I received an overwhelming response to my Momentum Investing presentation that I gave at 4th Delhi investor meet at India Habitat Center the other day.
If you haven’t gone through it already, please click on the link above.
One of the most common question I received from the DIY (do it yourself) investors was to receive an exact path, a way to go about developing and testing your own strategy. I thought I should write a blog about books I have read, people I have met and software I have used to develop and deploy mine.
So when I started off, I wanted to cut through the charade and no skin in the game jokers that come on TV and therefore I asked myself a very simple question, who is the most honest guy in town, someone who has done it himself and has laid it out for public to see.
My search didn’t take me long before I got introduced to the grandfather himself, Warren Buffet and his annual letters.
This is by far the best thing that can happen to you. It is not just about how he makes his investments, like a typical grandfather you would get life lessons on how to conduct yourself, benefits of frugality, how to judge people, have an internal scorecard in life, think in terms of probability and basically how to have a passion for work/life and a stress free life.
If you need a shortcut you can go through this website http://buffettfaq.com/ which chronicles his way of thinking on various topics. It’s a big list as grandfather apparently has a view on everything (talk about having a never ending vast circle of competence). (I had created a .mobi of this entire website, too lazy to attach it here)
Through Buffet I got introduced to Charlie Munger, perhaps the biggest influence on my life second only to Ed Seykota. Unlike the diplomatic grandfather, Charlie Munger is more of like in your face old man who calls spade a Fucking spade. Readers would do good if they read and re read the below book again and again until it sinks in.
Charlie taught me that financial independence is the ultimate goal, not to fulfill your never ending desires but to be free in true sense of the word. To be able to show the middle finger to bull shit. You can only think like a free man when you are actually free. If your salary depends on someone or something, you can forget about having an independent opinion. and best way to acheive that is by following a very tough mantra,
“DO NOTHING OR SWING HARD”
Charlie also brought home the point about how easy it is to fool oneself, our brain is a cabbage if not controlled and managed properly, his human misjudgment speech is epic (just touches the surface of the topics).
Charlie being a book worm himself, introduced me to a host of writers. It won’t be an exaggeration if I say, he opened the world to me. It was a like can of worms came crawling out and I got introduced to Richard Feynman, Robert Cialdini, Dawkins among others.
While this quest was manifesting at the qualitative side of my being, I was fascinated by the quantitative side of it.
Ed Seykota’s quote is how I see the world. If you cannot measure it, you cannot control it.
Ofcourse you need to draw a balance in between, not everything can be quantified and not everything that can be quantified matters.
That ladies and gentlemen is at the crux the difference between quant investing and value investing.
There are people at the extremes and then there is Joel Greenblat right in the middle. Through his magic formula, he tried to quantify and capture the revert to the mean syndrome that takes place in growth companies going through temporary corrections.
Readers would do good by reading his below mentioned book and devise strategies around spin offs and turn around candidates.
You can be a Stock Market Genius
Another very important person I cannot miss on this blog post is VAN THARP. His book on position sizing opened up my eyes to the impact it can have on one’s portfolio. Stock picking for me has decreased in ranking compared to art of sizing up properly.
The way you add up and reduce can change the game on its head. You see, 100 bagger with 2% allocation will not change your strata. You need to learn this amazing art of averaging up.
http://www.vantharp.com/products/definitive-guide-position-sizing.asp.
While you are there, indulge yourself in a position sizing game on his website.
Since we are on the topic of position sizing, a mention of Kelly criteria can’t be missed. This book instills in you the process of thinking in terms of probabilities rather than narratives.
As my journey forayed further into the growth/quant side of things, I came across the trio of William O neil, Jesse Stine and Mark Minervi.
These guys basically threw the conventional wisdom of slow and steady compounding out of the window.
In a nut shell what these fellas are saying is that you can either grow rich by compounding your money say 20-30% for a decade or more by chipping away (time is a friend of a good company) or you can wait and time your entry to such perfection that you can have crazy compounding rates like 40-80% for 4-5 years.
The idea is to get rich within your timelines and not for your kids.
Essentially they are short-listing outlier companies by filtering the price action and earnings.
All this by the way is thoroughly back tested and not based on hunches and emotions. William O neil and his team in fact went as back as 1800 to study the correlations between earnings surprises, All time highs and corresponding stock price moves.
Another person who influenced me a lot in developing a strategy and thought process was Nasim Nicholas Taleb. This guy is again in your face (I invite such people in my life, birds of the same…;))
Taleb taught me the sheer stupidity that prevails in the market and life in general.
People measure things based on tools they have, not on tools that are needed.
This availability heuristic although sounds very simple, has profound implications
Naked Option writers just live in denial even after seeing their fellows going bankrupt in some event or another. It is just fascinating to see how human brain (cabbage) works. Unless you get hit yourself, somehow you don’t feel the danger by just looking at your friend’s demise.
Taleb’s lessons also go beyond the investing world and touch on barbell theory both in stock investments and health related issues. (for example don’t exercise strenuously on a daily basis, instead do a normal stroll/walk everyday and a strenuous trek once every 3 months). Body likes randomness.
Moving forward, I realized that human intervention is counter-productive as cabbage might show its true colors in times when its needed the most and things should be automated as much as possible.
I started coding my own strategy and people who are interested in Amibroker (software that I use) would do well by buying the below book by Howard bandy which will get you rolling on to your journey
As far as momentum investing is concerned, you would do well by reading books by Mebane faber, Wesley Gray, Gary Antonacci and Andrew Clenow. You can also listen to the Stoic Podcast we did with the first 03 authors at www.stoicinvesting.com
I am sure I have missed a whole lot of names as I have been on a reading spree in the last 05 years.
So let me give a shout out to all the names that come to my mind.
Prof Sanjay bakshi’s blog
Ed Thorp’s book
Interactions with Gaurav Sud
Interactions with Aniket Krishna
Interactions with Puneet khurana
Valuable AFL repository at Marketcalls.in
Wonderful seminars by Rajendran
and many more resources which I am not able to recall.
So I hope I have not confused you more than you were before. Everyone has his/her own individual journey, end of the day stock market is just an excuse to find oneself and therefore there is no ONE WAY to find the truth.
Here s wishing all of you a very HAPPY NEW YEAR.. Cheers!!!!