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Of Sparrows and Bull Markets: A Lesson from History

China was saturated with disabling infectious diseases near the end of 1940s. Tuberculosis, plague, cholera, polio, malaria, smallpox, and hookworm were killing a lot of people in the country. More than 11 million people were infected with the water-borne liver parasite diseases. Cholera epidemics raged through the population freely, some years killing tens of thousands. Infant mortality was as high as 300 per 1000 live births.

The country was going through a political and social transition, and thus creating a national public health system and eradicating entrenched diseases was an obvious first step in improving the lives of its people.

The Chinese Communist government began initiating massive vaccination campaigns against the plague and smallpox, vaccinating nearly 300 million people. Sanitation infrastructures for clean drinking water and waste disposal were implemented throughout the country.

But physicians, immunizations and sanitation can only go so far. Something had to be done about the pests that transmit diseases –

Mosquitos responsible for malaria,

Rodents that spread plague,

Flies that were causing immense nuisances, and

Sparrows that ate the crops

These four pests – flies, mosquitos, rodents, and sparrows – were charged with public health treason and widespread irritation. This is when the Chinese government announced the “Four Pests” campaign.

The first three pests – rats, flies, mosquitoes – were identified because of their role in spreading malaria, typhoid, and the plague. Sparrows were included in this list because they consume rice and other seeds from agricultural fields. In fact, people were called upon to shoot sparrows, destroy their nests and bang pots and pans until the birds died of exhaustion. Millions of sparrows, perhaps even hundreds of millions, were killed.

The campaign worked very well. Many infectious diseases were eradicated, and their scope diminished. But that was because the Chinese had killed around 1 billion sparrows, 1.5 billion rats, 100 million kilograms of flies and 11 million kilograms of mosquitos. In terms of accomplishing its objective, the Four Pests campaign was a massive success.

Then, disaster struck.

The 1 billion sparrows that the Chinese had killed, it seemed, did not only eat grain seeds but also ate insects. Now, with no birds to control them, insect populations boomed. Locusts, in particular, swarmed over the country, eating everything they could find — including crops intended for human consumption. People, on the other hand, quickly ran out of things to eat, and millions starved.

Around 15 million (as per Chinese data) to 40 million (as per independent researchers) people died in what was called the Great Chinese Famine.

Now, the deaths of the sparrows were not the only contributing factor to the famine and deaths. A massive drought also added to the disaster. But the point here is that the Chinese – after getting the ‘brilliant’ idea to eradicate pests to eradicate diseases – ignored the “second-order effects” of their actions.

* * *

“The road to hell is paved with good intentions,” mentions A Handbook of Proverbs published in 1855.

By solving one problem, we generate another one and sometimes create an even worse one. The common pattern here is that somebody tried to modify the behaviour of a system – like the natural ecosystem in China – by tinkering with it in a small way. But that small action produced significant unintended consequences.

In fact, every action has consequences, intended and unintended. No matter how carefully we plan, we can’t anticipate everything.

Consider investing. Most of us, most of the time, operate on instant gratification. We focus on the investments we can buy today to maximize our returns in the short term. All we can think of are first-order effects, and fail to ask this very important question – “And then what?”

We overpay for stocks assuming they will continue to run up like they did in the recent past, and fail to ask, “And then what?” We forget that when we are overpaying for an investment, we automatically lose some of the implied return on that investment. If the investment loses money, we lose even more when we pay too much to own it.

We buy sub-standard businesses because someone else, especially some big investor, may have made money betting on it and then shouting about it, and fail to ask, “And then what?” For instance, when we are buying leveraged businesses, we fail to consider that most such businesses don’t have the staying power in the face of adversity.

We blindly follow the “influencers” on social media and buy into every advice they have to offer and forget to ask, “And then what?” This is because, under the spell of such people, we fail to differentiate between when they are educating us and when they are selling us products under the garb of education. And most are doing the latter.

When we partner business managers with low integrity since their stocks may be surging along with others in a bull run, we fail to ask, “And then what?” because we forget what Thomas Phelps wrote in his book 100 to 1 in the Stock Market – “Remember that a man who will steal for you, will steal from you.”

We may poke fun at others, like the Chinese in 1950s, who miss out on the second-order effects of their decisions, but we are often culprits of the same in our own lives and decisions.

* * *

I recently tweeted this image that I saw on the Whatsapp status message of my society’s security guard, a 45+ years old person with three children to take care of –

I have no idea what made him put up this image, just that I fear that he – or someone around him – may be trying to make money fast betting on stocks given the euphoria all around.

Now, I have no problem when anyone – especially people with low income and financial resources – is trying to earn money through various avenues. In fact, I have supported such activities in the past through part-funding small businesses started by some such people. But the reason I shared the above image was to serve as a warning that most people in the stock market – and especially new entrants, and especially those with low incomes and savings – do not understand the dire consequences of losing money gambling in stocks when the tide turns for the bad, and it does turn bad after a heady period, like what we have witnessed over the past 18 months. I have seen a lot of such people losing more than their few months’ income on such gambles, which is sad.

History would repeat. Though no one knows when, but it would.

Do not treat this as scaremongering, but a good friend’s warning who wants the best for you.

Noted financial writer George J. W. Goodman – who used the pen name of Adam Smith – wrote this in his wonderful book, The Money Game –

If you don’t know who you are, this is an expensive place to find out.

By “this”, Smith meant the stock market.

Asking “And then what?” is all about looking past a news event or action and understanding what that event or action might mean for the bigger picture. Of course, not all events and actions will destroy your core assumptions but looking at things wearing the “And then what?” glasses would keep you from making hurried investing decisions based on your emotions, which are often an investor’s worst enemy.

Whether you are looking to invest in a business, or invest in a new relationship or career, never forget to ask the “And then what?” question. Never forget to foresee the second-order effects.

It’s a life saver, believe me!

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sunshineweb · 3 years

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LIC Bonus Rates – 2021- 22 | Complete details

Recently LIC declared the bonus rates for the year 2021 – 2022 (As per March 2021 valuation). Let us see the complete details about LIC Bonus Rates – 2021- 22 and how they affect your life insurance returns. LIC of India has declared the latest bonus rates for the valuation period 1 st April 2020 to 31st March 2021. […] LIC Bonus Rates – 2021- 22 | Complete details published first on https://mbploans.tumblr.com/

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sunshineweb · 3 years

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LIC Bonus Rates – 2021- 22 | Complete details

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sunshineweb · 3 years

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Latest Post Office Interest Rates October – December 2021

What are the Latest Post Office Interest Rates October – December 2021? What are the latest Post Office interest rates on FDs, MIS, SCSS, NSC, KVP, PPF and SSY Schemes? Earlier the interest rates used to be announced yearly once. However, from 2016-17, the rate of interest will be fixed on a quarterly basis. I already […] Latest Post Office Interest Rates October – December 2021 published first on https://mbploans.tumblr.com/

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sunshineweb · 3 years

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Nippon India Growth Fund – Rs.10 to Rs.2051 Growth in 26 Yrs!!

On 6th September 2021, Nippon India Growth Fund NAV touched one more landmark of reaching Rs.2,000. The fund was launched on 8th October 1995 with Rs.10 NAV. It was a fantastic growth from Rs.10 in 1995 to Rs.2000 in 2021. But how was the journey? Many of you may be aware that earlier it was […] Nippon India Growth Fund – Rs.10 to Rs.2051 Growth in 26 Yrs!! published first on https://mbploans.tumblr.com/

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sunshineweb · 3 years

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Latest Post Office Interest Rates October – December 2021

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sunshineweb · 3 years

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Nippon India Growth Fund – Rs.10 to Rs.2051 Growth in 26 Yrs!!

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sunshineweb · 3 years

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Decoding “Rs 10,000 invested in Wipro became Rs 500 crore” example

I am sure you must have seen the famous example of how Rs 10,000 invested in WIPRO turned out to be Rs 500 crore in 2019. That’s a massive wealth. But today I want to decode this story and let’s see what are some of the issues and problems. I have created a video on […]

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sunshineweb · 3 years

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Sensex at 60,000: Timeless Lessons to Help You Stay Grounded

In March 2020, when the Sensex cracked to below 28,000 level caused by the onset of the Covid-19 crisis, I wrote a post about how I was investing my money through the crisis.

Today, just 18 months later, the Sensex has touched the 60,000 mark, or almost 120% up from its March 2020 lows, and I got down to writing another post on how I am investing my money through this euphoria.

But then I stopped, for except my stocks doing well like everyone else’s, nothing has changed as far as “how I invest” is concerned.

I quickly changed my idea for today’s post, and thought why not share with you some of the most important “sanity-check” lessons that I have learned from some of the wisest investors around.

So, here are a few relatively unknown but timeless quotes from some of the investing greats that have served me well and stay grounded over the years, and may also serve you good lessons on how you should view stock investing from the current perch, and not give in to the mindlessness that such times foster.

Don’t just read these quotes. Pause and think about them. Maybe, write them down by hand in your notebook so you remember them for long. As you will realize while you are reading them, they contain the essence of many investment books.

Let’s start.

Are You Rising, Or Is It the Pond?

Bull markets go to people’s heads. If you’re a duck on a pond, and it’s rising due to a downpour, you start going up in the world. But you think it’s you, not the pond.

~ Charlie Munger

No God Wants You to Get Rich

Once a bull market gets under way, and once you reach the point where everybody has made money no matter what system he or she followed, a crowd is attracted into the game that is responding not to interest rates and profits but simply to the fact that it seems a mistake to be out of stocks. In effect, these people superimpose an I-can’t-miss-the-party factor on top of the fundamental factors that drive the market. Like Pavlov’s dog, these ‘investors’ learn that when the bell rings – in this case, the one that opens the New York Stock Exchange at 9:30 a.m. – they get fed. Through this daily reinforcement, they become convinced that there is a God and that he wants them to get rich.

~ Warren Buffett

Things Don’t Get Better (or Worse) Forever

Very early in my career, a veteran investor told me about the three stages of a bull market. Now I’ll share them with you. The first, when a few forward-looking people begin to believe things will get better. The second, when most investors realize improvement is actually taking place. The third, when everyone concludes things will get better forever. Why would anyone waste time trying for a better description? This one says it all. It’s essential that we grasp its significance.

~ Howard Marks

Know What ‘You’ Believe In

When prices go up enough, everybody believes something, even if it is only that everybody else is just about to believe.

~ Adam Smith, The Money Game

Survival is the Only Road to Riches

Survival is the only road to riches. You should try to maximize return only if losses would not threaten your survival and if you have a compelling future need for the extra gains you might earn.

~ Peter Bernstein

There’s Only One Side of the Stock Market

There is only one side to the stock market; and it is not the bull side or the bear side, but the right side.

~ Jesse Livermore

Buy Cheap, Never Bad

My experience teaches me that by far the largest losses have been sustained by investors through buying securities of inferior quality under favorable general conditions.

~ Benjamin Graham

Don’t Just Get Sucked In

As a runaway bull market persists, its relentless vacuum cleaner eventually sucks everyone in. Investors who are skeptical about the perceived overvaluation are forced to watch as their career prospects melt down and security prices melt up. New rationalizations, disguised as rationales, enter the higher levels of discourse to justify jumping, or creeping, onto the asset-price train despite disdaining it when it was dozens of percentage points lower. A feeling of fear and acrophobia then becomes replaced by the giddy and disorienting feeling of finally being on track to make money along with the crowd and not feeling isolated in Cranky Valueland.

~ Paul Singer

Think About Your Wealth Like Your Children

Your wealth is like your children — the primary link between your present and the future. You should try to think about it in the same way. You want your children to have freedom but you also want them to be good people who can take care of themselves. You don’t want to blow it, because you don’t get a second chance. When you invest, it’s not your wealth today, but it’s your future that you’re really managing.

~ Peter Bernstein

* * *

“If we are facing in the right direction, all we have to do is keep on walking,” goes a Buddhist proverb.

It captures the essence of how we can train ourselves to be calm and patient, in life and while investing our hard-earned money, whatever be the situation.

When euphoria or fear runs high, don’t run with it. Instead, keep a calm mind, think well through things, and be patient. Avoid hasty decisions and keep playing according to your plan.

Things go bad after good times, like they go good after bad. But if you maintain your sanity before they go good or bad, you won’t be excessively elated or disturbed when they actually do.

That’s what intelligent investing should be all about.

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sunshineweb · 3 years

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“Guaranteed 11% returns” – A new misselling in insurance (VIDEO)

Recently I got a call from an insurance company sales executives and they tried to sell me an insurance policy which they said had Guaranteed 11% returns. The policy was Reliance Nippon Life Guaranteed Money Back Plan I knew that there is surely some catch and they are kind of misselling me, I didn’t know what […]

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sunshineweb · 3 years

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The Most Important Thing That Counts in Investing

One story from World War II that I found as tragic as it was magnificent was that of Anne Frank.

Frank was born in Frankfurt, Germany but moved to the Netherlands for safety in 1934, five years after she was born. The Frank family hid in their basement with four other Jews when Germany took control of the Netherlands.

Anne then began to write, at age thirteen, in a diary of her life, feelings and the outside world. She wrote in the diary every day for two years until their hiding place was found and she was forced into a concentration camp where she died with her sister due to a sickness. She was just fifteen when she died.

Although Anne wasn’t only a tragic girl in this war, her diary that is available to read as The Diary of a Young Girl displays the strength of her character. The diary portrays her as a brave and hopeful girl, character traits that are hard to manage in the kind of hardship that she was a part of.

One of her diary entries reads –

Human greatness does not lie in wealth or power, but in character and goodness.

Strong character is what Anne displayed through here little life. And strong character is what makes people great in their lives.

In the broader scheme of this Universe, even when I look at an unimportant field like investing, I find that investors who have done wonders for themselves are the ones who have displayed strong character at various points in their investment lifetimes.

By the way, I am not talking about those who have done well over the past few years (thanks to a genial market environment) because they have not yet been tested for the strength of their characters, but of those who have stood the test of time over more than a decade.

The thing about character is that no book or course can teach you on this, though very few of them talk about how you can gradually build it. Ben Graham’s The Intelligent Investor is one of them. Seth Klarman’s Margin of Safety is another. Philip Fisher’s Common Stocks Uncommon Profits is the third. And then you have Howard Marks’ memos and Warren Buffett’s letters to shareholders. Most of other stuff written on investing through the years, including this blog, is just commentary.

Anyways, if I were to draw down the lessons I have learned from these books and from watching successful investors on building a strong character required to do well in investing, here are five traits that stand out –

1. HUMILITY, especially intellectual.

Being humble in investing isn’t about being doubtful of yourself, or believing that you are untalented, unintelligent, or unworthy. On the contrary, it is about being humble about our own intellect, to question whether what we know is actually correct and even to adjust our beliefs if we are presented with new information. In other words, it is largely to do with intellectual humility.

As Philip Tetlock wrote in Superforecasting, true humility (in investing) is about recognizing that “…reality is profoundly complex, that seeing things clearly is a constant struggle when it can be done at all, and that human judgment must, therefore, be riddled with mistakes.”

Very few investors have the nerve to say, “I don’t know.” But that’s how you build humility in your investment process. If you start with “I don’t know,” then you are unlikely to act so boldly as to get into trouble.

2. INTEGRITY, which is the quality of being honest and having strong principles.

Successful investors focus on their investment process with unwavering steadfastness and honesty, whatever the stock market is doing and however others around them are behaving.

They show how, to be a successful investor, you must have a philosophy and a process that you stick to even when the times get tough. This is very important. If you don’t have the courage of your conviction and patience and toughness, you can’t be an investor because you’ll constantly be driven to fall in line with the consensus by buying at the top and selling at the bottom.

But it’s important to know that no approach will allow you to profit from all kinds of opportunities in all environments. You must be willing not to participate in everything that goes up (like what’s happening now), and only the things that fit your process and investment approach.

3. TENACITY, which is the determination to work hard and keep faith in your investment process and the power of compounding.

Over the years I have met a multitude of investors who knew about the power of compounding, but very few who truly understood its real power because that shows up not in one, three, or five years…but ten, fifteen and twenty years. And in an age of instant gratification, since not many have the tenacity to hold on to their faith in this power and in high-quality companies to create wealth, not many investors end up successful.

American investor, hedge fund manager, and philanthropist Leon Cooperman is quoted as saying –

It doesn’t matter whether you are a lion or a gazelle; when the sun comes up you’d better be running.

Cooperman is seemingly talking about the importance of hard work here, which is a direct offshoot of tenacity. Sensible investing is hard work.

But then, Jesse Livermore, one of the greatest stock speculators of all times, is supposed to have said –

The main reason why money is lost in stock speculations is not because Wall Street is dishonest, but because so many people persist in thinking that you can make money without working for it and that the stock exchange is the place where this miracle can be performed.

Warren Buffett has said –

I learned at a very early age how important it is to work hard and be honest.

Hard work you put in identifying businesses you want to own, and then the hard work you put in just staying put, doing nothing, is what should help you succeed in your investment endeavors. There are no shortcuts to the top.

4. SELF-AWARENESS, which is the conscious knowledge of one’s own character and abilities.

George Goodman aka Adam Smith wrote in his book The Money Game –

If you don’t know who you are, [stock market] is an expensive place to find out.

Mere gathering of facts and bookish knowledge can only lead us to chaos. That chaos is what causes most people to fail in their investing lives despite all the books they read and courses they attend. While it is obviously necessary to read the wisdom and ideas contained in all those great investment books, they will only help us with the “techniques.”

But without understanding ourselves, those techniques would only lead us to frustration (maybe, an ‘intelligent’ frustration) and ultimately failure.

In studying successful investors over the years, I have come to realize that the right kind of investing education comes with the transformation of ourselves, which entirely depends on our awareness of ourselves – our behaviour, risk-taking capacities, and habits.

When we are aware of ourselves, we are in a better position to behave well. And that can help us save ourselves from self-destruction that most other investors lead them to.

5. ADAPTABILITY, which is the quality of being able to adjust to new, changing conditions.

This is the core of Charles Darwin’s theory of evolution –

It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change.

Adaptability is one of the few skills that are hard to learn but pay off for the rest of your life.

Given the ever-changing world we inhabit, and given that this change is unlikely to ever slow down, what mattered very much yesterday (e.g. skill, knowledge, etc.) might not be worth a dime tomorrow. Change used to be slow and incremental: now it is rapid, radical and unpredictable.

Adaptability enables us to dwell on new circumstances and stay on top of the situation. Of course, this skill is best when combined with insight, giving us fresh perspective before the change itself. Growth depends on how adaptable you are.

Prof. Sanjay Bakshi told me this in an interaction some time back –

If you bought the right type of business, then there is likely to be a tendency for it to deliver better than what you envisaged. If you see that tendency play out after you have invested, don’t ruin it by staying with the original model. Your model has to be adaptive. If the performance is far better (or worse) than you envisaged, you have to change the model unless the improvement (or deterioration is likely to be temporary).

As Keynes used to say, when facts change, I change my mind. You have to have the same mindset when it comes to investing in both directions. That is, if the business is delivering far poorer performance than what you had envisaged earlier, and that performance is likely to continue because the moat is impaired, then your original model needs to be re-worked and it may well turn out to be the case that you should sell the stock. You have to have the ability to be detached from the outcomes, based on dispassionate analysis of real, meaningful data (not noise).

Combine adaptability with agility in these changing times and you have the right ingredients of success as an investor.

Oh, It Takes Time! The thing about character is that it cannot be strengthened quickly (not the least by reading posts like this one) and in ease and quiet, but only over time and often through the experience of trial and distress during a crisis.

In fact, character often does not come out as a result of crisis, but in a crisis – like during 2000, 2008, and 2020.

Character also comes out during heady times – like during 1999 and 2007, and then now, when your humility, integrity, and tenacity are tested by the overdose of easy and quick money that you and investors around you are making.

Charlie Chaplin said that a man’s true character comes out when he’s drunk. Well, my advice is to learn your lessons from watching others in the stock market who often get drunk on arrogance, fear, greed, and envy. Then, avoid being like them. Over time, you will end up building a strong character.

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