Investing Lessons: Scam 1992 – The …

I was intrigued by the new series, Scam 1992: The Harshad Mehta Story at Sony Liv. An absolute stunner!! Many important lessons to be learnt, both in Investing as for Life. I couldn’t resist myself from putting down the dialogues below (verbatim) and some of my interpretations below:

# “Emotion Mein Insaan Hamesha Galti Karta Hai” – People tend to make mistakes when they become emotional.

Inability to control the emotions of Greed & Fear leads to committing mistakes – in Life, as well as in Investing. Benjamin Graham, the father of value investing and Warren Buffett’s Guru, advised to make friends with stock price fluctuations. Graham used a brilliant metaphor to capture this idea. He asked investors to imagine someone called Mr. Market to be acting as your partner in a business. Sometimes, Mr. Market is in an elated mood and ready to buy your stake in the business for a very high price. That is where Greed sets in and one ideally should start to sell to Mr. Market.

On other occasions, Mr. Market could be very pessimistic and is ready to sell his stake for a very cheap price. This is time for maximum fear and pessimism and ideally one should start to buy from Mr. Market

He comes to your doorstep every-day with a price quote and he doesn’t mind being ignored. What you need to learn is that Mr. Market is there to serve you, not to guide you.

# “Apni Market Mein Genuine Investor Koi Nahi Hota, Sab Bhaav ke Khiladi Hote Hain” – In our kind of market, i.e. Trading, there is no genuine investor. Everyone plays on the Market Price.

Market is more rational than emotional. That’s precisely the reason market participants say “Bhaav Bhagwaan Che” – Market Price is God, but this is not always true!! Sometimes, the market turns more emotional than rational. When market turns emotional, an independent prepared investor needs to understand the emotionality of the market along with his; this is when money gets made!!! More at Investing Lessons from Sherlock Holmes – Lesson 12

# Sab ho jayega!! – Everything will fall in place properly

Self-denial is like fooling yourself and you are the easiest person to fool. The innate confidence that things will become better is what keeps us going. After all, its hope that keeps things ticking!! However, one should differentiate between daydreaming and being realistic.

There are times wherein we don’t sell our losers, knowing fully well that either the stock selection is incorrect, or the company’s fundamentals have weakened since the time the stock was purchased. Psychological biases, viz. Social Proof (if we have told the entire world about our investments), Loss Aversion Bias (Pain of losing is much higher than the pleasure of gaining), Confirmation Bias (tendency to interpret information that confirms our prior beliefs) do not enable us to take decisions rationally.

# Dar Ummid Par Hamesha Bhari Padta Hai – Fear always prevails over hope!!

Fear always results in higher intensity of market corrections as compared to the rise in the markets. Now, it is only when there is fear in the markets that you should start getting greedier and vice versa. However, in order that you are able to execute it, your investment framework, philosophy and ability to understand answers to some basic questions should be crystal clear.

Some of the questions which has bode me well from a framework perspective, especially when company’s stock prices have tanked:

1. What were/are the problems?
2. What was/has been the most important problem?
3. What is the inter-connectedness of problems?
4. Why did/does management engage in such a behaviour?

Read more at Market mayhem+Investing Framework!!

# “Baarish Mein Kitna Bhi Chaata Lekar Chalo, Chikni Sadak Par Aadmi Gir Hi Jaata Hai” – No matter you carry umbrella during rains, you still tend to fall on a smooth road.

You will end up making mistakes on your investments, no matter, how much caution you exercise. Hence, it is important to have a robust investment process and philosophy, so that your probability of making mistakes get lowered. I have penned down my Investment philosophy here

# “Success Kya Hai? Failure Ke Baad Ka Naya Chapter” – What is success? The next chapter after Failure

Some of the greatest investors or entrepreneurs had failed miserably initially to become successful eventually. This happens all the time!! However, the key lesson here is that you need to stay and survive in the game.

Its only when Radha Kishan Damani, one of the “R”s of the bear cartel led by Manu Manek (The Black Cobra) moved out of the stock market on incurring huge losses and then concentrated building the retail behemoth, D-Mart that he created stupendous wealth for himself and his shareholders ultimately. (Avenue Supermarket, aka D-Mart’s market cap: INR 1,284 Trillion, ~USD 17.1 Billion as on October 16, 2020)

The other “R”, Rakesh Jhunjhunwala, who was also part of the bear cartel and who lost heavily during Harshad’s bull run is now considered India’s Warren Buffett and is worth upwards of ~USD 2 billion.

As Howard Marks of Oaktree Capital has very succinctly said: “It’s more important to ensure survival under negative outcomes than it is to guarantee maximum returns under favourable ones.”

# Harshad Mehta: Mein logo ke bhasore Pe Khelna Chahta Hoon! I want to play ON the trust of the people.

Bhushan Bhatt, Harshad’s right hand man: Mein bhi vah kah raha hoon – Logo ke Bhasore Se Mat Khel!! That is what I am telling! Don’t play WITH the trust of the people

Playing ON and Playing WITH the trust of the people are diametrically opposite. Many a times, bankers and advisors provide wrong investment advice based on the trust which investors place on them. This short-sighted behaviour and the lure to get bonuses and carry at the expense of gullible investors is what has resulted in many stringent rules being placed upon them. After all, trust once lost is very difficult to regain.

In my recent post of Curse of Assured Returns!! I wrote about how it’s best to separate turds from Raisins. After all, you get rewarded optimally both from an insurance and Investing standpoint only by keeping them separate!!

# Yeh Market ka Masala Chaar Chizo Se Banta Hai: Pehla Tip, Khabar, Insider Trading, Research. Usmein Thoda Risk Mila Do. Ab Risk Jitna Jyada, Market ka Masala Utna Hi Tikha. Is Milawat mein ab Thodi Bhavna Mila Do, Emotion!! Ismein Thoda Long Daal Do, Ban Gaya Market Ka Masala!! -Market’s sentiments get built around Tip, Research and Risk. Higher the risk, higher the rewards. Add some emotion to this seasoning, it becomes “market masala”

Stock price is a function of Rationality and Irrationality. Most times, wherein the price seems to be in congruence with the rational elements, i.e. fundamentals of the company. However, irrationality in terms of emotions and volatility create risk perception. At times, perceived risk perception takes over the fundamentals!!

Obviously, this comes only from the experience of investing. As Don Vito Corleone in Godfather said: “I have learnt more in the streets than in the classroom”

# Itne Chote Amount Ko (INR 500 crores), Apne Apne Dimag Mein Mount Everest Bana Ke Rakha Hua Hai!! Mere Liye Sab Amount Chota Hai!! – You have created a perception of Mount Everest with such a small amount of INR 500 crores. For me, every amount is miniscule.

Investors often tend to weigh the opinion of an authority figure more heavily, thereby leading to Authority Bias. Humans usually have deep-seated duty to authority and tend to comply when communicated by an authority figure.

In the investing world as well, the common investors usually get  influenced or mis-influenced by some of these authority figures, however, we can perhaps avoid or reduce this bias by following the famous mathematician, Jacobi’s Inversion principle – Invert, Always, always invert.

Irrespective of the amount to be invested, if children are supposed to do their home-work, aren’t we?

Disclaimer: Please note that these are my personal views. While I am NOT a registered Research Analyst as per SEBI (Research Analyst) Regulations, 2014, all investors are advised to conduct their own independent research into individual stocks or industries before making any decision. In addition, investors are advised that past stock performance is not indicative of future price action.