is yours.“

“The biggest gainers in the market will be the stocks that absolutely nobody is talking about in their initial stage. Always remember that journalists are anything but professional money makers. They just write for a living and are required to publish several articles a week whether the pieces are actionable or not.“

Media are money making businesses. If financial journalists actually knew what was going to happen, they’d be billionaires. They’re paid to write articles that appeal to the masses. Never forget that.

Instead of being the sucker, understand that they focus on what has already happened and convey the general social mood, what the majority thinks. And when there is a very strong consensus in the market, very often, moves in the opposite direction are about to happen.

Historically, market tops tend to occur at the point of maximum optimism, and market bottoms at maximum pessimism. This fact is very difficult to understand for new investors since they’ve always been taught to trust the media.

Jesse recommends to only read headlines to gauge the social mood, and when there’s a very strong consensus, be prepared for strong moves in the opposite direction.

“The very moment the media is cheering or crying the loudest is often when a powerful move in the OPPOSITE direction is about the occur. These misdirection campaigns are often funded by hedge funds, investment banks, or other institutions with millions at stake.“

13- Tune out the General Market Noise

“Do not spend time worrying about the general market. Let your Superstock do all the talking. Worrying about the general market will undoubtedly decrease your general level of happiness and will sabotage your ability to trade the very best stocks to the best of your abilities. If the market crashes, and your sellpoint is triggered, so be it; At least you aren’t wasting your life worrying about potential market scenarios.“

I can’t count the number of times earlier in my career when I got scared by the general market and exited some individual positions right before huge moves, missing large profits.

We all tend to watch the general market since all the financial news refer to the “market” as the Dow Jones and the S&P 500.

But your job as a trader is to find the very best stocks, the ones that largely over perform the general market. The general market doesn’t reflect the performance of the very best stocks out there. You should not care much about it. Once again, let your stop do the worrying and take the unbiased decisions for you.

This is the final of the two part series. The first part appeared last week on our blog. It is written by Fred, appears on lonestocktrader.com and is available here.

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Benchmark indices ended Friday’s volatile session in the red, thus recording fall for the eighth straight day and third consecutive week, as investors remained cautious ahead of the US-China trade negotiation outcome.

India VIX was up almost 4 per cent to 26.49

The benchmark S&P BSE Sensex ended the day 96 points, or 0.26 per cent, lower at 37,463, with Tata Consultancy Services (TCS), HCL Tech, Tata Steel, IndusInd Bank and Infosys contributing the most to the indices’ fall. Twenty-one of the 30 constituents of BSE ended the session with losses.

The broader index Nifty50 gave up the crucial 11,300 mark and slipped 23 points, or 0.20 per cent, at 11,279. About 1,187 shares advanced, 1,270 shares declined, and 162 shares were unchanged.

Among sectoral indices, both Nifty IT and Nifty Metal dipped more than 1 per cent. However, Nifty PSU Bank gained 2.5 per cent, the highest among the gainers.

The broader indices fared better than their benchmark peers with the S&P BSE MidCap index ending 34 points, or 0.24 per cent, higher at 14,390, while the S&P BSE SmallCap index was ruling at 14,106, up 29 points or 0.21 per cent.

State Bank of India (SBI) shares rose 4 per cent to Rs 311, bouncing back 6 per cent from day’s low of Rs 292 in intra-day trade on the BSE, after the bank reported improvement in assets quality in last quarter of financial year 2018-19 (Q4FY19). The bank’s gross non-performing assets (NPAs) ratio declined to 7.53 per cent against 8.71 per cent in the previous quarter and 10.91 per cent in the corresponding quarter of the previous fiscal. Net NPAs during the period came in at 3.01 per cent against 3.95 per cent in the previous quarter and 5.73 per cent in the year-ago quarter.

Tata Steel slipped 8 per cent to Rs 480 on the BSE in intra-day deal on report that the company’s joint venture (JV) with Thyssenkrupp may fail as the deal is yet to be approved by European regulators who have expressed concerns about its impact on competition. The stock recorded its sharpest fall since November 15, 2016, when it dipped 8.3 per cent during intra-day trade on the BSE.

Venky’s (India) shares slipped 6 per cent to Rs 1,820 on BSE in the intra-day trade on Friday after the company reported 41.5 per cent year on year (YoY) drop in its net profit at Rs 29.94 crore in March quarter (Q4FY19), due to higher raw material costs. It was the third straight quarterly decline in net profit for the company.

Shares of Jet Airways inched up for the third consecutive day on Friday, rallying 7 per cent intra-day on the BSE to quote Rs 158 apiece after the airline received its first formal buy-out bid. State Bank of India-led lenders’consortium had invited bids from potential buyers, for the temporarily shut airline, till May 10.

HCL Technologies slipped 4 per cent to Rs 1,084 on the BSE during the early morning trade on Friday after the company announced a 100 basis point (bps) cut in the estimated operating margin (OM) for FY20 as against FY19. The company sees the OM at 18.50 – 19.50 per cent in constant currency (CC) terms for the current financial year.

Here are some picks from the week gone by.

Company: Tata Motors CMP: 184.95 Mastermind

Company: Titan Company CMP: 1129.45 Mastermind

Company: Voltas Ltd. CMP: 574.10 Mastermind

Company: IndusInd Bank CMP: 1431.00 Mastermind

Company: Bharat Forge CMP: 456.40 Mastermind

Please read our disclaimer here.
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Jesse Stine is not the regular stock guru you see on the Internet selling services. Nope.

And he’s not a hedge fund manager trading other people’s money either. Nope. Jesse Stine is an independent stock trader, just like you and me, trading his own hard-earned money.

And Jesse Stine produced a mind-boggling (and fully audited) 14,972% returns in the markets, turning $46K into $6.8M… in 28 months.

Yes, you read it right.

On top of becoming a self-made millionaire through his trading, Jesse also realized another dream of his a couple of years, which completely changed my life forever.

He wrote the book “Insider Buy Superstocks: The Super Laws of How I Turned $46K into $6.8 Million (14,972%) in 28 Months” in which he not only shares his life story, but also the trading strategy he used, as well as many invaluable lessons he learned through his 16 years of experience (at the time the book was publish, in 2013) as an independent trader.

I’d like to now share with you 13 lessons I gathered from his book.

1- Have Faith

“There certainly are no guarantees in life, but with the proper tools, focus, and vision, it is indeed possible to make millions as an individual investor“

If you want to succeed in trading, you have to believe from the bottom of your heart that you can and will succeed. Tune out the naysayers and create your own luck by studying, having a clearly defined strategy, making mistakes, staying positive, being flexible, and never quitting.

2- You’re Trading To Make Money

“When I’m risking precious capital, I’m in the market for one reason and one reason only: to achieve spectacular returns by exploiting irrational market behavior”

“Shift your focus and your efforts from the abundance of activities that DON’T contribute to investment success to the few activities that DO”

Although it might seem obvious, we all have conflicting reasons for trading that make us lose our main focus. Always remember that you are not trading to become the most popular on social media. You are not trading to show off when you are right. You are not here to show how wrong other people were. You are not here to try and guess the future or discuss economic or political events. You are here to make money.

3- Confidence

“The world’s greatest athletes, business people, traders, salespeople (you name it) all have a definitive lack of fear of making a mistake“

“I now know firsthand what they mean by let your winners run. It is definitely something that does not come naturally. I had to cultivate a tremendous level of confidence to enable me to do so.“

Being confident is one of the most consistent trait among successful traders. If you are confident, you won’t dread taking a small loss. If you are confident, you will follow your strategy and won’t deviate from it when under pressure. If you are confident, you won’t have the shadow of a doubt that you will make money.

4- Never Get Attached to Any Stock

“Marriage is simply not an option. You only date supermodels and Superstocks. Never fall in love with a stock. From this day forward, ONLY FALL IN LOVE WITH PRICES.“

You should never ever get emotional about a stock or the story behind a stock. Only trust prices. Every stocks are bad – unless they go up.

5- Never Give Up

“Against all odds, the most successful traders just never surrender; their suffering capacity defines their greatness. Like many aspects of life, it’s when you hit rock bottom that we decide with every fiber of our being that we simply must do whatever it takes to succeed on a massive scale“

I don’t know of any successful trader who didn’t suffer a big drawdown at some point in his career. I, for instance, lost 70% of my net worth on one trade 8 years ago. Like in life, what separates successful people from the unsuccessful ones is the ability to never give up when they get hit hard.

6- Be A Contrarian

“The largest market advances happen when we least expected them to happen. Market advances NEED a gigantic wall of worry to keep as many people as possible on the sidelines“

“If you cannot find a single article in favor of your investment and can find it only on obscure blogs, it could very well be the a winner for you. If you start seeing your idea in mainstream press, it is probably time to sell. And if you start seeing it in books, it’s time to sell short“

One concept that is difficult for beginners to grasp is the need to be a contrarian. Usually the vast majority of people is extremely bullish at major market tops and extremely bearish at major market bottoms. When everybody is on the same side of the boat, it tips over.
For stocks, it usually is a good sign when a stock starts its ascent and only a few people notice. It increases the chances that more people will pile up into the stock, making it rise even more.

7- Be a Lone Wolf

“The reason most investors underperform the market is that they spend a vast majority of their time studying the same concepts and techniques that 99% of other traders have studied before. They read the same books, surf the same sites, and watch the same people on television.“

“The 1% of people who accumulate all of the market wealth are those who do absolutely everything differently. They focus on the one or two game-changing variables that truly make all the difference.“

“Navigating the markets in isolation isn’t easy for most people to do because human nature dictates that we seek the safety of the herd in order to simplify or eliminate the thinking process […] We seek out ‘consensus’ views so as to feel like we are part of a community of like-minded investors. If we end up on the wrong side of an investment, it feels much better to go down with others“

It’s human nature to seek the advice and comfort of the herd as it feels safer.

However, in trading, there is no doubt that relying too much on other people will have a negative impact on your learning curve and on your trading.

90% of traders are not making money in the market. Why would you take any advice from those 90%.

On top of that, having too much interaction with other traders will make it harder for you to find a strategy that suits you, to follow your rules, and it will steal your focus from actually making money.

If you cultivate the ability to develop your own strategy, find your own trades and do your own post analysis, there is no doubt that you will thrive as a trader. Stop wasting valuable time, getting advice from unsuccessful people.

This is the first of a two part series. The second part will appear next week on our blog. It is written by Fred, appears on lonestocktrader.com and is available here.

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Back during my schooling years, I studied the same problem again and again so as not to make the same mistake come exam time.

Problem was, I was horrible at application.

If the exact question came out in the exam, I killed it.

But that rarely happened. The question was always worded differently and confused the heck out of me.

I screwed up similar questions time after time simply because I couldn’t adapt what I had studied to the current version of the question.

Isn’t the market like this?

You make investment mistakes and in order to make sure you get it right next time, you focus and tell yourself you won’t make the same mistake again.

But how often does the market offer the exact same situation?

Rarely.

Something is always slightly different. Before you know it, oops, your tendencies start to come out….. again.

I’ve written about this before, and seeing as how I’m the least perfect investor, allow me to share some of my common investing mistakes.

It’s time to confess.

My Common Investing Mistakes You Should Avoid 1. Trying to Time the Market

We are all affected by what the market does to a certain degree.

The biggest problem is that with the market zooming up, uncertainty about when to buy creeps in.

  • Should I buy now?
  • The markets are volatile so I will wait for a better entry.
  • The market is overvalued so I should wait until the market corrects itself.

The Fix: Focus on the investment quality of the business and buy it at a cheap or fair price independent of what the market does.

The best companies rarely give you the opportunity to get in at a good price. If you can figure out the future earnings power and the valuation looks good down the road, good investments only look cheap in hindsight.

2. Focusing on the Stock Price and Not Intrinsic Value

There are two parts to this common investment mistake.

If the intrinsic value of a stock is 50% or even 100% higher, then waiting for the stock to drop a measly 2% before buying doesn’t make sense.

I have found myself quibbling over wanting to buy it “just a little cheaper”.

How many times have you found yourself submitting a buy order and entering the bid price just a few cents lower than the stock price?

Stop quibbling over cents. That’s a lesson taken from Phil Fisher.

The second point is that the stock prices do not dictate intrinsic value. Let’s say AAPL’s stock price drops 10%. Headlines will crow over how the company lost $90B of it’s value.

Wrong.

One of my biggest business lessons has been that despite what the market does, a company like AAPL will continue to churn profit regardless of what the market does.

The general stock market is a secondary market. The company is not selling their securities directly to you. If this was the case, volatility and price movements would practically be eliminated as Apple would have a clear price they would sell the shares for.

If the stock drops 20%, it’s easy to get worried, but the best thing to do is to do nothing.

Well, maybe take a walk and come back.

3. Holding a Loser Until it Breaks Even

I hate this mistake.

I fall for this one more often than I should but it’s getting better.

A dreaded bias of not wanting to close the position on a stock at a loss that I invested a lot of time and effort on.

I wrote an update on GRVY recently. GRVY was a net net and had the makings of a huge profitable investment.

Like all things in life, it didn’t turn out the way I had planned. At first, the holding was hugely profitable, but I found myself looking at a -50% loss.

I kept holding despite deteriorating fundamentals and one failure after another. I sold most of it for a loss, but kept “hoping” that things will improve.

Yes. You could smell desperation.

4 years later, it’s up 500% and I get the occasional email from people saying what a genius I was… haha.

The afterword of this brief GRVY reminder is that I’ve been in many situations where I really hoped that things will improve. But seeing how this happened one too many times, it became clear that I was the problem, not the investment.

GRVY is now up 500% since then. They got lucky and righted the ship and it’s really taken off. Either way, GRVY is a lucky situation. There have been other companies that ended up going to zero.

Painful lessons that I have not repeated since. If I’m wrong, I cut my losses and focus my energy on making a better investment and my returns have thanked me for it.

4. Overly Focusing on Other People’s Opinion

There are pros and cons to this.

The pros are:

  1. it’s a shortcut to investing especially when you’ve found somebody you can trust
  2. saves time
  3. build a diversified (> 20 positions) based on other solid value investor picks and it beats the market

The cons are:

  1. you don’t know what you are getting yourself into
  2. you don’t know exactly when to sell
  3. you don’t know what to do if something bad happens and you need to keep asking for opinions

It’s truly a big mistake when you end up completely relying on another person on the investment.

As a blogger, I get emails from people asking me what I think of a particular investment.

My response? If you need my opinion, you should move onto something else.

Becoming overly dependent on someone else is a mistake which is a huge portfolio risk.

Human nature though. It’s easiest to be given a fish instead of learning how to fish.

5. Not Utilizing My Checklist Enough

I do have a checklist that I refer to. I purposefully don’t make it into a gigantic list as that itself leads to other behavioral issues.

But by using just one set of checklist, I end up looking for the same style of companies. My checklist needs to expand and evolve into something that can handle different types of investments.

A collection of shorter checklists is needed that is suited for different situations such as:

  • common value plays
  • turnarounds
  • high growth stocks
  • and net nets

Not only will this help make better decisions, but it will also reduce time during the research phase.

You need to have clear goals of what you want to know instead of wandering and figuring out what you should be looking for.

Am I the Only One to Make These 5 Mistakes?

I wish I can say that I only make 5 mistakes. But the list goes on and on.

At the same time, I’ve been able to avoid deadly mistakes by learning from the mistakes of others.

If I had one last thing to add as I wrap things up, it is that getting complacent and indifferent about mistakes is as bad as it gets. But if you’re a normal person, you’ll read all this and chalk it up as a good “tip” or “lesson”. We humans have an uncanny ability to forget the bad stuff.

The funny thing is that many people will go to the ends of the world to get back $10 if they feel they got ripped off. You’ll get mad about it and do what it takes to get it back.

Or you’ll spend 5 hours analyzing which washing machine to buy.

But losing $10,000 in the stock market is totally OK.

I just hate losing money in the stock market, as much as I do in day to day life. Maybe the best cure is to get mad when you lose money in the stock market and do what it takes to get it back.

What do you think?

The original article by Jae Jun appears on oldschoolvalue.com and is available here.

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Benchmark indices ended Friday’s session with marginal cuts after erasing its intraday gains in the final hour. IT stocks remained subdued throughout the day after the US-based IT services company Cognizant nearly halved its 2019 growth guidance.

The intra-day rise in the indices was spurred by a slip in oil prices with financial stocks gaining the most, before the indices retreated to trade flat in the end.

S&P BSE Sensex settled 18 points lower for the day at 38,963, with TCS, Hindustan Unilever, TATA Steel, HCL Tech and Infosys being the top drags. Twelve out of the 30 constituents of the BSE ended the day in red.

The broader Nifty50 was also down 12.5 points, or 0.11 per cent, to end at 11,712 levels. The market breadth was tilted in favour of declines. About 1,031 stocks fell and 702 shares advanced on National Stock Exchange.

Among sectoral indices, the Nifty IT index was the biggest loser, down almost 1.9 per cent while the Nifty FMCG index also slipped 1.13 per cent. On the other hand, Nifty Realty index and Nifty PSU Bank index gained 1.57 per cent and 1.09 per cent, respectively.

On a weekly basis, the S&P BSE Sensex closed 0.27 per cent lower while and the NSE Nifty50 slipped 0.36 per cent. This was the indices’ biggest weekly loss since February 11.

The volatility index, VIX, ended the day 4.35 percent higher at 23.98.

The broader market took the cue from benchmark indices to end flat. The S&P BSE MidCap index slipped 15 points, or 0.10 per cent, at 14,783, while the S&P BSE SmallCap index ended the day at 14,548, down 45 points, or 0.31 per cent.

Information technology (IT) stocks remained under pressure on Friday, after the US-based IT services company Cognizant nearly halved its 2019 revenue expectations after missing first-quarter results, as it faces sluggish demand in its financial and healthcare businesses.

Shares of Balrampur Chini Mills continued their northward journey, with the stock hitting 18-month high of Rs 157 before ending the day at Rs 156.50, up 1.69 per cent, on the expectation of strong earnings growth. The stock was trading at its highest level since December 6, 2017.

McLeod Russel India shares continued to reel under pressure, hitting an over decade low of Rs 45.45, down 10 per cent on the BSE on back of heavy volumes. The stock of flagship tea company of the BM Khaitan group was trading at its lowest level since March 12, 2009 on the BSE.

Roto Pumps shares were locked in upper circuit for second straight day, up 20 per cent at Rs 143 on the BSE, on the back of delivery-based buying. The stock of industrial machinery company zoomed 44 per cent in the last two trading days, in an otherwise range-bound market. In comparison, the benchmark S&P BSE Sensex was up 0.25 per cent at 39,078 levels.

The Mumbai-based real estate developer, Godrej Properties buys RK Studios for an undisclosed sum. It plans to build a mixed-use project with modern residences and luxury retail. The plot is located strategically on the main Sion-Panvel Road and the Kapoor family was in talks with many interested parties, sources said.

Shares of Kansai Nerolac Paints slipped 6 per cent to Rs 395 on the National Stock Exchange (NSE) after the company reported 12 per cent decline in its net profit at Rs 93 crore in March quarter (Q4FY19), due to lower demand for industrial products. The company had a profit of Rs 106 crore in year-ago quarter.

The share price of food major Britannia Industries was down nearly 4 per cent on Thursday following concerns over loans to group companies. The stock remained volatile through the day after a disclosure by Britannia that it had inter-corporate deposits (ICDs) in associate companies, which was under 25 per cent of its total investments.

Here are some picks from the week gone by.

Company: Syngene International CMP: 605.30 Mastermind

Company: Yes Bank CMP: 175.80 Mastermind

Company: Tata Steel CMP: 547.70 Mastermind

Company: Hexaware Technologies CMP: 335.90 Mastermind

Company: Biocon Ltd. CMP: 551.40 Mastermind

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Over the past ten years, I’ve participated in both the public and private markets, investing in over 50 late-stage private companies, early-stage startups, and pieces of real estate. This is how I’ve learned to evaluate investments. 

Successful investing boils down to buying assets at a discount to intrinsic value. The greater the discount, the more likely the investment will perform. Benjamin Graham, the father of value investing, called this “margin of safety.” The concept is simple in theory and extremely challenging in practice, with the valuation process anything but straightforward.

Two highly-educated, emotionally stable, and reasonable people can view the same information and come to very different conclusions. People weight information differently based on their preferences, values, and experiences. Some are comfortable tolerating certain types of risk. Predictions differ and forecasts can be wildly divergent. Those differences create the market. As just one participant in the market, here’s how I evaluate a company’s intrinsic value.

I always start by understanding what I call owner earnings, which I define as:

Owner Earnings = Net Income + Non-Cash Expenses (Depreciation, Amortization, Depletion) + One-Time Charges – (Maintenance Capital Expenditures + Working Capital Needs)

Said another way, owner earnings are the profits left over after necessary expenditures that owners can discretionarily spend, save, or reinvest. Blindly following the formula can easily provide false precision and a false sense of security. It’s merely a simplified starting point.

Depreciation and capital expenditures rarely reconcile easily, due to irregular spending patterns in response to the business cycle. The goal with those two items is to understand what spending is necessary to maintain the capacity and competitive position of the business, and if the company is doing so responsibly. It’s easy to dramatically boost net income by halting necessary reinvestments, the consequences of which won’t be noticed immediately. I see this in the private markets all the time. To the chagrin of sell-side “helpers,” depreciation is a real cost and should be looked at as merely the repayment of prior capital investments. It’s not “free” if you’re just being paid back. Depending on the nature of the assets, depreciation usually represents the average recent capital expenditure rate.

Although frequently grouped with depreciation as a non-cash expense, amortization is a different beast. Hard assets are depreciated. Intangibles are amortized. This distinction is critical in understanding cash returns. A large depreciation rate means the business is likely capital-intensive. High amortization means the business has probably been acquisitive and the difference in tangible book value and purchase price is being amortized. Therefore, amortization can usually be counted on to deliver higher post-tax returns, without necessary re-investment.

Special income/losses require particular scrutiny. If earnings are going to be distorted, this is usually where it happens. It never fails to amaze me how creative some get with what counts as “special.” In my experience, every business has a consistent barrage of non-recurring expenses. The causes behind those expenses may vary, but the total usually remains in a tight range. That range should be deducted from earnings.

Another important consideration is asset intensity, or how much past investment has been made to create the earnings. There are two very different ways to view asset-intensive companies. The first is the possibility that it creates a backstop for valuation. If you buy a company (or a share in it) with a large asset base relative to valuation, the worst-case scenario, failure and liquidation, can be reasonably calculated. The trick is to properly value the assets in a forced-sale situation, which almost always results in a very significant discount.

The downside to an asset-heavy business is re-investment requirements. Most would say that a business consistently netting $10M per year is a “good business,” but that fact alone leaves an incomplete picture. How would your view of the business change if I told you it had $150M of assets? This means that over the course of the business’s history, the owners invested at least $150M to produce that return. That’s a little less than 7 percent return on assets. Not great. What happens to owner earnings if the business grows and the investment rate remains steady? It would require about $30M in additional reinvestment to generate $2M of incremental profits, which isn’t a stellar tradeoff.

But a business’s economic worth goes beyond its assets and should always be centered around the owner’s benefit. Two common metrics are return on equity (ROE) and return on invested capital (ROIC). Both measure the profitability of the company based on the owner’s money it consumed, but in slightly different ways. ROE only takes into account the equity investment, while ROIC includes the total investment made, including debt deployed.

The difference between equity and assets is the use of debt, which is a tricky topic. Employing leverage always amplifies the outcome, good or bad, and the nature of the  business determines how intelligently debt can be used. For instance, railroads and banks have a low return on assets, yet are considered by many to have excellent potential based on their abilities to employ debt responsibly. Before you start thinking about writing a sarcastic comment about banks, leverage, and the crisis of 2008, let me explain a little further. Debt can be easily mismanaged and the line between responsibility and recklessness is not always apparent, especially when incentives aren’t properly aligned. With that said, many banks didn’t need to get bailed out in 2008 and remained excellent investments for their owners.

Many investors like to discuss the business’s competitive advantage(s) and a common term to summarize those is “moat.” A business with a moat, especially one with alligators in it, demonstrates its superiority by generating above-average returns on invested capital for an abnormally long time, which drives superior shareholder returns and reduces the risk of competitive destruction. Moats come in a variety of forms and range from branding or process-driven efficiency, to patents or contractual agreements. The trick is to understand why a company can produce profits and estimate the durability of that advantage.

The final quality I look for in a business is that it invests its capital well. The decision-making process around opportunities is called capital allocation, or how the company’s leaders decide to direct resources in the pursuit of returns. There are two big questions about these decisions: 1) How many high-confidence, high-return opportunities exist? 2) What is the company’s track record for making value-creating asset allocation decisions? The first question is what many call “runway,” or the size and time-frame for high-return reinvestment opportunities. The bigger the better. The second question revolves around the confidence and perspective of management. Some companies have long histories of making value-destroying, vanity decisions that boost top line and kill investor returns. Other companies make value-accruing decisions, with the occasional and understandable stumble. The ultimate investment is in a company with a long runway and management that has a history of making consistent, wise decisions. It may sound simple, but it’s incredibly rare. How important is this trait? I’ll let Warren Buffett explain:

“The lack of skill that many CEOs have at capital allocation is no small matter: After ten years on the job, a CEO whose company annually retains earnings equal to 10% of net worth will have been responsible for the deployment of more than 60% of all the capital at work in the business.”

The last piece of the valuation puzzle is earnings yield, or the projected cash-on-cash return based on the proposed valuation. For instance, a business bought at a 10X multiple of net income yields a 10% post-tax return in a steady, zero-growth state. Multiples differ depending on the buyer’s assessment of earning quality, growth projections, sustainability, and ultimately opportunity cost. The higher the multiple, the higher the expectations for future growth of owner earnings.

Valuation is a process that is best learned through experience and study. While no two investors share the same method, I hope a peek inside my perspective helps shape your methodology.  I’ve included a brief list of resources below that have proven helpful in my journey.

*One area I intentionally glossed over is time-cost, which can range from irrelevant to incredibly important. An investor only has 24 hours in a day. Some investments, like early-stage startups or small late-stage companies, can require massive amounts of time and effort to generate and protect returns. Most public investments don’t give the investor the option for involvement. It’s important not to discount time-cost and factor it into your investment formula.

The original article appears on Forbes.com, is contributed by Brent Beshore and is available here.

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Growing up I would help out serving customers in my grandparent’s corner convenience store (Milk Bar) on weekday afternoons and weekends.

My late Grandfather in his convenience store, better known as Parris’ Milkbar.

There was only one cash register on top of the counter, which received cash from the customer’s purchase, and my grandmother would take out money, from the cash register, to buy new stock for the shelves, pay the utility bills, and pay me.

My grandparents would then have to choose, either to, invest in growth, pay down debt, or pay their own living expenses, out of the remaining amount of money left in the cash register.

Little did I now then, that those are the key ingredients to understanding the cash flows operations of any business.

Those individual elements are:

  • Income
  • Working Capital Expenses
  • Maintenance Capital Expenditures
  • Growth Capital Expenditures (Investment in expansion)
  • Profit

For instance, the income is the cash received from customers. The working capital expenses is the cash taken out of cash register to pay for new stock that is then sold on the shop floor.

The maintenance capital expenditures were the expenses my grandparents had to spend to maintain the shop equipment (the ice-cream machine, soft drink fridges, milkshake machines, etc) at a safe level to meet government health & safety regulations, and also because equipment wears out as it gets used. Included in the maintenance capital expenses is the shop building itself, which resulted in occasionally paying tradesman to repair leaks, install power-points, or install new shop signage.

My grandparents didn’t, at that time spend money to expand the business. And finally, after all those expenses were meet my grandparents pocketed the after-tax difference.

These fundamental elements are found in every business, small and large. From these elements, we begin to understand the earnings power and intrinsic value concepts.

Now that common-stock values come to depend exclusively upon the earnings exhibit, a gulf has been created between the concepts of private business and the guiding rules of investment. 

When a businessman lays down his own [financial] statement[s] and picks up the report of a large corporation, he apparently enters a new and entirely different world of values. For certainly he does not appraise his own business solely on the basis of its recent operating results without reference to it financial resources.

Benjamin Graham and David Dodd

My grandparent’s shop provides a simple example of free cash flow. The excess cash leftover in the cash register is what Benjamin Graham referred to as ‘earning power” or what Warren Buffett refers to as “owner earnings.” That’s the amount of cash my grandparents pocketed after paying all the expenses and making the necessary investments to maintain the shop.

This free cash flow is the well from which all returns are drawn, whether they are dividends, stock buybacks, or investments capable of enhancing future returns.

Bruce Berkowitz

Benjamin Graham recognised that Intrinsic Value is an elusive concept, and wrote: “In general terms it is understood to be that value which is justified by the facts, e.g., the assets, earnings, dividends, definite prospects, as distinct from the market quotations established by artificial manipulation or distortion of by psychological excesses. But it is a great mistake to imagine that intrinsic value is as definite and as determinable as is the market price.”Graham explained that the intrinsic value of a business was determined by its earnings power.Example: Let’s make this reasoning clearer, let us consider a concrete and typical example. What would we mean by the intrinsic value of Bridgestone Corp., (BRDCY U.S.: OTC) in 2018.The market price was $22; the enterprise value per share was $22.95; $1.20 per share were paid out in dividends for 2017 and the six-year average is $0.72 per share; the average earnings for six years had been $2.64 per share. If we followed the customary method of appraisal, we might take the average earnings per share for the six years, multiply this average by ten, and arrive at an intrinsic value of $26.40.

Let us examine the reported individual figures which make up this six-year average.

The individual figures are the reported net income per share figures for the six years from 2011 to 2016.

We established earlier that the maintenance capital expenditures spent by my grandparents to maintain shop equipment and the shop building came at a cost, if neglected, both equipment failures and building repairs will damage their reputation in the eyes of customers.

Bridgestone’s reported earnings per share figures need to be adjusted to take into account the required maintenance capital expenses, which maintain the current level of revenue.

This table provides the approximate figures for each of our elements, and so we deduct from the reported net earnings figure $1.60 to get a truer picture of Bridgestone’s earnings per share.

So, $2.91 minus $1.60 equals $1.31 per share.

A good comparison is Free-Cash-Flow per share, which is $1.44 per share. It’s in the ball park.

As the old saying goes, ‘earnings is an opinion but cash is a fact.’

You now see the folly of a company reporting their earnings as Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA).

Yours in Investing

– Adam

The original article is by Adam Parris, appears on SearchingForValue.org and is available here.

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