Blockchain Technology Investment

Hello friends, in today’s article we see the Blockchain Technology Investment in form of Computer science and understand the basics and their goals.

We see in the previous article, that the main goal of making a bitcoin is to remove the Bank to make payments person to person. to complete this goal, one system is developed in that system blockchain used.

Read this article to understand better.

Blockchain Technology Investment

Blockchain Basics

Blockchain Technology Investment Goal:-

In this article, we see Blockchain in computer science opinion.

Software System:-

to Implement any software system, many have two ways

  1. Centralized
  2. Decentralized

In a centralized system, one single component controls the whole system.

In a decentralized system, no one control and every component are equal & corporate between them.

Every software must have Integrity, which means the system developed for that purpose work like that.

the system, keep data that are correct and complete, no other person, can’t interfere

Integrity is a very important thing for any software system. (Blockchain Technology Investment)

If the system doesn’t have integrity then, data may go, behave weirdly or any outsider can steal private data.

Up to now, we have learned, that the software system has two types

  1. Centralized
  2. Decentralized

and any software maintains integrity is very important

In a centralized system, maintaining integrity is easy. Because central components control all components.

But in a Decentralized or Peer to Peer system maintaining integrity is very difficult and there is no other center Patry.

In peer to peer system, anyone can join or leave it, so we don’t know, how much they are worthy of belief.

So to maintain peer-to-peer system integrity use Blockchain.

Blockchain is a way to do basic work.

so the question here is

Why are this peoples excited about Blockchain?

To understand, this we have to look blockchain timeline.

In Past, Firstly there is only cassettes to listen to songs, then comes the DVD/CD

But, Nowadays, all ends, now you can download music or stream online and listen to music and also you can share mp3 files with your friend this system started with the Napster Company

Napster is Peer to Peer ( P2P) music-sharing Internet Software.

So this company brings the revolution, by cutting off middlemen. Previously, music studio was mighty in the music industry.

Because, this studio, distribute all music in-country or stays, worldwide. They have their own established networks.

As an Internet company, Napster company develops software, and everyone downloading, like if I  want to download a song, then I search on software, and the software tells me which peer has that song.

So I directly download that song from that peer’s computer. same as, if someone wants my song, then they can download it from my computer. (Blockchain Technology Investment)

Napster company destroyed the big studio power, those are middlemen of singers and customers, from this story, we know that the P2P system has the power to remove Middleman to removing middlemen called disintermediation.

Most of the time middlemen take advantage of producers and customers. they take lots of money from customers and give little to the singer.

Real money, is only made by middlemen.

Any industry acts like a middleman, on those things, reaching from producer to customer, they are digital. so this industry is called as peer to peer system and have.

Capability to destroy middleman. In the financial industry, the major part is, money is transferred from supplier to consumer. Money’s digitalization and P2P system can change the whole financial industry by remaining lots of middlemen.

So these things make excitement in Blockchain technology.

Disintermediation of the financial industry excites people. P2P group has the capability to maintain disintermediation to maintain P2P system integrity, we use blockchain.

let’s understand what is blockchain?

What is Blockchain:-Blockchain Technology Investment

Blockchain is a combination of technologies such as

  • software/algorithm ( record transaction)
  • Data structure ( store data in blog form )
  • Cryptography ( use the hash function, digital signature, and provide security)

used to maintain the integrity of the P2P system.

People called Blockchain a ledger you can understand. Blockchain is a distributed P2P system of ledgers that uses.

  • Software/algorithm ( Record transaction)
  • Data structure ( store data in block form)
  • Cryptography ( use hash function, digital signature)

to maintain its integrity.

Now we understand Blockchain is a Ledger and stores transaction data or story anything, so now we can decide, who gives to

Reading and writing access

Reading Access means: that the transaction is already in a register, and who can see who gives Reading access is depend on Transparency and privacy.

If reading access all over the world means anyone can see the registered transaction, the blockchain is public.

This means we need transparency

Bitcoin and Ethereum, blockchain is public. On the other side, only a few have reading access then Blockchain is private. (Blockchain Technology Investment)

e.g. any company develops its own Blockchain and any that companies employee has reading access.

Now, let’s see writing access.

Writing access means, in the register, who can upload transactions means we can create the block.

who gives the writing access, is dependent on Security and speed

If writing access has to all users, means anyone can create the block. so that’s a blockchain called Permissionless Blockchain.

In this blockchain, security is more important because, we can’t believe in anyone, to prove work, we can secure the blockchain.

Bitcoin and Ethereum Blockchain is permissionless

On the other side, only a few people have writing access & I believe on them then that blockchain is permission blockchain.

so in this speed is more important & don’t need proof of work. Because

we have people, that we can believe, can upload transactions in the register.

Most commercial application speed and scalability are more important, so

Permissioned blockchain, most companies used. and they give writing access to a specific department.

From this four versions of blockchain occurs.

  1. Public and Permissionless Blockchain
  2. Public and Permission Blockchain
  3. Private and Permissionless Blockchain
  4. Private and Permission blockchain

1) Public and permissionless blockchain:-

This blockchain talks about disturbing the world. Examples, are Bitcoin, Ethereum

The main use is for speculation

Wrong work happens in this blockchain-like, dark net, mainly for Rob’s public

Most of the public and permissionless blockchains fail if they stay like this.

  • anyone can join, read, write, and commit
  • Hosted on public servers
  • Anonymous, highly resilient
  • Low Scalability (Blockchain Technology Investment)

2)Public and Permission Blockchain:-

  • Anyone can join and read the transaction
  • Only authorized and Known participants can write and commit
  • they have the medium Scalability

3) Private and Permissionless blockchain:-

  • Only authorized participants can join, read and write
  • Hosted on private servers
  • High Scalability

4) Private and Permission Blockchain:-

  • Only authorized participants can join and read
  • Only the network operator can write and commit
  • Very high scalability

Use in a commercial context, in that companies process, automate, and standardize on streamlining

private or permission blockchain use on a large scale, in all industry

funny things is here,  the main goal of blockchain technology is to make public and decentralized and this form they mostly failed.

but successful in private and permission blockchains.

this is efficiently handled by the big complex process and companies get here powerful. to remove this person this technology developed, and now this technology makes them powerful.

 

Finally, Blockchain Technology changes the world like the Internet, but not like that when they start with their thinking.

In 1994, Tim Berner Lee has a vision of a Blockchain,

The Internet is decentralized open, universal, and nondiscriminating, but not the internet is not like that

FACEBOOK, GOOGLE, and Amazon-like tech giants control all.

In Blockchain, sure this thing happen

Because, there is no difference, in how much your technology is superior or how much pure your vision

the difference is, can you adopt this technology, without violating any law to succeed in this work,

the required money power and resources, they have only to government or tech giants.

This is all about Blockchain technology.

Is bitcoin the future of Money?

Hello friends, in today’s article, we see whether is bitcoin the future of money? what happens in the future if cryptocurrency is ruled by the government, let’s understand all questions answered in this blog.

Previous Article on Bitcoin

Is Bitcoin the future of money:-

Is bitcoin the future of Money?

Before starting this discussion, I read a previous article on bitcoin, in which we discuss very well about currency and investment in bitcoin.

let’s see from our perspective

Our Perspective:-Is bitcoin the future of Money?

By seeing our perspective, some question arises, like

Is anyone use bitcoin for currency purposes?

the answer is No

Because, most people only use the currency for small transactions, on a daily basis.

so because of this reason, people don’t wait for 16 or say 18 hours for a small transaction to complete.

so bitcoin and Blockchain will be choked with transactions all the time.

if the common man makes a mistake while doing his transaction, then they lose money permanently, because there is no middleman to recover our payment. (Is bitcoin the future of Money?)

so Payments are irreversible if the user makes an error.

so everything goes on software, you very well know that software is not emotional.

and other things that it’s very difficult for the average person to understand and use for the common man.

and also common man is not financially literate and handling lots of private keys is difficult for them. if one of them lost the private key, so they lose the whole money, present in that amount.

Some people say Wallet handles your all private key,

so for this, I say most Wallet is hacked and a valley employee stole the private key and get all the bitcoin, that account has. and we can’t believe in their securities practices, because, this is not regulated properly.

So common man doesn’t care much about decentralization or a middleman-free system.

they only care about, whether my transition is complete or not

so the common man needs this type of system that is easy to use, and if makes any mistake gives forgiveness and does fast payment.

this is from the common man’s perspective, now let’s see the Governments perspective

Government Perspective:-

before, that question arises, like whether is government adopts bitcoin-type crypto as a currency and runs properly.

so the government does not accept or run this type of currency, Because,

to regulate the economy, the government should have control over the money supply, and its importance.

if the government runs the bitcoin as a currency, then as we discussed previous article, ( above link) the deflation starts, and the great depression comes again, so we go 1000 years bank, in that time central bank does not exist, or if exist they don’t control the money supply. (Is bitcoin the future of Money?)

and it’s too difficult to manage the money supply and it’s very difficult to run the economic cycle properly.

In the economy, have the more transaction so

Bitcoin, can’t handle that many transactions in small time, because of its scalability problem and the delay in executing transactions.

So normal times, not the common man or government, doesn’t leave their own currency and does not adopt the bitcoin currency.

but those countries can adopt bitcoin as currency because their currency has a bad time.

just like in 2008 in Zimbabwe countries, and in  2019 in Vanizola, got Hyperinflation

In Hyperinflation, inflation can goest up to 10,000,000% in a year.

so bitcoin is not that much Volatile, so these countries use Bitcoin as a currency.

so when bitcoin was created, they got an argument or say rules, for bitcoin or purpose.

government or central bank can not increase their money supply and decrease the money value. (Is bitcoin the future of Money?)

This means those people make money very hard, and some money in the bank, their money value decreases

so some people develop such a currency ( bitcoin0 in that way so government or central bank can’t devalue it.

so funny thing is that now a day

Those currencies use to cut down the bank and government money system. so that currency technology, use to run the banking process smoothly and make it more powerful and that currency is regulated by Government.

so the final conclusion is that bitcoin is not a future of money.

but may happen, this, people want crypto-type currency then, they can develop their own virtual currency like rupee coin, etc.

so this is all about the is bitcoin the future of money.

Is Bitcoin a Currency or an Investment?

Hello friend, in today’s article, we see is bitcoin a currency or an investment? and what is the effect on our economy and how we can use it for our best use? so let’s see each and every factor.

Previous Bitcoin Article

is Bitcoin a Currency or an Investment?:-

Is Bitcoin a Currency or an Investment?

before the start, let’s understand these terms

Currency means, a medium of exchange,

Investment means, allocating resources for profit.

before considering bitcoin as a currency, understand what is the factor that leads to currency.

A most important requirement of a currency:

Stability:-

Stability is the most important requirement of a currency, so let’s understand, bitcoin is stable or not.

if the currency is not stable, then it’s difficult to exchange.

let’s understand with an example

Suppose you want to take 100 rupees in payment from someone, and you get at the morning. and evening currency prices go down up to 90 rupees, then this type of volatility you don’t like it and this type of currency no one use it.

Is Bitcoin Stable:-

So the answer is, No

Bitcoin is extremely volatile because bitcoin is not a good currency.

Let’s suppose for a minute

is bitcoin a good currency if it becomes stable?

Now, we can use as currency for this question answer is No,

Because of the problem of scalability.

In bitcoin, by increasing trading volume it takes 16 hours to execute the transaction and increases the transaction fee.

If our world’s transaction is on bitcoin, then their trading transaction execution period takes a week to complete and the fee goes to maybe $100.

So no one waited for this time period and no one want to pay that high fee.

Let’s suppose for a minute, the Problem of scalability is solved

is bitcoin a good currency if it becomes scalable?

The answer is, No

Because bitcoin supply is not controlled by central banks or the government ( reserve bank) to run the economic cycle very well.

Money supply may increase or decrease by the reserve bank ( central bank). so bitcoin is not controlled that’s why the answer is no.

If the government increases the money supply more than GDP growth, then inflation increases.

Inflation is good, that’s why the economic engine (cycle) works well.

inflation means your money value decreases in the next year.

Because of inflation, this thing people get helped or motivated to invest their money and spend wisely.

so in bitcoin, the money supply is fixed, so inflation is impossible, but deflation may happen.

Deflation means, your money value increase in the next year, so because of this people don’t spend money or do not invest money in this activity, economic engine stop.

and like in 1929, the Market crash, after this crash, the great depression comes, that type of thing happens if deflation of money increases so recovery takes almost 10 to 20 years in future.

In summary says, If all problems solve with bitcoin without the permission of center and government this bitcoin can’t use as a currency or not work as a currency.

if government interference is required to use bitcoin as a currency, then why government uses bitcoin as a currency, then they can use their own digital cryptocurrency like rupee coin, etc.

so above discussion, we conclude that bitcoin is not a good currency.

 

so now let’s see whether bitcoin is an investment or not

 

A most important requirement of an investment?

Growth:-

Is important to become an investment.

has bitcoin shown any growth? the answer is

yes, bitcoin gives, a 1,000,000X return ( you can read the previous article) in 10 years

so this type of growth, not even the stock market gives.

Bitcoin is a very high-risk, very high return investment option.

so this investment is not like Benjamin Graham, Warren Buffett, and Charlie Munger’s definition of investment.

for this speculation option to be precise.

Bitcoin is just like, bonds and stocks, but the only difference is bitcoin’s value comes from intersubject reality

means, people things, ow bitcoin has value is $150,000. so big value becomes that if everyone thinks the value is zero, then their value becomes zero.

anything, cannot be currency and investment both at some time.

Because stability and growth can not exist at the same time.

If stability has then growth can not exist at the same time.

if growth has then stability can not exist at the same time.

so people whatever say, like, bitcoin is currency, they can replace bank, but actually everyone thinks Bitcoin is an investment.

to prove this point,

when the bitcoin price goes stable, by seeing the price of bitcoin, people don’t get happy, they get worried about why people’s bitcoin goes high, and say bitcoin stop going higher.

Because people stop accepting bitcoin so above thought needs profit, not a currency lover.

so the last conclusion is that Bitcoin doesn’t have a currency future but bitcoin can become part of investments like bonds, stock, and cryptocurrencies.

How Bitcoin’s Prices Increases in Past?

Hello friends, In today’s article, we see how Bitcoin’s prices increase in the past, what are the reasons behind that, and most important question, if Is there any chance bitcoin prices goes up in the future. so let’s see them one by one.

Previous Bitcoin Article

How bitcoin’s prices increase:-

How Bitcoin's Prices Increases in Past?

 

so, friends, anything product price depends on the supply and demand of that product.

Let’s talk about the supply of Bitcoin

We all know that only 21 million bitcoin, can be created up to 2140.

Supply-side of Bitcoin:-How Bitcoin’s Prices Increases in the Past?

By the time bitcoins supply speed also going down. In the previous 12 years back, every 10 minutes, new 10 bitcoins is created so nowadays, 6.25 bitcoins are created in 10 minutes,

so Slowying block rewards every 4 years is like

  • 50 BTC in 2009
  • 25 BTC in 2013
  • 12.5 BTC in 2017
  • 6.25 BTC in 2021

After the 21st century, the supply chain of bitcoin must slow down, so next 4o years only 1 bitcoin is created.

So on we understand that the supply side is limited,

and It was predecided when bitcoin was created, and everything works on a rule.

means, Price increases just because Demand is high.

so now let’s see the demand side

Demand Side of  Bitcoin:-

From 2010-to 2014 the demand increased due to publicity ( negative publicity)

Criminals use bitcoin to buy and sell drugs, give murder rewards, and do many other illegal things.

With news, Bitcoin gets publicity. Whatever it is negative?

But people know about this and the bitcoin price is increased.

but from 2010 to 2014, buying bitcoin is difficult for the common man, because, at this time, only know how to buy bitcoin, those people know how to save tax, etc. people only bought the bitcoin, between this period.

post-2014, People getting easier to invest in bitcoin. (How have Bitcoin’s Prices Increases in the Past?)

Because so many application comes and common people easily buy bitcoin.

so bitcoin demand increases, so the price also increases.

so increasing the price of bitcoin, peoples say, Bitcoin is far better than the stocks, and bitcoin give 5 to 10 X return.

People are doing speculation on a bitcoin and demand increases for Bitcoin.

In this process one problem was found, when demand increases at such a speed, the supply is limited. or not increases that speedily.

up to now, that’s much bitcoin is created between 30% of bitcoin is lost. This means people who own bitcoin forgot their private key ( those people don’t know about private keys, read this article about bitcoin story).

Another thing is, that those people have the Bitcoin they don’t want to sell, and they say I am holding it.

Bitcoin is very slowly created.

so in short say, 30% of bitcoin is lost, other people keep holding and slowly bitcoin is created, and people need bitcoin to buy for speculation for that things. (How Bitcoin’s Prices Increases in the Past?)

Bitcoin prices go higher.

for this purpose, the bitcoin price may go to $100,000 or $1,000,000. or maybe the bitcoin price goes zero if the bitcoin price is going down. this depends on the people’s thinking.

 

so the conclusion of the article is Bitcoin’s price is going up just because of demand.

in the next article, we see whether Is bitcoin a currency or An Investment.

so this is all about how bitcoin prices go up.

What gives Bitcoin Value?

Hello friends, in today’s article, we see what gives bitcoin any value. If bitcoin has any value, so then what things, give the value? so let’s understand step by step.

Previous Bitcoin Article

Fiat currency and What gives Bitcoin Value?:-

What gives Bitcoin Value

In history, Food, animal, gold, and silver coins were used as currency.

Because Food is valuable, we can use it for eating purposes. animal-like cow, goat gives the milk for drinking.

and gold and silver are valuable because they increase the beauty of a person that wearing. not just because they are limited sources.

So nowadays, we use the currency called Fiat Currency as money

Fiat money means, someone, who has the power, to take a paper and write down 100, then that paper increases a value equal to a hundred. (What gives Bitcoin Value)

by taking other colored paper, and writing on that 2000, then that paper value is about 2000.

Fiat money doesn’t have, its own value like food (used for eating), Animals (which gives milk), and not like gold and silver to increase beauty.

Fiat money has value because the government tells us. and they only have two uses

  1. Legal Tender:- That means, in India, everyone accepts the money, and no one rejects it. If they do, they go to prison.
  2. Tax Payment:- so staying in India, everyone has to pay taxes to the government to run the country. and they accept tax in Fiat money.

fiat money backed by trust in the government, means you believe that with much fiat money you have,

you can buy things, so no one rejects that money in your transaction. and you have a big belief in this. (What gives Bitcoin Value)

On the other side says, ” Fiat money is backed by Fear of government.

if you do not accept this fiat currency, then you go to prison.

The above discussion is about fiat currency, let’s come to the main points of what makes bitcoin valuable.

to understand better Money system, I highly recommend reading Robert Kiyosaki’s book,

What makes Bitcoin Valuable:-

  1. Is Bitcoin valuable, because, its supply is limited, As we know only 21 million bitcoin is the only exit on the planet.

Only giving a limited supply, does not mean they have value.

suppose, for me, that things don’t have any value, so for me they are worthless, whatever, their number is

2. Is Bitcoin Valuable because creating them is costly? ( high cost of creating bitcoin)

Bitcoin costs, like one-year electricity of two countries like Singapore and Switzerland, required electricity for one year, more electricity is required to create a bitcoin, than this country’s electricity. (What gives Bitcoin Value)

So bitcoin, the value must be that much, that much cost require to create them.

Suppose, creating any product, we required 1 lakh rupees, but people don’t require that product, which means that product value is zero.

So any product or things don’t have value because they have limited supply or require more money to create.

Because they have value, it means that the product is desirable and people want those things.

What makes Bitcoin Desirable:-

Because of bitcoin, you can pay direct online payments from one person to another without any intermediary/ censorship.

Payment happens in a cash by seating in the home. Are things possible because of math (cryptography) and technology

Are things possible because of math ( cryptography)

fiat money is backed by the government, just like Bitcoin is backed by math ( cryptography)

which transaction is valid, how much Bitcoin is created, how speedily it is created, all things happen by using math( cryptography)

Because, Bitcoin payments happen, without the interaction of the Government and banks. (What gives Bitcoin Value)

so for criminals, Bitcoin is a valuable and useful currency. e.g. Buying drugs, selling drugs, murdering someone, and giving rewards in bitcoin.

so like this, works Bitcoin, in the initial time, and have the most useful value for criminal.

But nowadays, the common man needs Bitcoin and bitcoin has value for common people also.

let’s why this,

Any paper is valuable because everyone thinks it is valuable this is called Intersubjective reality.

means, that if everyone accepts things, and has value, then they become valuable.

Suppose, someone, writes on paper, and 10,20,50,200,500,2000, and everyone accepts that this paper has value, whatever the number is written on it. and everyone accepts and they decide to exchange this paper, in our society, we accept this paper in our transactions and use it as money.

If our acceptance is self-sufficient then everyone uses this paper as currency. and everyone pays their bills, tax, and other traction in these papers.

when people make noise on bitcoin and say, Bitcoin is valuable, then it gets valuable.

When in the initial time, Bitcoin is not famous, in that time everyone thinks bitcoin mining is a game and bitcoin is a toy. (What gives Bitcoin Value)

When one person orders two pizzas with 10,000 bitcoin. then this positive feedback started and first-time people think bitcoin is valuable and people buy pizza.

If someone accepts bitcoin on selling pizza, that direct means, that person thinks bitcoin is valuable. and another person also takes bitcoins from that pizza owner means other things can buy with bitcoin.

With intersubjective reality, bitcoin is valuable. because, for a common person, this technology is useful, nowadays.

but there is one problem with Intersubjective reality. when this currency comes to end, they are destroyed in a few minutes.

or says they end very easily.

Let’s understand Intersubjective reality as one problem with the story.

In America. Those people living from start in America, those people called Native Americans.

and they have different, different tribes, and in that time

Wampum was used as a currency to exchange things.

Wampum is like the type of necklace,

Wampum they use because one tribe knows, that other tribes also take this for the transaction., and the second tribe knows the third one also takes this. so this thinking goes on and on

when Europian comes in 1700 in America, they bring their own europian currency, with them.

so they exchange their currency with big tribes and do transactions only in European currency.

so big tribes, stop accepting the Wampum currency, and that an effect, spread whole over America, and tribes stop accepting WAmpum as the currency of exchange. (What gives Bitcoin Value)

and they only use European currency so with small change, the whole Wampum currency is destroyed, this problem has in the intersubjective reality.

so this is all about bitcoin value.

FIRE Movements in Life

Hello friends in today’s article, we talk about the FIRE Movements. FIRE means Financial Independent and Retire Early). Everyone wants to retire early, so for that, we writing this blog. so let’s understand how to get retire early.

so let’s start

Financial Freedom

Fire movements:- Financially Independent, Retire Early)

The FIRE movement, the concept was given in the book, Your money or your life by Vicki Robin. so let’s understand how we can use this concept to get financially independent and retire early in life. before starting you have to make the financial Target that defines your financial independence.

FIRE Movements in Life

So let’s start with our income source

Income Source:-

so if you want to be financially independent, you have to first step is income source. In Financial Freedom, you have saved money, and multiply your saving by investing this money.

Money people think, how much I can save, in this you can save up to 70% of your income. but, most people can’t save that much, so you can save, how much you can save, that’ may be more than 10% of your income.

when start saving first from your income and then you have to manage your spending within your remaining income.

In this, you have to be very frugal living, cut out the big expenses, and save money.

then you have to multiply your savings money.

Multiply Your Saving:-

Just saving money, is not enough, if you only save money, and put it in the Bank, then inflation eats your all money, and the negative compounding effect works against you.

so for that, you can invest this money in the stock market, because, the stock market gives more return than, any financial instrument.

when you invest in Stocks, its means, you are buying the pieces of the company’s business.

So when you invest in a wonderful business, that means, your saving money multiply not only 10, or 100 times, they can be multiplied by 1000 times, after two decades. (FIRE Movements in Life)

Before investing, you have to confirm, that, you have 3 years of money, to maintain your lifestyle and family expenses, can handle for three years, and only remaining surplus money you can invest.

Because the stock market is very volatile, when you need money in the next year, then you get some losses, so be confirmed, you have an emergency fund, and 3 years of lifestyle maintaining money.

You can learn, about money from books, some of the books as the intelligent Investor, One Up On Wall Street, Common Stocks, and Uncommon Profits, Stocks to riches, etc.

Example to Achieve FIRE Movements:-

let’s take, a normal example of a Teacher ( Ramesh), that has only Rs. 30,000 per month income,

so according to the FIRE Movements, you should invest 50 % ( more than 10 % of income)

Rs. 15,000 per month you can invest in the stock market or you can do the SIP.

so Ramesh has decided that 1 crore rupees are their retirement amount.

so Ramesh is 40 years old.

let’s do a calculation of how much time to make 1 crore rupees by just saving money

Rs. 15000 ( saved money/per month) * months ( 10,000) 833 years = Rs. 1,50,000,00

so it’s impossible for the teacher ( Ramesh ) to get their FIRE Movement in a single life, so for this, you have to get the help of the Stock Market.

so let’s understand, if they invest, how much they get after 2 decad

see the following screenshot, you may surprise.

 

 

if you invest like this, only 20% of return for 20 years, can bring the 3 crore rupees for your retirement.

The Dhandho Investor:- Chapter 12

Hello friends, in today’s article, we see The Dhandho Investor:- Chapter 12, this chapter is all about the margin of safety while you invest in the stock market. so let’s understand this concept in the author’s words.

Previous Chapter 11

Dhandho 401: Margin of Safety – Always

The Dhandho Investor:- Chapter 12

In this chapter, the author refers the Benjamin graham’s book, the intelligent investor, the key idea of investing, and also the importance of the Margin of Safety. the author also gives examples of Warren Buffett’s investments.

so let’s understand it

the author says, ” Mr. Buffett hosts business school students from over 30 universities every year. The schools represent a wide range from Harvard and Yale to the University of Tennessee and Texas A&M.

the students get to ask him questions on almost any subject for over an hour before heading out to have lunch with Mr. Buffett at his favorite Steakhouse.

virtually every group asks Mr. Buffett for Book Recommendations. Mr. Buffett’s Consistent Best Book recommendation for several decades has been Benjamin Graham the “Intelligent Investor”

As he stated to students from Columbia Business in Omaha, Nebraska On March 24, 2006

The Intelligent Investor is still the best book on Investing, it has only three ideas you read need

  • Chapter 8 – the Mr. Market analogy. Make the Stock Market Serve you. the C section of the Wall Street Journal is my business broker it quotes me prices every day that I can take or leave and there are no called strikes.
  • A stock is a piece of a business. Never forget that you are buying a business that has an underlying value based on how much cash goes in and out.
  • Chapter 20 – Margin of Safety, Make sure that you are buying a business for way less than you think it is conservatively worth.

— Warren Buffett

Graham’s perspective on the importance of the margin of safety seems pretty straightforward and simple. recall that Einstein’s five ascending levels of intellect were ” Smart, Intelligent, Brilliant, Generous, simple.”

When we buy an asset for substantially less than what it’s with, we reduce downside, risk, Graham’s Genious Was that he fixated on these two joint Realities.

  1. The bigger the discount to intrinsic value the lower the risk.
  2. the bigger the discount to intrinsic value, the higher the return.

Then the author talks about, papa Patel and Manilal and Branson’s Dhandho with Margin of safety

the author says, ” Papa Patel, & Manilal have likely never heard of Benjamin-Graham. Branson too has likely never read any of Graham’s books.

Their Dhandho journeys have always been all about the Minimization of risk. They’ve always fixated on the seemingly bizarre notion of ” the lower the risk, the higher the rewards.” (The Dhandho Investor:- Chapter 12)

Most of the top-ranked business schools around the world do not understand the fundamentals of margin of safety or Dhandho. for them, low risk and low returns go together as do high risk and high returns.

Over a lifetime, we all encounter scores, of low-risk, high-return bets. they exist in all facets of life. Business schools should be educating their students on how to seek out and exploit these opportunities.”

then the author gives, the example of Margin of Safety

the author says, ” One of the most vivid examples of margin of safety at work in the equity markets is Warren Buffett.

Observations about his purchase of the Washington Post in 1973.

We bought all of our { Washington Post ( WPC)} holding in Mid-1973 at a price of not more than one-fourth of the then per-share business value of the enterprise.

Calculating the price/value ratio required no unusual insights, most security analysts media, brokers, and media executives would have estimated WPC’s intrinsic business value at $400 to $500 million just as we did, and if $100 million stock market valuation was published daily for all to see.

Our Advantage, rather, was attitude; we had learned from Ben Graham that the key to successful investing was the purchase of shares in good businesses when market prices were at a large discount from underlying business values.

— Through 1973, and 1974, WPC continued to do fine as a business, and its intrinsic value grew. Nevertheless, by year-end 1974 our WPC holding showed a loss of about 25% with a market value of $8 million against our cost of $106 million. (The Dhandho Investor:- Chapter 12)

What we had bought ridiculously cheap a year earlier had become a good bit cheaper as the market, in its infinite wisdom, marked WPC stock down to well below 20 cents in the dollar of intrinsic value.

….. Warren Buffett

then author explains, how warren Buffett, gets this company at discounted prices

the author says, ” As inside, Mr. Buffett hasn’t sold a single share a Washington Post over the past 30 years of holding the stock.

that’s original $10.6 million dollar investment is now worth over $1.3 billion over 124 times the original investment. the Washinton post pays a modest dividend, now paid by the past to Berkshire Every year, exceeding the Amount Mr. Buffett paid for the stock in the first place.

Why was the Washinton Post Trading at such a large discount to intrinsic value in 1973/1974?

Mr. Buffett goes on to offer an explanation. Most institutional investors in early 1970, on the other hand, regarded business value as only mirror relevance when they were deciding the prices at which they would buy or sell.

this now seems hard to believe however these institutions were then under the spell of academics at prestigious business schools who were preaching a newly fashioned theory;

the stock market was totally efficient and therefore calculations of business value and even thought, itself, were of no importance in investment activities.

Warren Buffett says, ” We are enormously indebted to those academics what could be more advantageous in an intellectual contest – whether it be a bridge, chess, or stock selection than have opponents who have been taught that thinking is a waste of energy?”

Over the past 20 years, there hasn’t been much change in the thinking of institutional investors with regard to market efficiency as stated by charlie Munger when speaking at the 2004 Wesco annual meeting.

Charlie Munger:- Very few people have adopted our approach… maybe two percent of people will come into our corner of the tent, and the rest of the ninety-eight percent will believe what they’re been told ( p.g. that markets are totally efficient.)

It is instructive to note that Mr. Buffett bought his Washinton post stake at a 75% discount to intrinsic value.

As Benjamin Graham told Senator Fulbright, all discounts, to intrinsic value eventually lose.

Mr. Buffett knew that this gap was likely to close in a few years, whenever I make investments, I assume that the Gap is highly likely to close in three years or less. (The Dhandho Investor:- Chapter 12)

My own experience as a professional investor over the past seven years has been that the vast majority of gaps close in under 18 months.

Mr. Buffett has his Washinton Post stake for about $6.15 per share in $25 per share. let’s assume that the Washington Post got to at least 90% of its intrinsic value increased by a modest 10% a year.

So, in 1976, the business would be worth over $33.28 per share ( $25 * 1.1 * 1.1* 1.1), and 90% of that is about $30. If a person bought the Stock in 1973 and sold it in 1976, the annualized return would be about 70% a year. Let’s the kelly Formula and this one, let’s assume the following conservative odds.

Odds of making 4 times or better return in three years – 80%

Odds of making 2 times to 4 times or better return in three years  – 15%

Odds of Breakeven to 2 times – 4%

Odds of a Total loss  – 1%

In this case, the Kelly formula suggests that an investor bet 98.7% of the available bankroll on this mouthwatering opportunity.

At the time, Berkshire Hathaway had a total market capitalization of about $60 million.

Available cash was likely a small fraction of this member. I’d estimate that Mr. Buffett likely used well over 25% of hrs available bankroll on this bet.”

then author explains, Graham’s Fixation on the Margin of Safety

author says, ” Graham’s fixation on the Margin of Safety is understandable. Minimizing downside risk while maximizing the upside is a powerful concept. It is the reason Mr. Buffett has a net worth of over $40 Billion. he got there by taking minimal risk while always maximizing returns.

Most of the time, assets trade hands at or above their intrinsic value. the key, however, is to wait patiently for that super-fast pitch down the center. (The Dhandho Investor:- Chapter 12)

it is during times of extreme distress and pessimism that rationality goes out the window and prices of certain assets go well below their underlying intrinsic value.

Extreme Distress can be caused by macro-events like 9/11 or the Cuban Missile Crisis. or they can be company-specific- for example, Tyco’s Stock Price collapse during the Dennis Kozlowski Corruption Scandal. We can not predict which asset classes are likely to get distressed next. however, if we only focus on a single asset class of Stocks, that encompasses thousands of businesses.

Virtually every week, specific businesses that trade on public markets see their prices collapse. At other times it might be an entire sector that gets written off. More rarely it might be an entire market sells off due to a macro-shock like 9/11

Papa Patel, Manilal, Branson, Graham, Munger, and Buffett have always fixated on a large Margin of Safety and gone to great lengths to seek out low-risk, high-return bets.

it is truly a fortunes’ Formula.”

So this is all about the Dhandho Investor Chapter 12.

The Dhandho Investor Chapter 11

Hello friends, in today’s article, we see The Dhandho Investor Chapter 11 Summary. this chapter is all about fixating on Arbitrage. so let’s understand, how value investors can take benefit from this arbitrage.

Previous Chapter 10

Dhandho 302:- Fixate On arbitrage (Chapter 11)

The Dhandho Investor Chapter 11

In starting the author explain, what is the arbitrage, and how value investor take benefit from that

the author says, ” Arbitrage is a powerful construct and a fundamental tool in the arsenal of any value investor. with arbitrage, we get decent returns with virtually no risk.

The elimination of downside risk, even if the upside is limited, is awesome -& that is exactly what arbitrage gives us. With arbitrage, the appeal is ” Head, I win: Tails, I breakeven or win!”

Although many different forms of Arbitrage exist, compare these four:

1) Traditional Commodity Arbitrage:-The Dhandho Investor Chapter 11

in this, the author explains, Commodity Arbitrage

the author says, ” If gold is trading in London at $600 per ounce and is changing hands at $610 per ounce in new york city, an arbitrageur can buy in London and immediately sell in new york capturing the spread.

Over time, these trades will lead to the special being dramatically narrowed or eliminated.

2) Correlated Stock Arbitrage:-

In this arbitrage, the author gives the example of Berkshire Hathway

the author says, ” Berkshire Hathaway has two Classes of -BRK-A and BRK-B – which trade on the New York stock exchange ( NYSE). BRK-B is economically worth 1/30 of BRK of BRK-A.

One BRK-B share has 1/200 the voting rights of a BRK-A share. so it is slightly inferior as it has less than one-sixth of the voting power for the same dollar and invested, other than that, these two stocks are virtually identical. also, since Mr. Buffett, these close friends have large enough BRK-A Holdings. (The Dhandho Investor Chapter 11)

To control the company, these voting rights differences are mostly irrelevant. BRK-A shares can be converted into BRK-B shares at the discretion of the holder at any time however, the holder can not do the reverse.

Based on these facts, these two stocks should trade in lockstep with each other- or perhaps BRK-B ought to trade at a very slight discount due to its inferior voting rights and one-way conversion features.

However, the reality is different. As figure 11.1 shows, during a recent 3 month period. BRK-B traded mostly at a discount to BRK-A for a few weeks and then traded at a premium for a few weeks.

On some days, the two stocks, differed by up to 1 percent. Assuming minimal frictional costs an arbitrageur could endeavor to capture that spread.

This type of arbitrage exists in a variety of stocks, sometimes holding company stocks, trade at a discount to a sum of the parts even if the parts are individually publically traded.

sometimes the same stocks on different exchanges can have price differences. Closed-end-funds from time to time trade at significant discounts to their underlying assets, all are candidates for arbitrage plays.”

then author explains the merger arbitrage, between two companies

3) Merger Arbitrage:-

the author says ” Public company A announces it is to buy public company B for #15 a share, prior to the announcement B was trading at $10 a share; immediately after the announcement B goes to $14 a share.

if an investor buys B at $14 and holds the Stock until the deal closes; then the $1 spread can be captured for a tidy profit in a few months. (The Dhandho Investor Chapter 11)

However, there is always some risk that the deal does not close. In that case, Company B’s Stock price might head back down to $10 ( or lower). Unlike other forms of arbitrage discussed earlier, this is not risk-free. this is sometimes called risk arbitrage.

There are well-downside statistics on the percentage of announced mergers that never close. don’t get government approval, don’t get shareholder approval, or the like. if you understand the business and these dynamics, you can handicap the odds of the deal closing and decide to place a bet ( or not ) accordingly.”

then author explains, his famous Dhandho arbitrage

4) Dhandho Arbitrage:-

the author says, ” Virtually all startups engage in Dhandho arbitrage. An example of this is presented in chapter 5.

Our barber set up shop in town C and had a 17-mile arbitrage likely was reduced to a few blocks and the arbitrage mostly disappeared. However, while it lasted, he had Super-normal profits.

He got these profits by taking very little risk. It was low risk and high uncertainty that got him his bounty. the barber is a classic Dhandho arbitrageur.

Head, He wins, Tails, he doesn’t lose much!

the overwhelming majority of entrepreneurs are not risk-takers. they are Dhandho arbitrage players. one of the most vivid examples of this dhandho arbitrage. entrepreneurial journeys is the story of computing, documented by Amar Bhide in his wonderful book ” the origin and evolution of new businesses.”

then the author gives a detailed story,

the author says, ” In 1994, computing, was founded by two 20-year-olds- steve Shevlin and Robert Wilkin.

Shevlin was the main driver of the business. A college dropout, Shevlin, entered the army where he trained and worked as an electronic technician. (The Dhandho Investor Chapter 11)

he didn’t care too much for the military’s uptight attitude. After a brief stint, he left the army. Shevlin was unemployed and without much money. He lived in a tiny studio apartment in Florida.

it was the very early days of the personal computer business, and Shevlin being a hacker type, had a computer and a printer in his studio.

The Ideal setup required the printer to be placed away from the PC and he needed a 20-foot cable to connect them. he went to a shop that sold printer cables and computer accessories and asked if they had the long cable he needed.

at that time, when PCs were very few the interfaces for all these cables were not Universal or standard as they are today. there was a hodgepodge of different cabling and socket standards.

The retailer said he had the cable but it was only seven feet long. he suggested daisy-chaining three cables and adding some special connectors to make it all work.

Shevlin was not happy with the total price or nature of the proposed solution. He went back to his studio and thought about the situation. he come back to the retailer and said that he adds been a tech in the army and knew how to make PC cables.

he offered to make and sell cables in a variety of lengths to the retailer. the retailer said that he was used to getting all sorts of requests for cables of different lengths that he did not have the ability to procure or provide. Nonetheless, the retailer was hesitant about taking inventory risk on unbranded cables as some of the different lengths that he did not have the ability to produce or provide.

Nonetheless, the retailer was hesitant about taking inventory risks and unbranded cables as some of the inventory might become obsolete quickly.

Shevlin offered to give it to him on consignment the retailer said that on a consignment basis, he’d stock anything.

so Shevlin was in business with the first customer lined up. Shevlin and Wilkin carefully noted all the missing cable lengths and connections that people might want. (The Dhandho Investor Chapter 11)

They bought 300 free cables and all the hardware to make the various connectors and want to work.

they made various odd-length cables and delivered them to the retailer who was elated. these cables cost about two to three dollars apiece which was very competitive with the other shorter lengths.

the retailer put them for sale at over $30. everyone was happy with the healthy margins.

They started to get more retailers to carry their cables and sales grew significantly over the next few months. then sales started falling.

The retailer put them for sale at over $30. everyone was happy with the healthy margins.

they started to get more retailers to carry their cables and sale grew significantly over the next few months. then sales started falling. the retailers said that they no longer needed the CompuLink cables as their primary vendor had come up with these lengths, and the incumbent had a better brand and packaging.

Shevlin was very disappointed and spent some time thinking. he realized that PC and printer manufacturers are continuously coming up with new models of printers and new models of computers and other devices that need to be connected.

Every few months, CompuLing changed large portions of this product line as competitors entered the fray. Shevlin was always running about three to six months ahead of his big competitors in intraday cables because he was nimble and focused. the competitors were slower because they were larger companies, and it took time to roll out new products.

Shevlin would get the new cables into distributor channels, scoop, in all the super-normal profits as a monopolist, milk it for three to six months, and then be told that he was either being replaced by the mainstream vendor or had to drop prices.

They did exceptionally well with their lowly Dhandho arbitrage and become an Inc.500 company in 1989- one of the fastest-growing businesses in the United States.

They literally were the Ultimate business arbitrage model- one where supernormal profits were totally free but lasted just a few months.

They were good at dealing with uncertainty, low-risk high uncertainty and arbitrage are the core fundamentals of how good entrepreneurs operate. (The Dhandho Investor Chapter 11)

As computer interfaces began to get standardized computing original arbitrage spread all but vanished. it continued to evolve and always looked to exploit on offering gap.

It did find such a gap in complex cable installation today, CompuLink has 600 employees doing mostly cable installation services.

This spread, too, has narrowed, but in the meanwhile, it has built brand and reputation. it’s likely CompuLink Will continue to strive -at least for several more years before this gap closes.

Due to technology changes or more intense competition. ”

then the author gives the examples of GEICO Insurance, the arbitrage spread is its focus on selling auto insurance policies without agents or a branch office Network.

so this is a summary of chapter 11, from the book ” The Dhandho Investor” written by Mohnish Pabrai