February 2022

the DHANDHO INVESTOR By Mohnish Pabrai

By Laxman Sonale February 19, 2022

Hello friends, in today’s article, we see the new book on value investing from the world-famous and also greater value investor of all time i.e. Mohnish Pabrai. the book’s name is the DHANDHO INVESTOR. In today’s article, we only see the first chapter, which helps you to understand the motel business, and most important Low-risk high return philosophy, in Mohnish Pabrai, words, says, ” if Head: I win, if tail; I don’t lose much”.

so let’s start this book

Chapter 1:-the Dhandho Investor

In the introduction, the author ( Mohnish Pabrai) talks about, how this book, is invented.

the author says, ” this book, the DHANDHO INVESTOR, is a synthesis of ideas lived encountered in my readings, interactions with friends, and various experiences, both visceral and direct.

I have very few original ideas, virtuality everything has been listed from somewhere. if there wasn’t a warren buffet, there wouldn’t be Pabrai funds and there certainly wouldn’t be this book.

It is hard for me to overstate the influence warren buffet and charlie Munger has had on my thinking. their perspectives have, in one way or another, shaped virtually every page. I can never repay my debt to them for selflessly sharing priceless wisdom over the decade’s thanks, warren, and charlie.”

after his grand introduction, let’s start chapter 1 of this book, Patel Motel Dhandho.

Patel Motel Dhandho:-the Dhandho Investor

in this chapter, the author gives the history of Asian Indians and also how the DHANDHO word come, and most important how Patel enters the Motel business in America. so let’s start

the author says,” Asian Indians make up about 1 percent of the population of the united states about three million people. of these, there million, a relatively small subsection is from the Indian state of Gujarat. and very few small subsections of Gujraties, the Patels, are from a tiny area in southern Gujrat.

less than one in five hundred Americans is a Patel. It is this amazing that over half of all the motels in the entire country are owned and operated by patels. what is even more stunning is that there were virtually no patels in the united states just 35 years ago. they started arriving as refugees in early 1970 without much in the way of education or capital.

their heavily accented, broken English-speaking skills didn’t improve their prospects either. from that severely handicapped beginning will all the odds stacked against them, the Patels triumphed.

Patels, as a group, today own over $40 billion in motel assets in the United States, pay over $725 million years in taxes, and employ nearly a million people.

How did this small, impoverished ethnic group come out of nowhere and end up controlling such vast resources there is a one-word explanation: DHANDHO.”

After this, the author explains the Dhandho words,

the author says, ” Dhandho (pronounced dhundoe) is a Gujarati word. Dhan comes from the Sanskrit root word Dhana meaning wealth.

Dhan-dho, literally translated, means ” Endeavors that create wealth”. the street translation of dhandho is simply “Business.” which is business if not an endeavor to create wealth.

However, if we examine the low-risk, high return approach to business taken by the patels dhandho takes on a much narrower meaning. (the Dhandho Investor by Mohnish Pabrai)

We have all been taught that earning high rates of returns requires taking a greater risk. Dhandho flips the concept around. Dhandho is all about the minimization of risk while maximizing the reward.

The stereotypical Patel naturally approaches all business endeavors with this deeply ingrained riskless dhandho framework-for him it’s like breathing.

Dhandho is thus best described as endeavors that create wealth while taking virtually no risk.

Not only should every entrepreneur seek to learn from the Patel dhandho framework, but also the primary audience for this tone-investor and allocators of capital.

Dhandho is capital allocation at its very finest. if an investor can make virtually risk-free bets with 0utsized rewards, and keep making the bets over and over, the results are stunning.

Dhandho is how the patels have exponentially compounded their net worths over the past 30-odd years.

I am getting ahead of myself. sit back, relax grab a cool one, and mellow out. you’re about to begin a remarkable journey-one that I hope is as rewarding and profitable for you as it has been for me and a generation off Patel businessman.” (the Dhandho Investor by Mohnish Pabrai)

then the author gives the history of Patels, I hope you read his history in the book, for that buy this book from the following link(image)

then author explains why Patels choose the Motel business. by taking one the Patel example,

the author says, ” that still begs the questions, why did the first wave of patels who entered the united states go into the motel business? why not delis, laundromats, or drugs stores? why motels? and why not just find a job?

part of the answer lies in another demographic shift that was underway in the early 1970s in the united states. after world war II, there was a huge buildout of suburbia and the interstate highway system.

the automobile had become a middle-class stable and American family-owned motels popped up all along the newly built interstates.

the 1973 Arab oil embargo and misguided American economic policies ( price and wage controls) led to a deep recession across the country.

Motels are heavily dependent on discretionary spending. the recession coupled with rational and sky-high gas prices led to huge drops in occupancy, many small nondescript motels were foreclosed by banks or went or sold at distressed prices. (the Dhandho Investor by Mohnish Pabrai)

at the same time, the kids of their old motel-owner families were coming off getting and saw plenty of opportunity outside of the motel business and left in droves to seek their fortune elsewhere.”

then the author gives the most exciting part of this chapter is the psychology behind buying a motel by Patel.

for that author give papa Patel examples.

Papa Patel:-

the author says, ” it is 1973, papa Patel has been kicked out of Kampala, Uganda and has landed as a refugee in anywhere town, the USA with his wife and three teenage kids.

He has had about two months to plan his exit and has converted as much of his assets as he could into gold and other currencies and has smuggled it out of the country.

It isn’t much- a few thousand dollars. with a family to feed, he is quickly trying to become oriented to his alien surroundings.

he figures out that the best he can do with his strange accent and broken-English speaking skills will be a job bagging groceries at minimum wage.

Papa Patel sees the small 20 rooms motel on ale at what appears to be a very cheap price and starts thinking. if he buys it, the motivated seller or a bank will likely finance 80 percent to 19 percent of the purchase price. His family can live there as well, and their rent will go to zero. his cash requirement to buy the place is a few thousand dollars. Between himself and his close relatives, he raises about $5,000 in cash and buys the motel.

A neighborhood bank and the seller agree to carry notes with the collateral being a lien on the motel. As one of the first patels, in the united state, Dahyabhai Patel succinctly put it, “I required only a small investment and it solved my accommodation problem because ( my family and I could live and work there”

then author explains how the Dahyabhai Patel gets the success and behind their calculated risk.

the author says, ” Papa Patel figures the family can live in a couple of rooms, so they have no rent or mortgage to pay and minimal need for a car. (the Dhandho Investor by Mohnish Pabrai)

even the smallest motel needs a 24-hour front desk and someone to clean the rooms and do the laundry- at least four people eight our each.

Papa Patel lets all the hired help go. mama and papa Patel work long hours on the various motel chores, and the kids help out during the evenings, weekends, and holidays.

Dahyabhai Patel, reflecting on the modus operandi during the early days, said, “I was my own front-desk clerk, my own carpenter, mu own plumber, maid, electrician, washerman, and whatnot.”

with no hired help and a very right rain an expense. Papa Patel motel has the lowest operating cost of any motel in the vicinity. he can offer the lowest nightly rate and still maintain the same ( 0r higher) profitability per room than his predecessor and competitors.

As a result, he has higher occupancy and is making super-normal profits. his competitors start seeing occupancy drop off and experience severe pressure on rates.

their cost structure prohibits them from matching the rates offered by the Patel motel leading to a spiraling reduction in occupancy and profits.

the stereotypical Patel is a vegetarian and leads a very simple life. most restaurants in the united state in 1970. don’t serve vegetarian meals, so eating at home is all the more attractive and much cheaper for Patel families.

they are busy with the motel day and night, so they have little expenses for this family that are abysmally low. with a single beater car, no home mortgage, rent, or utilities, and zero commutes eating out or spending on vacations or entertainment of any type, papa patels family lives quite comfortably on well under $5000 per year.”

then the author explains, what if they don’t buy the motel and do the job and their living expenses

the author says, ” prices are lower in the 1970s, the minimum wage is just $1.60. the best papa and mama Patel could hope for are total annual earnings of about $6000 per year, if they both take up jobs and work full time.

If they buy a 20-room motel, at a distressed price of $50,000 with about $5000 in cash and the rest finances, even at rates of $12 to $13 per day and 50 percent to 60 percent average occupancy, the motel will generate about $50,000 in annual revenue. (the Dhandho Investor by Mohnish Pabrai)

In the early 1970s, with treasures yielding about 5 percent, the owner or most banks will be delighted to finances the motel purchase at a 10 percent to 12 percent of $5000 and another $5000 to $10000 in out of pocket expenses for motel purchase at a 10 percent to 12 percent interest rate with a lien on the property.

Mr. Patel has annual interest expenses of about $5000, principal payments of $5000 and another $5000 to $10000 in pocket expenses are thus under $20,000

even if the family spends another $5000 year on living expenses ( a grand sum in 1970), Papa Patel nets over $15,000 a year after all taxes and all living expenses. If he had borrowed the $5000 from a fellow Patel he has it full repaid in four months. he could even elect to pay off the mortgage on the motel in just three years.

the annual return on that $5000 of invested capital is a stunning 400 percent ( $20,000 in annual returns from the investment- $15,000 in cash flow and $5000 in principal repayment)

if he borrows the $5000 from a fellow Patel, the return on invested capital is infinite zero dollars, in and $20,000 a year out. that’s all fine and dandy you might say, but what if the business does not work out? what if it fails?”

then author explains what if the motel business is failing

author says,” For this first motel purchase, papa Patel not only has to give a lien on the property but most likely also a personal guarantee to the lender as well. however, papa Patel has only $5000 ( or less) to his name, so the personal guarantee is meaningless.

if he is unable to make the payments, the bank can take over the property but he has virtually no assets outside of the motel. the bank has no interest in taking over the motel and running it. it has no such competency.

it will be very hard for the book to sell a money-losing motel and cover their note.

it is very simple:- If a Patel can not make the motel run profitability, no one can. the bank’s best option is to work with papa Patel to make the motel profitable, so the bank is likely to renegotiate terms. and try to help papa Patel get back on trade. (the Dhandho Investor by Mohnish Pabrai)

It is net, net papa Patel still runs the motel; the family still lives there, and he works as hard and as smart as he can to make it- he has no choice. it makes it work or go bust and homeless.

Remember this is an existing business with a very stable business model and a long history of cash flow and profitability.

It is not rocket science. it is a simple business where the low-cost provider has an unassailable competitive advantage, and no one can run it any cheaper than papa pate.

the motel business ebbs and flows with the economy eventually, conditions are likely to become better, the bank is made current on payment, and everyone is happy most of all papa Patel.”

then the author talks about let’s look at this investment as a bet,

the author says, ” let’s look at this investment a bet, there are three possible outcomes.

First, the $5000 investment yields an annualized rate of 400 percent. let’s assume this continues for just 10 years and the business is sold for the same price as it was bought ($50,000)

This is like a bond that pays 300 percent interest a year with a final interest payment in year 10 of 900 percent. this equates to a 21 bagger on annualized return of well over 50 percent for 10 years.

Assuming a 10 percent discount rate, the discounted cash flow stream is shown in table 1.1

Table 1.1 Discounted Cashflow Analysis of the best case for Papa Patel

Year	Free Cash Flow ( $)	Present Value ( $) of future cash flow
Excess cash		0
1	15,000	13,636
2	15,000	12,397
3	15,000	11,270
4	15,000	10,247
5	15,000	9,314
6	15,000	8,467
7	15,000	7,697
8	15,000	6,998
9	15,000	6,361
10	15,000	5,783
10	Sale price 50,000	19,277
Total		111,445

Second, the economy goes into a severe recession, and business plummets for several years. the bank works with Mr. Patel and renegotiates loan terms as described earlier.

Mr. Patel has a zero return on his investment for five years, and then starts making $10,000 a year in excess free cash flow when the economy recovers and booms (200 percent return every year after five years)

the motel is sold in year 10 for the purchase price. now we have a bond that pays zero interest for five years, then 200 percent for five years, and a final interest payment of 900 percent ( see. Table 1.2) (the Dhandho Investor by Mohnish Pabrai)

Table 1.2 Discounted Cashflow Analysis of the Below-Average case for Papa Patel

Year	Free Cash Flow ( $)	Present Value ( $) of future cash flow
Excess cash		0
1	0	0
2	0	0
3	0	0
4	0	0
5	0	0
6	10,000	5,645
7	10,000	5,131
8	10,000	4,665
9	10,000	4,240
10	10,000	3,854
10	Sale price 50,000	19,277
Total		42,812

this equates to a seven-bagger on annualized return of over 40 percent for 10 years.

third, the economy goes into a severe recession, and business plummets.

Mr. Patel can not make the payments and the bank foreclose and Mr. Patel loses his investment. the annualized return is 100 percent. these three outcomes cover virtually the entire range of possibilities.

Assume the likelihood of the first option is 80 percent, the second is 10 percent and the third is 10 percent.

These are very conservative probabilities as we are assuming a one in five, chance of the motel performing for worse than projected-even though it was bought on the cheap at a distressed sale price and run by a best-of-breed, savvy, low-cost operator.

We have unrealistically assumed there is no rise in the model’s value or in nightly rates over 10 years. even then, the probabilities-weighted annualized return is still well over 40 percent.

the expected present value of this investment is about $93,400 (0.8 * $111,445 + 0.1 * $42,812)

from papa patels perspective, there is a 10 percent chance of losing his $5000 and a 90 percent chance of ending up with over $100,000 ( with an 80 percent chance of ending up with $200,000 over 10 years.

This sounds like a brainer bet to me.”

so some numbers are coming, please read carefully to understand the wonderful logic behind the motel business.

then the author gives simple race tract examples, on his best advice,

the author says, ” If you went to a horse race track and you were offered a 90 percent chance of losing your money, would you take that bet?

heck yes, you’d take that bet all day long, and it would make sense to bet a very large, portion of your net worth with those spectacular adds. (the Dhandho Investor by Mohnish Pabrai)

This is not a risk-free bet, but it is a very, low-risk high returns bet, Heads, I win; tails, I don’t lose much!

the skeptic in you remains unconvinced that the risk here, is low. you might say that there is still the very real possibilities of going broke if you bet all you have ( like papa Patel has done)

papa Patel does bet it all on one bet, but he has an ace in the hole. If the lender forecloses and he loses the motel, he and his wife can take up jobs bagging groceries, work 60 hours a week instead of 40, and maximize their savings.

At the 1973 minimum wage of $1.60, they earn $9,600 a year. after taxes, they can easily sock away $2,000 to $4,000 year

after two years, papa Patel could step up to the plate and buy another motel and make another bet. The odds of losing this bet twice in a row are 1 in 10. and the odds that it plays off, it’s over a 20-fold return, that’s on an ultra low-risk bet with ultra-high returns one very much worth making!

Heads, I win; Tails, I don’t lose much

with such high cash flow coming in, papa Patel is soon flush with cash. he still has a very modest lifestyle. His eldest son comes of age in a few years and he hands over the motel to him.

the family buys a modest house and goes hunting for the next motel to buy. this time, they buy a larger motel with 50 rooms, the family no longer lives at a motel, but still does not do most of the work, with little in the way of hired help.

the formula is simple: Fixate on keeping, costs as low as possible, charge lower rates than all competitors, drive up the occupancy and maximize the free cash flow.

finally, keep handling over motels to up and -coming Patel relatives to run while adding more and more properties.

there is a snowball effect here and over time we end up with these amazing statistics -half of all motels in the united states are under Patel ownership.

having fully corned the motel market the patels have begun buying higher-end motels and have derived into a number of businesses where they can apply their lowest-cost operations.

Dunkin donuts franchises, convenience stores (7-eleven), and the like. some have even bronched out into developing high-end time-share condominiums.

the snowball continues to roll down this very long hill becoming bigger over time.”

So this is all about chapter 1 from the book ” The Dhandho Investor” on Patels motel Dhandho.

Financial Literacy to become rich

By Laxman Sonale February 13, 2022

Hello friends, I am Laxman Sonale, In today’s article we see the financial literacy to become rich from chapter 11:- ‘why must one invest’ from the book ” Stock To riches ” by Parag Parikh. In this chapter, you know the difference between rich people and poor and middle-class people’s income, their expenses. The most important how we become rich.

so let’s start

Previous Chapter 10

Chapter 11:- Why must one Invest:-Financial Literacy

In the starting, the author gives a quote on today’s situation.

“Modern man drives a mortgaged car over a bond financial highway on credit card gas.”

– Early Willson

In this chapter, the author talks about the basics of financial literacy. let’s see what he say

the author says, ” I would like to end the book with some thoughts on the paradigm of money and the basic of financial literacy. these concepts are very well explained in the Rich dad, poor dad series authored by Robert T. Kiyosaki with Sharon L. Lechter.

We are afraid of losing money, of not having enough to make. if you have a passion for anything you will accept by passion helps you to think positively. But when you do that you will never have enough money to fulfill your desires.

People believe that money can solve all their problems, but that idea is an illusion.

Remember when you were just out of college. you had certain desires to be fulfilled and certain bills to be paid. so you were thrilled when you got a job. (Financial Literacy)

you believed that the paycheque at the end of the month would solve all your problems when the paycheque arrived you paid the bills for your desires. you were happy about it, but this happiness was short-lived.

As soon as you fulfilled your desires, they increased and you required more money to fulfill your desires. they increased and you required more money to fulfill those new desires.

When you got a hike in your salary the pleasure was again short-lived for your desires increased in proportion to your income.

It’s a never-ending story and you are always afraid that you will never have enough. so every time you think of money fears grips you and you make decisions not with your mind but with your heart.

What you need to do is to change your paradigm. passion should drive you not to fear, think of what you can do with money and what you should do to make it.

money is an idea. you see it more clearly with your mind than your eyes. learning to play the game of money is an important step on your journey to financial freedom.”

after this explanation, then the author talks about learning the money game.

Learning the Money Game:- Financial Literacy

in this point, the author shows how money works for rich people, middle-class people, and poor people.

the author says, ‘ To be a successful investor you must know how money works, there are some elementary facts about finance that unfortunately are not taught in schools and colleges. (Financial Literacy)

so let’s begin, learning now

The question you should ask Yourself: What is an Asset?

Answer:- An asset is that which creates an income for the owner.

see the following image to understand better.

Question: What is Liability?

Answer:- A liability is that which creates an expense for the owner.

see the following image to understand better.

then the author gives the difference between asset and liability with bank examples

author says,” have you been approached by banks willing to lend you money to buy a house? Does your banker say he will help you buy an asset?

Attractive deals in the form of low-interest rates and long-term mortgage payments are offered. so you go ahead and buy your dream house thinking you are buying an asset.

By the definition of an asset, it should create an income for you. however, here it is creating on expense in the form of mortgages, taxes, interest, etc.

so common sense demands that you treat it as a liability rather than an asset.”

then, the author explains, why a banker tells you, a house is an asset.

the author says, ” Yes, the banker did tell you that you are buying an asset. what he did not tell you was that he was buying the asset for the bank and a liability for you.

There is nothing wrong in buying a house and mortgage, but understand that you are thereby creating a liability for yourself that will entail further expenses. even if you buy a house with your own money and kept it locked you should treat os as a liability as you are incurring expenses for its upkeep in the form of maintenance charges, property tax, society charges. etc. (Financial Literacy)

However, if you buy a house on mortgage and rent it, and your rental income is higher than the mortgage, then you have a positive cash flow.

House becomes an asset as it generates an income. Understanding how assets and liabilities work is basic to Financial Literacy.

Your cash flow is an indication of whether you are building assets or taking liabilities. if income is coming in your pocket, you have an asset, if income is going out of pocket, it is a liability.

Once you understand this you can work out your own financial future.”

then the author explains the Cash Flow of middle-class

Cash flow of the Middle-Class People:

In this, the author says, ” A majority of the customers of bank and consumer goods companies come from the middle-class. it is not because of their inherent purchasing power but because they happen to be attractive borrowers.

They are cautious about money yet, as they strive to improve their standard of living they get increasingly into debt. all their lives they work to pay off their mortgages, credit cards bills, car longs, etc.

they start small, like taking a loan to buy a two-wheeler, but soon their desires increase and they want to buy a car. so they go to the bank and take a car loan to fulfill their desire. with a bigger loan, the outgoings increase and they desperately look for a hike in their salary.

the hike comes and with it the desire to buy a bigger car. so the bank offers them a bigger loan. and this goes on and on. expense move and an increase in salary are soon nullified.

Only the liability increase; no-effect is a mode to increase the asset. they don’t realize that they have started working for the bank also ( by taking up liabilities.)

Now they work for two bosses. One who provides the job, and the bank to whom they give the interest, mortgage, etc?

this is the cash flow of the middle-class, which you will understand better from the following image.

As the income of the middle-class increase so does their liabilities.

they make little effects to create assets Instant gratification and financial illiteracy dominate their decision-making. they believe, they are creating assets in the form of houses, cars,s, etc. whereas they are only creating liabilities and increasing their expense. (Financial Literacy)

see the following image to understand middle-class people status quo

What differentiates the middle class from the rich is their lack of financial literacy.

it is the cash flow that makes all the difference the rich understand the power of money and they make it work for them. they always have a positive cash flow.”

then the author talks about the cash flow of the rich.

Cash flow of rich people:-

in this the author says, ” the rich create assets, the assets create income, from they create more assets. even if they buy a house on mortgage, they rent it and the rentals are higher than the mortgage and other charges they pay.

so the house is an asset for them even if they take a bank loan to acquire it. see the following image to understand better way.

the balance sheet of the rich consists of assets like stocks, bonds, real estate, etc.

their income derives mainly from dividends, interest, rental, etc. they make their money work for them and they do not create liabilities.

thus their expenses are under control. anyone can do what the rich do.

Firstly it requires discipline to stay the course and avoid instant gratification of desires.

Secondly, it requires an understanding of the basic principles of assets and liabilities. it’s easy to become financially literate if you have the patience.

some say that money begets money these people should have stayed rich, they lost only because they were not financially literate.

they did not know, how to harness the power of money. To become rich you must have a passion for money. Making money is a game and you must enjoy playing it. It is tough but worth the trouble.”

then the author gives fours ways of making money.

the author says, ” there are four ways by which people make money ad each method forms one quadrant of the income generation circle. (Financial Literacy)

different people fall into different cash quadrants depending upon the source of their cash flow.

Employee cash flow quadrant:- they work for somebody and earn a salary as employees.
Self-employed cash flow quadrant:- they are the professionals like, doctors, lawyers, architects who are self-employed.
Businessman cash flow quadrant:- they are the ones who own a business.
Investor cash flow quadrant:- they are investors whose income comes from investments.

to which quadrants do you belong.

whichever quadrant you may be, if you want to make your money work for you need to make every effort to get into the investor quadrant.

Only then will you be able to achieve financial freedom.

A lot of us would love to be in the business quadrant, but few of us are not blessed with the skills or the abilities, or the resources to run a business.

so the best alternative would be to take a share of the profits of the company by way of dividends and capital appreciation. to gain a detailed perspective on the above concepts I would strongly recommend to the read the rich had, poor dad, cash flow quadrant by Robert T. Kiyosaki with Sharon L. Lechter ( C.P.A.)”

then the author talks about the best form of investment,

for that, you can read this in the book,

buy the book from the following image link

So this is all about the chapter 11 summary of the book ” stocks to riches ” by Parag Parikh on Financial literacy.

The Stock Market Bubble formation

By Laxman Sonale February 11, 2022

Hello friends, I am Laxman Sonale, In Today’s article, we see the stock market bubble from chapter 10 of the book Stock to riches. In this chapter, the author explains the different types of thinking of participants in the markets. and how the government thinks, and how the system thinks, as well as how operator the benefits of any situation.

What are we learn from this Blog?

if you read this blog carefully then you realize how the system works, and how people play the game of the stock market bubble formation, and make the money. If you are a retail investor, then you definitely avoid this game, how to avoid detail, in this blog,

so let’s start

Previous chapter on Mutual Funds:- honest Review:–

Chapter 10:- The Stock Market Bubble formation

In this chapter, the author Parag Parikh talks about the financial bubble that happened in history. Their cause ad psychology of every participant. so let’s understand one by one the reason for their bubble formation and bubble bursts.

In starting the author says, ” The Stock Market are fascinating because they are so unpredictable furious activity is followed by long periods of lull. Many a fortune is made and lost. the Greed and Fear of participants make the stock market volatile. (The Stock Market Bubble)

The one who can understand this and in turn exploit it is easily the master. Stock markets are known for their intermittent bubble. to understand who and what causes them, we need to ascertain how the system works and what drives the participants. Systems Vagaries of the stock markets.”

then the author talks about how the system thinks about it.

System Thinking:-The Stock Market Bubble

In this, the author says, ” A system is that which maintains its existence and functions as a whole through the interaction of its various parts. The human body is a perfect example of a system. It consists of different parts and organs each acting separately yet all working together and each impacting the others.

Similarly, all around us, there are systems and systems within systems. System thinking is looking at the whole picture, the different parts, and the interconnection between the parts.

It thinking in circles, in loops rather than in straight lines. the parts of a system are all connected directly or indirectly. The action of one part affects the other and that other responds to the new influence.

The influence then comes back to the first part in modified ways, making a loop, not a straight line. This is known as the FeedBack loop.” (The Stock Market Bubble)

then the author gives the example of our hunger to understand the feedback loop

Hunger is a good example of this. When you feel hungry, you want to eat. so you eat as much as you need to satisfy your hunger. Once your hunger is satisfied you stop eating.

your hunger influenced your craving for food and in turn the amount of food. you ate influenced your hunger. it looks like one action but actually, it is a loop. it would be only one action if you knew exactly how much food to eat to feed your hunger and you ate that quantity of food.

When two parts are connected the influence can go both ways, like a telephone line; if you can dial a friend he can also dial you.

Feedback is the output of a system reentering as its input, or the return of information to influence the next step.

Feedback is fundamental to systems. there are two types of feedback loops.

Reinforcing Feedback:-

When changes in the whole system return to amplify the original change and this amplified change goes through the system producing more change in the same direction.

An example would be a snowball rolling down the hill. it collects snow as it rolls and becomes larger and larger until it eventually becomes a boulder.

Balancing FeedBack:-

When changes in the whole system return to oppose the original change and so dampen the effect. A balancing feedback loop is where the change in one of the systems results in a change in the rest of the system. that restrict, limit or oppose the initial change and keep the system stable, or else the reinforcing feedback would break the system. (The Stock Market Bubble)

Feedback is a circle. It takes time to travel round in a circle and so the effect can appear sometime after the cause. when there is a time delay between cause and effect and we assume there is no effect at all, we may be surprised when the effort suddenly happens.

What we do now will affect our lives in the future when the consequences come around again. We do not see the connection and we blame prevailing conditions but actually, the roots lie in our own past actions. We mold the future by our present actions.

Very often the most critical point of leverage in any system is the belief of the people because it is these beliefs that sustain the system.

The stock market is one such system and it is its beliefs and the behavior of its. Various participants from time to time shape their progress.”

then author explains each participants psychology, including governments, regulators, stock exchange, brokers, banks, companies

The Psychology of Stock Market Participants:-

At this point, you know each participant’s aim in the stock market, and how they think

in this author says, ” understanding the psychology of the participants is the key to knowing how they will behave when they are gripped by fear and greed. he who understands this psychology is able to manipulate the markets by using the different participants at different times.

Now let’s see what each one wants from the markets.

Governments:-

At this point when the world has become a global village and each country wants to attract foreign capital, governments need booming markets. (The Stock Market Bubble)

Stock markets are the barometer of an economy. they send positive signals to foreign investors when they are in a bull phase.

Booming stock markets create confidence and spur the governments to go ahead with their economic policies. No government likes depressed stock markets.

Regulator:-

Regulators are appointed by the government, the regulator also likes booming stock markets.

A rising market is evidence of good government it also results in additional revenue in the form of higher transaction of services charges due to the increase in turnover.

Stock Exchange:-

They facilitate stock transactions. during boom periods, incomes skyrocket, by way of transaction charges from brokers, listing fees, etc.

Brokers:-

in a bull market, the clientele increase and so do business opportunities. this results in higher incomes for the brokers.

Banks:-

Their business increases with soaring stock markets as opportunities open up in lending against stocks, margin trading, depository, and custodial business. etc.

The feel-good factor drives investors to banks for various financial services.

Companies:-

Rising markets lead to higher stock prices, the net worth of owners increases, and companies can map up more capital for expansions. Financially healthy companies are able to attract and retain good talent and keep their shareholders happy. (The Stock Market Bubble)

Mutual funds:-

Higher stock prices mean increased net asset value rising markets attract more investors which means more money under management fees. they are also able to come out with different kinds of funds to satisfy every requirement.

Media:-

The media plays a pivotal role in spreading information. an increase In investors means increased viewers/readers, which translates into increased advertisements revenue.

Investors:-

The lure of quick money draws investors into a bull market. Day traders become very active as they are rewarded with easy gains.

Operators:-

He is the smartest and shrewdest of all. he is aware that the bull run psychology creates the bull run. He knows the system, he understands the psychology of the participants and he has the ability to exploit that for his own benefit.

He is the king-maker who uses his knowledge to win over investors, brokers, and company management.

after this

the author explains how we make a bubble in the market.

Making the Bubble:-

in starting this point, the author gives the quote

: ” Whoever can supply them with illusion is easily their market.” – Guston Le Bun

so the author gives three points of making bubble.

1) Stock Price:-

At this point, the author says ” The fulcrum of the stock market is the stock price. the management of companies is the biggest beneficiary of a price increase and it is in its interest to keep stock prices high.

Anyone who promises to boost line prices easily becomes its master.

The operator understands the weakness very well, he tells the management that its company stock is undervalued and convinces it that he can take it higher. in most cases, he is a broker or an investment banker, which gives him the credibility of knowing the stock markets.” (The Stock Market Bubble)

then comes the role of the second point

2) The Deal:-

The management gives the operator some stocks at the current low price and a predetermined amount to rig the stock. the operator uses the money for his stock market operations while his profits come from a portion of the stock he is given at the beginning, which he sells when the price goes up.

A fixed amount of performance fees is also given to execute the deal. Over and above that the operator makes money by way of trading on his own account during the rigging process.

the third point is one circular trading

3) Circular trading:-

This author explains step-by-step circular trading.

Step-1:- The operator has his own band of brokers who specialize in such operations. the circular trading starts, Broker-1 sells shares to Broker-2 who in turn seel broker-3 who then sells to broker-4, and so on.

As the shares change hands the price increase. thus reported volume. when this data reaches investors they think that since the stock is moving something must be happening. (The Stock Market Bubble)

Circular trading picks up momentum and the stock price and volume increase, the referring loop is created. Even if there is pressure to sell the operator absorbs, it with the money given to him by the management.

If the conditions are bullish the operator and his band of brokers also, absorb the selling by taking their own positions.

This creates artificial scarcity and the reinforcing loop becomes stronger. see figure to understand the circular trading process.

Creating the Reinforcing Loop:-

At this stage, the manipulators can not exit. they are making the bubble, so they need to support the price, or else the reinforcing loop will break.

the Stock needs to get its momentum before it can stand on its own. So a fund manager of a mutual fund or an institutional investor is roped in to join the inner investment adds credibility to the stock.

Investors are lured by the entrance of these investors. This helps the rigging the gives credibility to the stock.

Step-2:-

Now the stock has got its feet. Regular Volume data and the rise in price attract investors. Saliency heuristic is at work. the rise in stock is seen as a positive turn in the fortunes of the company.

Slowly the stock becomes newsworthy. Stories about the company, its growth potential, restrictions, and so on appear in the stock market, journals availability heuristics at play.

All available information on the company is positive. the recall value for the stock gains prominence and more investors start buying. (The Stock Market Bubble)

The seed of Greed is sowed. With each price rise, demand for the stock increases, and other players such as retail investors join the game. fundamentals and valuations take a back seat.

The initial operator and his band of brokers at this stage do not do much except plant stories in the media, generate excitement about the stock by way of research reports, and convince another intermediate who in turn recommend the stock to their clients.

Essentially, their job is done. the stock is on autopilot. the bubble starts ballooning. at this stage, the manipulators are able to exit.

Stage-3:-

the net is spread, more stock market participants enter the fray. Banks and private financiers look for lending opportunities. the stock enters the list of stocks against which banks will give an overdraft facility.

this further enhances the credibility of the stock the stock builds huge volumes as genuine buying and selling take place.

Enter the media. Stock price movements are flashed on tv screens ad analysts recommend it at investment debates.

the stocks soar further on inflexibility as more and more investors enter the market, afraid that they will miss the bus. this herd mentality pushes the stock still further. Now with greed in the driving seat representative heuristic comes effect makes investors feel that the market is undervaluing their stock and they become more confident of their holding.

they become salesmen for the stock and recommend it to their own friends, and relatives. Each person becomes an expert in his own sphere of influence. the initial operator then exits and move to other stocks in the same industry where representative heuristic is at play. (The Stock Market Bubble)

the bubble is for real and the reinforcing loop is strong. all the participants in the market are happy, as each one is a winner. Between the cause and effect, there is an interval, the duration of which no one can predict. the balancing loop has to come up to play to correct the system is to be stable. nobody can predict when that will happen but happen it will.

The severity of the balancing loop is directly proportionate to the severity of the reinforcing loop.

then lastly the author explains how the bubble burst,

you can read this in this book, buying this book, from the following link

so this is all about the stock market bubble from book stock to riches.

Mutual Funds:- Honest Review

By Laxman Sonale February 9, 2022

Hello friend, I am Laxman Sonale, In this article, we see Mutual Funds: an idea of when time has gone from chapter 9 of the book Stock to riches. In this Parag Parikh Explain the mutual fund industry and also the fund manager problem, as well as the destroyer environments. So let’s understand the most famous industry in finance.

Previous Chapter 8

Chapter 9: Mutual Funds: an Idea where time has Gone

In this starting author explain the real meaning of Investing, If you think investing or stock market is some magical place and those take the risk on that they win and become very rich in overnight. then you can ignore this article right now.

But if you invest in mutual funds without knowing about them, and their behavior/psychology, then this article helps you most to understand this industry.

you want to learn about investing and avoid the big mistakes of financial life/in mutual funds then you must read with understanding.

so hope you get the notification. so let’s start this chapter 9

At the start, the author says, ” Investing is a game of patience, and investors get rewarded if they invest for the long term. the longer one stays invested the greater are the rewards. Buy a value, sit on it, and left time to do the rest.

In today’s changing time’s investors shun the age-old wisdom of Long term investing and chase the illusion of short-term quick profits. Keynes is often quoted – ” In the long run we are all dead” – to justify the speculative urge of Short-term quick profit.

the strategy of short-term is to time the market rather than invest in good sustainable business. sometimes you go night and make a quick buck. (Mutual Funds:- Honest Review)

But the game of Timing can be very difficult and it is hardly advisable when it concerns one’s hard-earned money. Everything changes but there are certain principles that do not change. the power of principles is that they are universal timeless truths. if we live our life based on these we can quickly adapt and apply them anywhere world, we cling to practices, structures, and systems for some sense of predictability in our lives. we forgot the principles and we are headed for trouble.

Investment management is a profession but it is being run like a business. So the rules of sound investment take a back seat and the rules of business dominate.”

then the author explains the beginning of the Mutual funds

The Beginnings of Mutual funds:-

In this point, the author explains the history of mutual funds, and how this industry is born.

the author says, ” This industry was created to channel the savings of a vast number of small investors into the capital markets. it Is a vehicle to safeguard the interests of the small investors who are assumed to be incapable of taking investment decisions on their own.

The Mutual fund industry provides the basic infrastructure for professional investors, in the form of professional fund managers investment research, business analysts, stock market analysis, and system to cater to the huge pool of investors. the aim is to fulfill the long-term investment needs of retail investors.”

the rule of the Game of mutual funds

Long term Investment Strategy
Investor friendly: Exit Within 24 hours
Professional fund managers with strong market expertise.
Backed by strong Research Analyst.

You also know about these rules, when you start investing in mutual funds, in the form of SIP. so this is the main rule, let’s see the deep game, from the fund manager side, to understand this, the author explains The Paradox concept

The Paradox:-

the author says, ” Most mutual funds talk about long-term investment strategy. however, they are open-ended and the investor can exit whenever he wants.

The paradox is that on the one hand it talks about a long-term investment philosophy but on the other, it does not encourage the investor to be a long-term player. (Mutual Funds:- Honest Review)

this is because the normal practice in the mutual fund industry is to have open-ended funds and the principle of long-term investment takes a back seat, the game is that of timing the market and looking for short-term gains.

In Fact, it would be wrong to assume that investors do not want their money looked in for long periods. If that were true then people would not invest in RBI bonds, or past savings schemes for five to seven years, or in the public provident fund, for 15 years.”

then author blames this industry, for many reasons, let’s see one by one reason

the author says, ” The industry itself needs to be blamed for nurturing and nursing the culture of open-ended schemes. As the industry grew so did the competition leading to high marketing costs.

Money comes when the markets climb as the net asset values start going up. there is a scramble to get in and fund managers are pressured to invest in a rising market at inflated asset prices.

However, pull-out(taking out money from mutual funds) forces fund managers to sell the portfolio at depressed prices to meet the redemptions.

the basic principle of buying when prices are depressed and others are selling, and selling when prices are high and others are buying is not workable. fund managers are forced to act in a way that does not conform with the basic investment principle.

fund manager’s decisions are being controlled by the environment.”

then author talk about the Fund managers Behaviour, if you invest in a mutual fund, then you should this following paragraph carefully to understand fund manager behavior

Fund Manager’s Behaviour:-

the author says, ” Because of the pressure to perform in the short run, fund managers chase each other’s net asset values rather than follow sound investment strategies.

When the information, communication, and entertainment (ICE sector) moved up in 1999, fund managers chased those stocks, and prices rose steeply. (Mutual Funds:- Honest Review)

Most of them had the same ICE stocks among their Top holdings. at the time of the rise of the public sector understanding in the oil sector, most of them had ONGC, BPCL, and HPCL as their top holdings.

then when the fed passed, they competed to sell and depressed the prices. it is obvious that the herd mentality is what drives them to make decisions.

newspaper and financial journals report quarterly performance of funds. Influenced by this news, investors enter and exit funds forcing fund managers to change strategies midway. they are thus forced to keep up with market trends and this affects their performance.

Also, the practice of offering bonuses and rewards for turning in short-term profits rather than for following a sound investment strategy forces them to adopt short-term strategies. as a result, it is the investors who lose.

For if making short-term money was so simple in the market he would not be a fund manager. he would be busy making money for himself playing the market.

This is not to say that all fund managers are mediocre. the Indian capital market does have some very good talent and we need to create the right environment for such talent to flourish and at the same time reap benefits for the mutual fund holders.”

after this, the author explains the destructive environment for mutual funds.

Destructive Environment:-

In this point, the author talks about the mutual fund environment.

the author says, ” the mutual fund manager manages the money of investors whom he has not even seen. it is the sales team and third-party distributors who bring in the investors. In a situation where fiduciary responsibility is very important, not knowing the investor whose money he is managing can call his commitment into question.

Mutual fund managers have a file of cash to be invested in the stock markets. naturally, broker company managements and other operators chase them with quick money ideas. with so much attention being showered on them,

there is a danger that they could overestimate their abilities and performance. Sometimes the rewards for performance could also make them overconfident. (Mutual Funds:- Honest Review)

It is true that we can not blame the fund manager but the point is when there are so many good professionals in the field, they should not be forced to operate in less than conducive environments.

The business of a broker depends upon the number of resources he is able to mobilize for the fund. hence brokers may try to sell a fund to investors not because it is a good investment but in order to generate business from the purchase and sale of stocks.

The fund manager and the broker please each other for their own benefit and in the process, it is the investor who suffers.

the development of the mutual fund’s concept was perfect for its time. the idea was to pool together the resources of investors and invest them in the stock markets.

Professional fund managers backed by strong research would handle the investments. thus the investor was assured of the services of professionals. but times have changed.

The level of education has improved. information flow has increased. The Internet enables the exchange of information in real-time. Online trading enables real-time execution.

Chat sites ( like our blog) help investors discuss their views and seek opinions. the power of knowledge has shifted from the hands of a few to those of the masses.

We now have a web of smart professionals with new ideas knowledge and operations as compared to a handful who are working for the mutual fund industry.

in fact, the concept of mutual funds has become outdated. mutual funds are competing with millions of traders. and with so much volatility and pressure on performance, they have also become weekly traders, if not day traders.

our belief that mutual funds are good is getting another example of a mental heuristic.”

then the author talks about mutual funds as a profession or business.

Mutual funds: A profession or A Business

in this point author puts both scenarios of the profession and the business

author says, ” Money management is a profession. the professionals who make it are validated by their performance. unfortunately, the advent of mutual funds has turned it into a business where the goal is to increase the assets under management.

today, funds compete for the size of assets, chasing a benchmark of relative returns. the aim is to beat the top-performing fund. Even a poor two percent becomes a benchmark.

On the other hand, a professional like a portfolio manager will benchmark against absolute returns because in most cases has fees are linked to his performance.”

then lastly the author gives the solution of mutual funds.

Mutual funds solution:-

in this author explain the different types of mutual funds, and which one is best, let’s see

the author says, ‘ Open-ended mutual funds are the main cause of the volatility in the markets today. I believe that close-ended mutual funds(is a type of mutual fund that issues a fixed number of shares of their own fund) are the best vehicles for a long-term investor.

it allows the fund manager to be disciples, which in turn reaps substantial rewards for investors. no doubt the choice of such funds is limited. (Mutual Funds:- Honest Review)

In this case, the price of the fund could fluctuate according to the net asset value, but when the units change hands they go from one investor to another and there is no redemption on the fund.

the fund manager, therefore, is free to make long-term decisions because the environment does not control him. for the healthy growth of the mutual fund industry, more such close-ended funds need to be floated.

however, the irony is that close-ended mutual funds quote at a premium prior to listing and at a discount to the net asset value after listing. This discount may be viewed as an expensive monument erected to the inertia and short-sightedness of the shareholders.

The price movements of close-ended funds display the fickle behavior of investors as investor sentiment varies over time.

When noise traders are optimistic, the price of the net asset value narrows. when noise traders are pessimistic, the price of close-ended funds declines, and the discount to the net asset value widens.

Investors in close-ended mutual funds are subject to two types of risk: firstly, the fundamental risk of the net asset value going down, and secondly, the noise trader risk of widening the discount due to pessimism. The opportunity arises in the second scenario.

However, the investor would need the patience to benefit from such an opportunity. But isn’t investing a game of patience after all!

then the author talks about the future of open-ended mutual funds,

you can read this in the book, by ordering on the following image link.

Mental heuristics In Stock market

By Laxman Sonale February 6, 2022

Hello friends, I am Laxman Sonale, In today’s article, we see chapter 8 from the book Stock to riches ( mental Heuristics). In this chapter the author, Parag Parikh explains how our mind is working in real life as well as in the stock market. Especially when money comes. So if you want to avoid losing money, then read this article, and understand it carefully.

let’s start

Previous Chapter 7

Mental Heuristics:-

At the start of this chapter, the author gives the two questions to test our mental heuristics, hey guys questions are so funny and logical, let’s see

Question 1:- Three birds are sitting on a tree, two decide to fly away. How many birds are there on the tree?

Question 2: Observe the following picture which line appears longer?

The bottom line appears longer but if you look at the diagram below you notice that both the lines are of the same length.

To support the above statement, the author gives the following diagram

the author gives the right answer to the first question

the author says, ” Although both the lines are the same why is It that the lower line appears longer? that’s because the brain takes a shortcut when processing information. I do not process all the information and this leads to biases. this process is known as mental heuristics.

If your answer to the first question- How many birds are there on the tree!- is one,

then you have fallen prey to mental heuristics. your brain does not the information properly. The answer should be three birds. Two had only decided to fly away.

They did not fly away had I told you that they flew away then you would be right.”

The first time I read it, I am also falling in bias

then the author gives the definite definition of mental heuristics and explains mental heuristics with examples

the author says, ” the dictionary definition of the word heuristics refers to the process by which people reach conclusions usually by trial and error.

This often leads them to develop thumb rules, But these are not always accurate. One of the greatest advances of behavioral psychology is the identification of the principle underlying these thumb rules and the errors associated with them.

in turn, these rules have themselves come to be called heuristics. In short, the following four statements define heuristics bias

People develop general principles as they find out things for themselves.
People rely on heuristics to draw inferences from available information.
people are susceptible to certain errors because the heuristics used are imperfect.
People actually commit errors in a particular situation.

Then the author gives examples of this

the author says, ” there is a newly opened megastore in the vicinity whose stock is listed on the stock market. you see a big queue outside it and you think it must be doing a roaring business.

You buy the stock hoping it will go up because the store is doing well. But there could be umpteen reasons for the queue the store definitely could be doing great business. But it is also possible that customers are queueing to return defective goods or perhaps the service is slow, or maybe all the other stores in the vicinity are closed on that day.

There are various reasons for the queue but our brain does not weigh all the probabilities and makes a decision on half-baked information.

Stock markets are interesting because Investors do this all the time.

then the author explains with reliance industries limited ( RIL) examples

the author says, ” when the company discovered a gas vein. the stock jumped as investors cashed in on this news. But let us analyze the situation without falling prey to mental heuristics.

the gas source was discovered but there were other factors to be considered the quality of the gas, the number of wells to be drilled, the time it would take, the plans to finance the project, etc.

Before the profits could be repaid yet analysts predicted the future profitability of RFL and on such hopes, investors bought the stock at rising prices.

This is how mental heuristics work when the brain does not process all the information and its implications. the tech boom was built on the same logic and we know the damage it has done.”

then author explains why we do this time by time,

the author says, ‘ Evolutionary forces shaped human cognition over centuries. that served our ancestors well, allowing for quick quality decisions.

Today, the complexities of our lives throw up multifarious data that sure minds may not assimilate very easily. The heuristics we help carry associated biases, which undermine the quality of our decisions. let’s take a look at some heuristics and their biases.”

then the author explains different heuristics

let’s see one by one

Availability heuristics:-Mental Heuristics

In this, the author says, ” One bias associated with availability is the ease of recall.

We are more likely to make judgments based on recent or easy-to-remember events rather than other similar but harder to recall instances. the flow of information around us is what happened in the India shining story of 2003-04.

All available information press, television, bureaucracy, business, and political circles, centered on the positive aspects of the Indian economy.

No negatives were permitted. shared by so much optimism the herd mentality comes into play and everyone not only believed the story, they advocated it.”

then the author explains, how these availability heuristics work in the stock market

the author says, ” this was reflected in the stock markets, the senses jumped from 2800 in April 2003 to over 6000 in April 2004. the NDA and its allies were sure they would win the electrons as the India shining story pointed a rosy picture of their governance. come May 2004 and the electron results announced that the NDA government had lost. How did this happen? the post-analysis revealed that the India shining story had been aggressively sold in the major cities; hence the exit polls in these cities placed the NDA’s chances very high. But 70 percent of the population lives in rural areas and for them, India was not shining. thus NDA was lost. (Mental Heuristics)

On may 17, 2004 the markets crashed by more than 800 points in just two days.

The reason:- All available information was negative. In bull markets, there is only positive news and in bear markets, it is only negative. that’s why markets go up or come down on reflexivity.”

then the author explains other heuristics, let’s see how they work in the stock market.

Representative Heuristics:-

In this, the author says, ‘ We assess the likelihood of an event by its similarity to other occurrences A predominant bias associated with this is an overreaction.

In the stock market, if the leaders report impressive performance, then all the stocks in that particular sector benefit.

the fortunes of the steel industry seemed to be changing and TaTa steel reported increased earnings profits. All the stocks in the sector including the junk and penny stocks attracted investors interest irrespective of whether they too would report increased earnings when the textile industry reported good profits, not only did all the stocks in that sector rise but companies in associated industries, like machinery manufacture, spinning mills, dyes, and chemicals also attracted attention. (Mental Heuristics)

Representative heuristics also affect investors’ actions. Investors try to replicate their portfolios by following the leaders. if they find that a leading find or broker or a respected personality has bought a particular stock they also buy the stock. in a way, this gives rise to the herd mentality.”

then the author explain saliency heuristic

Saliency Heuristic:-

In this, the author says, ” Individual over regret to un unusual event assuming it to be a permanent trend. Two airplanes crashed into the world trade center and the world stays flying the next day. Surely this type of incident has the next day. On the contrary, the next day was probably the safest time for flying.

In bull markets, analysts overreact to unusually good quarterly earnings assuming it would be repeated in the future and become bullish on the stock. In the bear market, they overreact to a bad quarterly estimate extrapolating it too for the future.

In 2004 second-quarter GDP growth estimates of 10 percent saw the markets going up on the assumption that the trend would continue. Actually, it needs to be sustainable to justify good times ahead, however, this is how saliency heuristic works with investors.”

then author gives overconfident examples, you can read this in the book, buy this book from the following link

then the author explain herd mentality with example in the stock market.

Herd Mentality:-Mental Heuristics

in the author says, ” Prakash bought a Maruti Western after carefully researching the decision. He was very happy with it and, enjoyed driving the car on his long haul trips to Lonavala. After a few months, a flood of strangers approached him and offered to buy the car at reduced prices.

The vehicle was in good condition and had done a few thousand miles. Worried that he had not made the right decision Prakash considered selling his Maruti at half his cost price. should he sell the car?

Before you answer, ask yourself what advice would you give him if he wanted to sell 1000 shares of Maruti, which he had bought for Rs. 400 and was now quoting at Rs. 300 due to depressed stock market conditions.

The history of the stock market shows that most investors buy stocks in companies or mutual funds for presumably sound reasons but exit their holdings the moment the market turns against them. (Mental Heuristics)

they sell when a bunch of complete strangers offers them less than what they had paid. Conversely, they will pay high prices for stocks or real estate, or paintings just because other people whom they don’t even know are willing to pay such prices. The dot-com boom was a result of such thinking.

In Stock market Parlance this is known as investing with the herd. We need to understand the manner in which the value of a stock or commodity is determined. To some extent what other people think matters a great deal.

Beauty may be in the eyes of the beholder but the value is often in the eyes of the buyer. If Prakash wanted to sell the Maruti then it was worth what the buyers would pay for it. But if he didn’t then he was the only one to decide the value of his car.”

then author explains how herd mentality work in the stock market

the author says, ” In the stock markets most often investors allow popular opinion and behavior to define value for them; sometimes for the good but often not their buying or selling decisions are made not on the basis of their own convictions, but on the value that strangers appropriate.

The Herd mentality affects business decisions to a great extent people try to replicate the leaders. In the end everyone behaves alike which leads to cutting prices for market shares. This is very common in the stock brokering business.

Technology has made it easy to install trading terminals across the country. So to survive in a competitive market, brokers have lowered their trading commissions to as little as 3 paise. the difference between one broker and another is the difference in their commissions, not in the value they offer their clients.

that how herd mentality works in business.”

after this, the author gives the size bias

Size Bias:-

In this author talk about two friends, that invest in the market with different time frame, let’s understand size bias.

Two friends, Gautam and Salman, are just out of college and have taken up jobs. from day one Gautam sets aside Rs. 300 every month, which earns him 10 percent per annum, after 10 years he stops as he has started a family.

Salman got married early and did not save anything for a long while. After 10 years, he began to set aside Rs. 300 every month earning him 10 percent per annum.

He continued doing this for the next 30 years until he retired at the age of 60. Salman’s investment was Rs. 1,08,000 while Gautam’s was only Rs. 36,000

When both retired who has more money? it would seem to be Salman as he has been saving for 30 years. in reality it was Gautam. (Mental Heuristics)

At 60, Gautam got Rs. 1,051,212 while Salman got Rs. 621,787. This is the power of compounding which investors normally forgot.

Salman could not make up for the 10 years that Gautam’s money compounded at an annual rate of 10 percent per annum.

We often tend to look at the big numbers and ignore the small ones.

In money matters, it is the small figures that make all the difference.”

After this author gives the wonderful advice to the trader, how their mind works, and how they recognize patterns.

this you can read in this book, buy the book from the following link.

So this is all about chapter 8 on mental heuristics from book stocks to riches by Parag Parikh.