Once all the warriors assembled for the war, Barbareek saw Lord Krishna sad and weeping in a corner. Staying true to his resolve to help the one in a problem, Barbareek asked him the reason for his sadness. Lord Krishna replied that he was sad because there is one person who stands in between the result of the war. And untold hardship will come to mankind if the war doesn’t end and remains in a stalemate. Barbareek told Krishna to stop crying and resolved to kill that person who had put Krishna in that hardship. He just needed to be told the name of the person. Krishna picks up a mirror and shows it to Barbareek. That person was Barbareek himself.
Why?
Because Barbareek was endowed with untold strength and could single handedly conquer the war for either side. In the beginning, the Pandavas side was weaker, so as per his vow, he would join them. Over time however, he would destroy a big part of the Kauravas’ army, then Kauravas would become weaker and Pandavas would become stronger. To always help the weaker side, Barbareek would have to switch sides and fight from the side of the Kauravas. With time, Pandavas would become weaker. He then would have to leave Kauravas and join the Pandavas again. This would become an infinite loop and the war would never end. Lord Krishna foresaw this eventuality.
When shown the mirror, as the person who made Krishna sad, as per his vow Barbareek beheads himself and offers his head to Krishna.
Coming to the billionaires now. Newspaper industry was once the titan of the business world. With wonderful economics and political power, it enjoyed a formidable moat around its business castle. But time can erode the most powerful of the moats. Internet has upended this business upside down with the readers moving online. This was quickly followed by advertising and the marketing dollars moving online. Newspapers no longer carry the political, financial and the business muscle. Once a champion of newspapers, Buffett has sold all of his newspaper investments.
However, some billionaires around the world are trying to resuscitate newspapers – some hard-nosed capitalists are seeing opportunities and trying to infuse life into them while making money for themselves at the same time. Another species of billionaires who grew reading up these newspapers are trying to revive them by restructuring them, putting them in a non-profit foundation and endowing the foundation with substantial grants. Like Barbareek, these billionaires are on the side of the weak. Only time will tell, if they achieve their objectives.
These very interesting articles in The Wall Street Journal talks about these developments around the newspaper industry.
Not according to this oil farmer.
The Bitcoin Dream
Last night, I dreamt of my friend who always talks and tweets about Bitcoin. For the sake of hiding his identity, I have named him Bittu (for he is a Bitcoin buff). The dream went like this:
Bittu: Hi Ankur
Me: Hi Bittu
Bittu: Did you read my latest tweet on Bitcoin?
Me: No, I am absent on Twitter.
Bittu: Why? You know there’s so much of valuable information available on Twitter.
Me: I know. But I also remember what my teacher Buffett says: “Value is what you get and price is what you pay”. I think, for me, the cost in terms of distraction and time spent on Twitter would be more than the value I would get. It would be a losing trade. Hence, I stay away.
Bittu: As you wish. By the way, did you invest in Bitcoin?
Me: No, I don’t understand it. My teacher Buffett teaches that one should stay within one’s circle of competence. I don’t understand Bitcoin and its dynamics and the chances are low that I would understand it even if I made an attempt.
Bittu: I suggest that even if you don’t understand Bitcoin, you should invest 1-2% of your networth. If it works out, it would make you rich.
Me: But I am already comfortably rich for my lifestyle. My teacher Buffett also teaches that one should not risk what one does have and does need in order to get something one doesn’t have and doesn’t need. More importantly, putting 1-2% might be a relatively small amount but it would break my discipline. Soon enough, I am sure there would be many opportunities which I don’t understand, vying for 1-2% each. I feel it would be a slippery slope- easier to start but difficult to stop.
Bittu: The way the governments around the world are printing money, it’s quite likely that there might be massive inflation. Bitcoin would be a good hedge against inflation.
Me: I don’t understand that part well enough. For the sake of discussion, if we assume that there might be high inflation, I feel that people would still require necessary products and services. And strong businesses would have the pricing power to pass on inflation to their customers. Hence, strong businesses too should serve as a hedge against inflation.
Bittu: People also say that if not a wealth creator, Bitcoin might act as a wealth protector.
Me: By whatever name you call it, ultimately every financial transaction has 2 components: cost and value. You need to have a fair idea of both in order to enter deals which first protect and then create wealth. If you don’t know either of them, you are entering quicksand. I know the cost of Bitcoin but not its value.
Bittu: The narrative around Bitcoin is changing. Even some of the best-known investors are throwing their weight behind it. You would get left behind.
Me: I don’t want to fall for social proof. I have fallen for it earlier and have learnt precious lessons out of it. If other investors understand Bitcoin and make money, they deserve it. The fact that they make money and I don’t, shouldn’t bother me.
Bittu: You are raving too much about your teacher Buffett. Do you know he has underperformed the benchmark for so many years and his investing methods have become a passe?
Me: Underperformance is partly because of the gigantic amount of money that he oversees and not necessarily because of obsolescence of methods. I manage small sum of money and understand his investing methods. His methods have worked for me in the past and hopefully they should work in the future as well.
Bittu: His methods won’t work forever. Till what point will you follow him?
Me: He has shown the path till $300 bn. Once I reach there, I will see.
Bittu: What’s the path?
Me: Buy good quality businesses run by good quality people and available at a fair price. Buy in sizeable quantities and hold them for a long period of time.
Bittu: Okay Ankur, I need to go. Good luck for creating wealth through investing in such businesses.
Me: Thanks, Bittu. Good luck to you too for creating wealth through Bitcoin.
In life, risk can come from anywhere. More so, in equity investing. This thought has been captured very well by the following quote :
Once upon a time, there lived a group of 4 friends: Cleverwit 1, Cleverwit 2, Cleverwit 3 and Dumbwit. As the names suggest, three of them were quite clever and one of them was considered dumb according to conventional standards.
All of them lived in the ashram of their guru to attain education. After having spent many years in the ashram and having completed their education, they headed home. The journey home was long and encountered forests on the way. While passing through one of the forests, they came across some scattered bones.
Cleverwit 1: Hey! Let’s utilize our guru’s education and test ourselves. By looking at these bones, I can tell you that these belong to a lion. I can arrange them.
Cleverwit 2: And if you could do that, I should be able to put flesh and skin around it.
Cleverwit 3: Well, if both of you are successful, by the grace of our guru – I should be able to infuse life into the lion.
Dumbwit who was until now silent and patiently listening to their conversation shivered at the idea and expressed the danger, all of them would get into should the lion come to life. All cleverwits, too consumed by their knowledge and an opportunity to show it off dismissed his apprehensions and called him a coward.
Having realised that it would be difficult to rationalise with his friends once they have made up their mind, he requested them to let him climb a tree before they brought the lion to life. Cleverwits agreed and Dumbwit quickly climbed the tree. The Cleverwits were successful, the lion came to life and filled its belly with the bodies of 3 cleverwits. Dumbwit witnessed this sad scene from a tree and wished his friends had listened to him.
Cleverwits were all clever but they made a fundamental error. Dumbwit may have been otherwise dumb but he got his basics right.
In investing too, we encounter situations where the business is all good and we may think we are clever to spot such a business but there is this element which if comes to life would devour the capitalist. The risk could come from a single supplier, single customer, single geography, single asset or dependency on a favourable regulation etc. The risk could also come from a questionable quality of management. Dubious related party transactions and schemes of arrangement are fertile grounds to perpetrate wrongdoings on minority shareholders.
IF we encounter such a business or a management with a fundamental flaw, we should think like Dumbwit and climb to a safe vantage point. Investing in situations fraught with grave risks is stupidity not bravado. Sadly, in investing stupidity often appears camouflaged as bravado.
I read this story in Amar Chitra Katha (a popular comic magazine) and added to my mental framework. The message here is Buffett’s Rule No 1 in investing “Never lose money”.
Another favourite story of mine is one from the book of Osho.
Once a dhobi (washerman) came for his morning rounds to pick up dirty laundry from his customers’ houses. He was accompanied by his donkey whom he used to transport laundry. In the village also lived a Seth (wealthy merchant).
Having arrived at the Seth’s house, the dhobi asked for laundry. The Seth saw a shining glass piece tied around the donkey’s neck.
Seth: Hey! What have you tied around your donkey’s neck? And where did you get it?
Dhobi: I don’t know what it is, Sir. I was passing through a road and found it lying there. I liked it, picked it up and tied it around my donkey’s neck.
Seth: Okay. It’s of no use to you and your donkey. Let me buy it from you. I will give you Rs 10 for it.
Dhobi thought for a few moments and agreed to sell but for Rs 20. Seth thought that the dhobi is going to come back in the evening and sell the same thing to him for 5 bucks. Seth spent the whole day thinking about the glass piece and waited anxiously for the dhobi to return in the evening.
The evening finally came and so did the dhobi with the washed laundry and his donkey. But the glass piece around his neck was missing.
Seth: Wherrrre is the glass piece?
Dhobi: Oh! Somebody in the market offered me Rs 50 and I gave it to him. Good that I didn’t give it to you for Rs 20 in the morning.
Seth: You fool ! That was a piece of diamond and was worth atleast 10,000 bucks and you sold it for 50.
Dhobi: Sir, I am ignorant and do not know anything about diamonds and their values. I asked you 20 bucks because my donkey eats grass worth that much in a day. And I thought either I would sell it for atleast that much or else I won’t. But you haggled for 10 bucks knowing very well that it was a diamond and was valued much more. Don’t you think you are a greater fool than me!
Most of the time in investing, we are like the dhobi. We are ignorant about the businesses and we don’t know their values. Market prices in isolation should not mean anything to us. But sometimes, we understand the business and we can also conservatively calculate its intrinsic value. IF we find ourselves in such a situation and the price offered by the market offers a good margin of safety, we should act decisively to buy and not act like the Seth and haggle for lower prices.
This is a story which reminds me that historical prices are irrelevant. A business might have traded at much lower valuations in the past but we may have been the dhobi at that time knowing nothing about the business. The important thing is to know when you are the dhobi and when you are the Seth.
I would like to add a word of caution here. This story should not turn you into an unjustifiable optimist and buy any business that you like disregarding the valuations. 3 things are important: you should understand the business, the business should be conservatively valued and finally it should be available at a good margin of safety.
The above 2 stories remind me of the important elements of risk avoidance and acting decisively when things are within our circle of competence. These elements have been taught by investment masters over a long period of time. I have tried to understand these in the form of stories as stories have a powerful way of wiring our brains.
I read these stories in different books in contexts which were not related to investing. But knowledge is like sunshine and should be welcomed from all directions.
