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The Safal Niveshak Mastermind

I hope you enjoy the three complimentary chapters from “The Safal Niveshak Mastermind” – one-year course to help you reinvent how you invest, work, and live.

You will find complete details of the Value Investing Course at the end of this PDF.

I trust that this taste will whet your appetite for more!

For more on the Course and how you can register for the upcoming batch, visit HERE.

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Website: www.safalniveshak.com

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Contents • Introduction: No Time for Excuse. Start Now .............................. 04 • Lesson 1: Are You an Investor or Speculator? ............................ 13 • Lesson 2: Being a Value Investor .................................................. 19 • Course Brochure ............................................................................. 29

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Introduction

No Time for Excuse. Start Now!

“There are only two mistakes one can make along the road to truth; not going all the way, and not starting.” ~ Buddha

The leading American entrepreneur, author and public speaker Seth Godin has had a great influence on my life as a writer and thinker. In his latest book titled The Icarus Deception, Seth writes about the story of Icarus, whose father Daedalus fashioned two pairs of wings out of wax and feathers for himself and his son to fly out of a prison they were captivated in. Daedalus tried his wings first, but before taking off from the island, warned his son not to fly too close to the sun, nor too close to the sea, but to follow his path of flight. However, overcome by the giddiness that flying lent him, Icarus soared through the sky curiously, but in the process he came too close to the sun, which melted the wax. Icarus kept flapping his wings but soon realized that he had no feathers left and that he was only flapping his bare arms, and so he fell into the sea and died. The Icarus myth is often used as an example of when hubris or over-confidence – of flying too high – can go badly wrong. However Seth, in his book, points out that there is another part of the story – Icarus’s father Daedalus also told his son not to fly too low as the water could also damage his wings. As per Seth… Society has altered the myth, encouraging us to forget the part about the sea, and created a culture where we constantly remind one another about the dangers of standing up, standing out, and making a ruckus. However, he writes, settling for too little is “a far more common failing”. The crux of Seth’s book is that we all have the potential to do great work in life. However to do so, we need to leave our comfort zones – to fly closer to the sun. What this requires of us is to have the hubris to take bigger risks and create new things. This requires facing up to the pain involved in the process, and being open to possible failure and criticism. of 30


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Are You Flying Too Low? In the investing world where you find more and more people sleepwalking through their lives instead of taking the risk of going against the crowd, it pays to be an Icarus. Given that Icarus has set a precedent for you, you don’t need to fly too close to the sun by having a false arrogance and thus risking your life’s savings to earn super-normal returns. But then, there’s a great risk in flying too low and settling for mediocre long-term returns on your money (mediocre means anything less than inflation), which could happen only if you play a rash money game. Can You Really Fly? I have heard hundreds of times over the past few years that small investors can’t really win the investing game that is stacked heavily against them. The argument goes – “If large, intelligent investors with an army of analysts and complex mathematical tools cannot beat the market, how can small investor do it?” If you are in search for an answer to this question, I hope you have heard this small story of a hound (wild dog) spotting a rabbit and giving it a chase. After some distance, the hound began to gain, but then gave up the chase. As it returned home, a farmer commented that the little rabbit had been too much for the hound, who replied, “It’s one thing to run for your dinner, but quite another to run for your life.” In the same way, when it comes to investing, the big investors are merely chasing returns to earn their bonuses (the food). You, the small investor, must play the game for your life, i.e., to earn enough to meet your life’s most important goals. Here is what Peter Lynch, an outstanding ex-fund manager in the US, once said… I have been hearing that the small investor has no chance in this dangerous environment where there are 50,000 professional stock pickers who dominate the show and the small investor ought to get out. From where I sit, I’d say that the 50,000 stock pickers are usually right, but only for the last 20 percent of a typical stock move. It’s that last 20 percent that Wall Street studies for, clamours for, and then lines up for – all the while with a sharp eye on the exits. The idea is to make a quick gain and then stampede out the door. Small investors don’t have to fight this mob. They can calmly walk in the entrance when there’s a crowd at the exit, and walk out the exit when there’s a crowd at the entrance. of 30



You got the point, right? As a small investor, you’ve got huge inherent advantages that professional money managers don’t enjoy. Now, it’s only the point of realizing that those advantages exist, and learning to profit from them. Start Preparing for Tomorrow We often blame our past and worry about our future. The fact is that – and you also know this – life is in living NOW. It’s all about the…

• Choices we make now; • Habits we form now; • Actions we take now; and • Enlightenment we receive now

Regretting about the past is like wasting time and energy on the impossible. And worrying about the future is like having no belief in your capabilities. Live in the present. Connect with it. Accept it. Experience the joy of being. Do it NOW. The best possible way to prepare for tomorrow is to concentrate with all your intelligence, all your enthusiasm, on doing today’s work superbly today. That is the only possible way you can prepare for the future. When I was ten years old, my grandfather would draw me a house with windows and doors. He would tell me how many brick lengths the bottom and sides needed, and how many brick lengths each window and door would take. Then he asked me how many bricks it would take to build the whole house. If I had trouble answering, he wouldn’t get upset. He would simply say: “This is how you build a house. One brick at a time.” Well, this is also how you build your wealth over the long term. By not worrying about your future as an investor or the size of your wealth, but by practicing the right things ‘now’…bit by bit. of 30



Just Write it Out I don’t know about you, but when I have a problem that’s proving difficult to solve, I write it down and then apply critical analysis to solving it. It helps me in coming up with solutions. Just by identifying the exact pain point can help us to take positive steps in our investing life. This is because knowing where it hurts the most enables us to look for targeted solutions. As Seth Godin writes in The Icarus Deception, you are so much more than you ever thought you could be. You are no longer burdened by what you thought were limitations. You are only limited by your ability to overcome your fear of what’s outside your comfort zone. Now, if you are ready to fly high… Let’s Start from the Start Before we get into the Value Investing Course, let me touch upon what I will cover over the next few months? Someone asked Buffett, “If you were to teach an investment course, besides works by Ben Graham and Phil Fisher and your letters, what would be on the syllabus?” Buffett answered… An education in investing requires only two courses – How to Value a Business, and How to Think About Markets. You don’t have to know how to value all businesses. Start with a small circle of competence, things you can understand. Look for things that are selling for less than they’re worth. Forget about things you can’t understand. You need to understand accounting, which has enormous limitations. You need to understand when a competitive advantage is durable or fleeting. Learn that the market is there to serve you, not instruct you. In the investing business, if you have an IQ of 150, sell 30 points to someone else. You do not need to be a genius. You need to have emotional stability, inner peace and be able to think for yourself, since you’re subjected to all sorts of stimuli. It’s not a complicated game; you don’t need to understand math. of 30



It’s simple, but not easy. Now, that makes my job easy! Based on what Buffett suggests and based on my understating of how investing really works, the Value Investing lessons you will receive over the next few months will revolve around these few things…

• Creating the value mindset • Conducting good investment behaviour • Creating a latticework of mental models • Building and growing circle of competence • Understanding businesses and moats • Financial analysis, with its limitations and shenanigans • Calculating intrinsic valuations • Putting it all and go compounding

I will try to cover all these lessons in a jargon-free, non-geeky way so that you find it simple to understand and implement But then, a Buffett says, “It’s simple, but not easy.” How? Well, that’s what we are going to learn as we progress with the course. On picking businesses to invest in, Buffett says, “I don’t look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.” I have designed this course to help you find those 1-foot bars in the stock market using proven business-like principles and applying a value investing framework. So, “unfasten” your safety belts, get over your fear of learning, be ready to change your behaviour, and get set on this amazing, and adventurous, journey. But please remember what a wise man once said – “Adventure comes with no guarantees or promises. Risk and reward are conjoined twins.” This is the reason I always advice someone starting out that fortune favours the brave. There are many good reasons not to toss your life up in the air and see where it lands. Just don’t let fear be one of them. of 30



How to Become a Successful Investor? We all dream of beating the market and being super investors and spend an undue amount of time and money in this attempt. Consequently, we are easy prey for the magic bullets and the secret formulae offered by eager salespeople pushing their wares. Bullets like…

• Here’s the secret of finding market-beating stocks • Our strategy will help you find stocks like Buffett • We can help you multiply money by 4-5x

In spite of our best efforts and even after falling prey to sleazy marketing from money experts, most of us fail in our attempts to be more than “average” investors. Nonetheless, we keep trying, hoping that we can be more like the investing legends – another Warren Buffett or Peter Lynch. We read the words written by and about successful investors, hoping to find in them the key to their stock-picking abilities, so that we can replicate them and become wealthy quickly. In our search, though, we are whipsawed by contradictions and anomalies. In one corner of the investment landscape, stands someone like Vishal Khandelwal of Safal Niveshak, yelling to us to buy businesses with solid cash flows and liquid assets because that’s what worked for Buffett. In another corner, someone else cautions us that this approach worked only in the old world, and that in the new world of technology, we have to bet on companies with solid growth prospects. In yet another corner, stands a silver tongued salesperson with vivid charts and presents you with evidence of his capacity to get you in and out of markets at exactly the right times. It is not surprising that facing this noise of claims and counterclaims that we end up more confused than ever. I believe that to be successful with any investment strategy, you have to begin with an investment philosophy that is consistent at its core and which matches not only the markets you choose to invest in but your individual characteristics. In other words, the key to success in investing may lie not in knowing what makes Warren Buffett or Peter Lynch successful but in finding out more about yourself, as we will understand during the Course. So, it’s all about being self aware by answering questions like…

• Am I a patient or impatient person? • Do I have a long term horizon?

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• How do I respond to peer pressure? • Am I a worrier? • Am I a details person or a big picture person?

A little self introspection will pay off much more than investing your money in another “get rich quickly” book. Ultimately, what I am arguing is that there is no one best investment philosophy that works for all investors. Like at the end of this course, either you will love the concept of Value Investing and adopt it to invest your money, or you will never try it for some obvious reasons (like “Who has the time to do the hard work?”). Before Being Successful, How Do You Become Smarter? I recently came across this wonderful article on Farnam Street, titled “The Buffett Formula – How to Get Smarter”. The answer that the author suggests, and as Buffett has stressed upon for long, is – Read a lot. Warren Buffett says, “I just sit in my office and read all day.” Here’s Charlie Munger’s edition… We read a lot. I don’t know anyone who’s wise who doesn’t read a lot. But that’s not enough: You have to have a temperament to grab ideas and do sensible things. Most people don’t grab the right ideas or don’t know what to do with them. What Munger says about people “not grabbing the right ideas”, Adler wrote in a different way in his book… The person who says he knows what he thinks but cannot express it usually does not know what he thinks. So read, my friend. Read a lot. Don’t just read to absorb information. That’s what everyone else is doing. Instead, read to ask questions. Read to look for answers. Read to understand the various answers. And read to decide for yourself the best answer for the question you asked. Now, if you think what I just suggested sounds like a lot of work, well you’re right! I am sure most people won’t do it, just like most people will never sit quietly to understand why they are investing in the first place. But you do it…for your own sake. Remember what Munger says, “The game of life is the game of everlasting learning. At least it is if you want to win.” I’m sure you’re here to win. of 30



Before We Start…A Warning! Before we start with this course, let me remind you that knowledge doesn’t equal behavior. If you have ever met me, you know that I am slightly overweight. Even I know this, and I know that the easiest way for me to remedy this situation is for me to eat less and exercise more. Sadly, despite my knowledge, I haven’t adjusted my behaviour completely – especially when it comes to exercising – so as to see a drastic reduction in my waist size. The same is true when it comes to investing. Learning the secrets of a sound investment process and realizing that we are prone to behavioural biases is an important first step, but it isn’t enough. We need to force ourselves to actually change our behaviour by altering the way we approach investing. That’s exactly what I will try to help you do through this course. Napoleon Hill said in his amazing book Think and Grow Rich – “Desire is the starting point of all achievement, not a hope, not a wish, but a keen pulsating desire which transcends everything.” I wish you that pulsating desire to change your investing life throughout this course, and even after that. Exercise Before we start this course on Value Investing, the very first exercise I want you to undertake is to start a diary where you should note down all your key learnings over the next one year. That diary will also double-up as an “investing journal” where you should record all your thoughts and emotions while analysing stocks and while making a buying/selling decision. It would serve you well when you were to look at your past thought process, which will help you avoid a lot of old mistakes. You would be using your diary a lot of times during performing the lesson exercises and preparing your investment checklist and philosophy as we move ahead in the Course. And, like I have done, you can name it “Diary of a Dumb Investor” to constantly remind yourself of how little you know and how much is there to learn.

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In the first 1-2 pages of this diary, try answering these four questions that you must answer before starting anything in life…

1. What is my biggest fear of being a stock market investor? 2. What would happen if that fear came true? 3. Would it stop me from trying again? 4. What do I expect from the Mastermind course that would help me get over this fear?

Then head over to the Mastermind Forum via this link and answer the first and the last question there. The reasons I would like you to answer these questions is not to just write them out and forget them, but because the answers will lay the groundwork for an enhanced self awareness as far as your future as an investor is concerned. I wish you all the best for the learning path you will cover over the next one year!

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http://www.safalniveshak.com/forum/mastermind-lesson-exercises/my-biggest-fear-of-being-a-stock-market-investor/


Module 1 | Lesson 1

Are You an Investor or Speculator? A lot of investors I meet or interact with through Safal Niveshak want to seek my opinion on their stock portfolios – a large number of them being in complete mess. One big reason for the same is the fact that most of these people bought stocks without a hint of what they were getting into. It’s like they were flirting with someone and then saying they were serious all this while! I still remember this small conversation with a friend sometime in October 2008. This gentleman, my classmate from school, had been a bright student in the past. He was a practicing doctor, but had no clue about investing in the stock markets. But one fine day, on advice from some of his patients (yes, even patients can give doctors some ‘painful’ advice!), took his first step into the stock markets only to see his savings burn in the crash that followed. Sometimes I wonder how even intelligent people (like my doctor friend) fall into the trap of playing with their hard-earned money without knowing what they are getting into. They work so hard for many years to become successful students, professionals, and businessmen. And then, in a small phase of mindlessness, lose their entire savings just because ‘someone’ advised them a way to become rich fast. Most of such people I have had the luck to meet call what they are doing as ‘investing’. If the father of investing – or let me say ‘sensible investing’ – Benjamin Graham were to hear that, he’d turned over in his grave! Graham was among the firsts to clearly define what ‘investing’ actually is, and how it differs from what most people do in the stock markets (like my friend did) i.e., speculate. But before I take you to Graham’s definition of investing and speculation, let me take you a bit deeper into their entire confusion most people have between ‘speculation’ and ‘investing’. Let me first ask you – What do “you” think is the difference between investing and speculation? Think about the answer. Then first write down the definition of “investing”, and do the same for “speculation”. The answers may not come by easily. But they should.

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After all, ‘investing’ and ‘speculation’ were first defined way back in 1688 when Joseph de la Vega wrote Confusion of Confusions, one of the earliest books written on the working of the stock market. In this book, de la Vega observed three classes of men:

1. The princes of business, called “financial lords,” were the wealthy investors. 2. The merchants, the occasional speculators, were the second class. 3. The last class was called the “persistent speculators” or the “gamblers.”

Then, around 250 years later, Philip Carret wrote a book called The Art of Speculation where he believed that the best way to determine the difference between investment and speculation was the “motive” of the person involved. Carret suggested that while an investor is concerned about the fundamentals of the business, the speculator is worried just about the stock price. He wrote, “Speculation may be defined as the purchase or sale of securities or commodities in expectation of profiting by fluctuations in their prices.” Sound eerily similar to what you have seen people around you doing? Or like you yourself have done over the years? Anyways, let’s now come to Benjamin Graham who differentiated between investing and speculation in the 1934 edition of his “Bible of Value Investing” called Security Analysis. Graham defined… “An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.” Let me now bring in Seth Klarman, who wrote in Margin of Safety… “…assets and securities can often be characterized as either investments or speculations. The distinction is not clear to most people. Both investments and speculations can be bought and sold. Both typically fluctuate in price and can thus appear to generate investment returns. But there is one crucial difference: investments throw off cash flow for the benefit of the owners; speculations do not. The return to the owners of speculations depends exclusively on the vagaries of the resale market.” Finally, here’s what Warren Buffett says… “The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of of 30


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Cinderella at the ball. They know that overstaying the festivities — that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future — will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands.” Buffett adds… “Basically, it’s subjective, but in investment attitude you look at the asset itself to produce the return. So if I buy a farm and I expect it to produce $80 an acre for me in terms of its revenue from corn, soybeans etc. and it cost me $600. I’m looking at the return from the farm itself. I’m not looking at the price of the farm every day or every week or every year. On the other hand if I buy a stock and I hope it goes up next week, to me that’s pure speculation.” Of Silly Charts and Voodoo Practices John Maynard Keynes defined “speculation” as “…the activity of forecasting the psychology of the market.” He said that the speculator must think about what others are thinking about stocks and the stock market. In Chapter 12 of his book – The General Theory of Employment, Interest and Money (1936) – where he explained price fluctuations in equity markets, Keynes wrote… “It is not a case of choosing those [faces] that, to the best of one’s judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.” So, in a Keynesian beauty contest, the judges are told not to pick the most beautiful woman (the best business) but instead to pick the contestant they think the other judges will choose as the most beautiful (the most speculative stocks). The winner of such a contest may be very different than the winner of a traditional beauty contest. Much of what you see during IPO rush and bull markets is in fact a Keynesian Beauty contest, with stock market participants trying to guess what others are thinking…about what others are thinking…about what others are thinking [repeat]. So, effectively, people who indulge in day-trading or swing-trading using silly charts and other voodoo-like practices are speculators. You will hear them talk about how the market “behaves” rather than what the value of a given stock may be. But then, to guess about market “behavior” based on a chart is just that – a guess! In a 2011 interview, Buffett was asked to explain how he sees speculation as opposed to investing. Buffett replied…

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You know, it’s like pornography… the famous quote and all that. I look at it in terms of the intent of the person engaging in the transaction. …An investment operation in my view is one where you look at the asset itself to determine your decision to lay out some money now to get some more money back later on. So you look to the apartment, house, you look to the stock, you look to the fame in terms of what that will produce. And you don’t really care whether there’s a quote under it at all. You are basically committing some funds now to get more funds later on through the operation of the asset. Speculation, I would define, as much more focused on the price action of the stock, particularly that you buy or the indexed future or something of the sort. Because you are not really, you are counting on, for whatever factors, could be quarterly earnings, could be up or it’s going to split or whatever it may be or increase the dividend, but you are not looking to the asset itself. And I say the real test of how you, what you’re doing is whether you care whether the markets are open. When I buy a stock, I don’t care whether they close the stock market tomorrow or for a couple of years… Now if I care whether the stock market is open tomorrow then I say to some extent I’m speculating because I’m thinking about whether the price is going to go up tomorrow or now. And then gambling I would define as engaging in a transaction which doesn’t need to be part of the system… So, What Do You “Want”? Just think for a moment, and you are not embarrassed to admit that you want your investments to support you during your years in retirement. Neither are you embarrassed to admit that you want your investments to support your children or help you do good work for others. But then, if you are like most investors out there, some of what you want from your investments is embarrassing, such as your wanting status. You might want to mention your investment in the “best” or the “hottest” stock out there, as you think it signals high status. I have seen a lot of investors buying expensive stocks just because they couldn’t have avoided not owning these stocks like other “successful” investors who made money in them. It may be due to jealousy of seeing others make money, or regret of missing out on future returns, but look around and you would find even serious investors speculating to make a quick buck ‘just one last time’! But then, a loud expression of your “investment status” (like “I have bought a great stock like Titan” or “I bought Nestle”), like a loud display of an oversized logo on a Louis Vuitton bag, can bring embarrassment rather than an acknowledgment of status.

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In a 1930 book, Watch Your Margin: An Insider Looks at Wall Street, the author asks a person – “Do you know why people go into stock speculation?” “To make money,” the person replies. “Not at all,” said the author, “They go in for the pleasure of getting something for nothing. What they want is a thrill. That is why we drink bootleg whisky, and kiss the girls, and take new jobs. We want thrills. It’s perfectly human, but Wall Street is a poor place to look for thrills, for the simple reason that thrills in Wall Street are very expensive.” The world has changed greatly since then, but our wants remain the same. The man answering the author above (that we speculate to make money) is not entirely wrong. We do want to make money from investing and speculating. But the author is surely right. We want pleasure from investing and speculating, and we want thrills from playing the beat-the-market game and winning it. The truth is that the stock market is still a poor place to look for thrills and the stock market thrills remain expensive, but we are willing to pay the price. In fact, a majority of participants in the stock market consider themselves like sportsmen. They want to win. In sports, only if you win the gold medal are you paid millions for endorsements of shoes, watches, and cereals, while silver and bronze-medallists are paid little, and fourth-place athletes are paid nothing. Gold medals also bring the emotional benefits of pride and the expressive benefits of a winner’s image. It is no wonder that an Internet broker made the connection between investment competitions and sport competitions in an advertisement displaying a sprinter in starting blocks above a caption… “If you’re waiting for just the right time to start investing online, we have one thing to say. Bang!” You see, the race to speculate in stocks to earn big money, and do that quickly, is too tempting…and the desire to win is too strong. But the consequences are sad! You already know it, don’t you? Finally, Mark Twain said that there are two times in a man’s life when he should not speculate: when he can’t afford it and when he can. Because this is so, understanding the difference between investment and speculation is the first step in achieving investment success. And that’s exactly what we will try to do now. of 30



Exercise Having read the above perspectives on investing versus speculation, it’s now upon you to decide whether you have been an investor or speculator all these years. So, visit the Mastermind Forum right away (through this link), and answer these three questions –

1. Are you an investor or a speculator…or are you both? 2. Which was your last stock purchase that qualified as a Graham-styled investment- (1) It was based on thorough

analysis, (2) promised safety of principal and (3) a satisfactory return? 3. Which was your last stock purchase that qualified as a speculation? Why do you think it was a speculation?

Clue: Thinking long term or short term might be a sensible starting point that helps us distinguish between investing and speculation. But a ‘time element’ is simply not sufficient. The distinction between investment and speculation is deeper. And you are the best person to know this distinction and share with other members of the tribe. Reminder: As I suggested in the Introduction, I hope you have started work on your investment diary/journal where you would be noting down all your key learnings over the next one year. That diary will also double-up as an “investing journal” where you should record all your thoughts and emotions while analysing stocks and while making a buying/selling decision. It would serve you well when you were to look at your past thought process, which will help you avoid a lot of old mistakes. Believe me, this diary is going to be an extremely useful tool in helping you become a better investment thinker and make better decisions while minimizing mistakes. So please start work on it, if you haven’t already. References and Further Reading

• Chapter 1 of The Intelligent Investor by Benjamin Graham – Investment Versus Speculation: Results to Be Expected by the Intelligent Investor

• Are You an Investor or a Speculator? ~ Jason Zweig • What is the Difference between Investing and Speculation? ~ Robert Hagstrom

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http://www.safalniveshak.com/forum/mastermind-lesson-exercises/lesson-1-are-you-an-investor-or-speculator/

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http://blogs.wsj.com/totalreturn/2013/02/28/are-you-an-investor-or-a-speculator-part-one/?mod=WSJ_Business_LatestHeadlines

http://blogs.cfainstitute.org/insideinvesting/2013/02/27/what-is-the-difference-between-investing-and-speculation-2/


Module 1 | Lesson 2

Being a Value Investor Value investing has been around since the beginning of market and investing history. Yet, especially before 2002, it has had relatively low visibility. As more individual investors jumped on board in the late 1990s, people were more excited more by the go-go world of trading and aggressive growth investing. More intrigued by companies that make software codes and network routers than by companies that sell paints and soaps. While boring to some, the value investing approach has earned strong returns for its faithful followers, often far beyond market averages for good stock pickers. Value investing has brought prosperity in healthy markets and survival during the numerous downturns throughout the twentieth century. But what exactly does it mean to be a value investor? At its most basic level it means seeking out stocks that you believe are worth considerably more than you have to pay for them. But all investors try to do that! In reality, value investing is both a mindset as well as a rigorous discipline. Charlie Munger defined it as – “All intelligent investing is value investing — acquiring more than you are paying for.” So, value investing equals intelligent investing. But ask anyone who has a faintest idea about value investing, and the general view is that it is same as bottom fishing, or buying cheap stocks – those that are trading at low price to earnings (P/E) or low price to book value (P/BV). This is far from truth. Value investing is much more than buying cheap stocks. As Munger said… You’re looking for a mispriced gamble. That’s what investing is. And you have to know enough to know whether the gamble is mispriced. That’s value investing. So while “investing” is about buying cheap stocks, “value investing” is about knowing clearly what you are buying. Benjamin Graham, the father of value investing, stated in his book Security Analysis (called the “Bible of Value Investing”)… of 30


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An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative. What this definition implies is that if you don’t have proper data and reasoning associated with an appropriate price tag (cheap stock), it isn’t value investing. After all, everyone is looking to buy low and sell high. So what is it that differentiates real value investors, who are actually quite rare, from all the others who trade in the stock market? Value Investing is…Difficult! Making money on “cheap” stocks – which is the goal of every value investor – is harder than it sounds and can take years to play out. In fact, identifying a cheap stock and buying it is a relatively easier proposition. But value investing is difficult simply because…

• You need to have patience, and a lot of it • You must be disciplined • You must mind your behaviour • You must know when to go against the crowd • You must read a lot (annual reports, investing books etc.)

In all, value investing requires hard work. This is probably the reason you won’t find many value investors out there. But whoever has had the patience to practice value investing in its real form, has done wonders for his stock portfolio. How to Become a Value Investor? In his 1992 letter to Berkshire Hathaway shareholders, Warren Buffett wrote… We think the very term ‘value investing’ is redundant. What is ‘investing’ if it is not the act of seeking value at least sufficient to justify the amount paid? Consciously paying more for a stock than its calculated value – in the hope that it can soon be sold for a still-higher price – should be labelled speculation (which is neither illegal, immoral nor – in our view – financially fattening). Whether appropriate or not, the term ‘value investing’ is widely used. Typically, it connotes the purchase of stocks having attributes such as a low ratio of price to book value, a low price-earnings ratio, or a high dividend yield. Unfortunately, such characteristics, even if they appear in combination, are far from determinative as to whether an investor is indeed buying something for what it is worth and is therefore truly operating on the principle of obtaining value in his investments.

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Correspondingly, opposite characteristics – a high ratio of price to book value, a high price-earnings ratio, and a low dividend yield – are in no way inconsistent with a ‘value’ purchase. So it’s the ‘process’ of picking up bargain stocks that value investing is all about. You must know what you are getting into. That’s exactly what we are going to learn in this course over the next few months. But Then… “Most people aren’t cut out for value investing, because human nature shrinks from pain.” Not me, that’s what a leading money manager in the US Jean-Marie Eveillard says. I believe his words are a great reminder that making money on cheap stocks, which is the goal of every value investor, is harder than it sounds and can take years to play out. Value investing, on the face of it, seems easy. Just read about a business, calculate its intrinsic value in an excel sheet using pre-determined formulae, and if the stock price is much lower than that intrinsic value, buy the stock or else avoid it. Theoretically, this is true. But then, as Yogi Berra says, “In theory there is no difference between theory and practice. In practice there is.” So, while learning about value investing isn’t difficult, putting the learning into practice is. Why? I have realized over my ten years of being an investor that the long-term rewards don’t go to people who think value investing is easy. The reality is that superior returns can be earned only by those who know that it is hard – and still stay put. But the way most “value” investors behave is very different. In fact, a lot of people start out as “value investors”, then get upset seeing their returns after one bad year, get mad after two years, and gone after three! A lot of experts would tell you that a great stock picker can “always” outperform the market. However, ironically, investors who buy into this myth often sell in a panic as soon as the next crash proves that no stock picker can “always” outperform.

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So what makes for a true value investor apart from just finding businesses that are selling cheap? A lot, I believe. What Makes for a Good Value Investor? Noted American investor, Whitney Tilson, in his recent book called “The Art of Value Investing: How the World’s Best Investors Beat the Market” suggests thirteen key characteristics that make up a true value investor. He writes that value investors typically… 1. Focus on intrinsic value. What a company is really worth – buying when convinced there is a substantial margin of safety between the company’s share price and its intrinsic value and selling when the margin of safety is gone. This means not trying to guess where the herd will send the stock price next. 2. Have a clearly defined sense of where they’ll prospect for ideas, based on their competence and the perceived opportunity set rather than artificial style‐box limitations. 3. Pride themselves on conducting in‐depth, proprietary, and fundamental research and analysis rather than relying on tips or paying attention to vacuous, minute‐to‐minute, cable‐news‐style analysis. 4. Spend far more time analyzing and understanding micro factors, such as a company’s competitive advantages and its growth prospects, instead of trying to make macro calls on things like interest rates, oil prices, and the economy. 5. Understand and profit from the concept that business cycles and company performance often revert to the mean, rather than assuming that the immediate past best informs the indefinite future. 6. Act only when able to draw conclusions at variance to conventional wisdom, resulting in buying stocks that are out‐of‐favor rather than popular. 7. Conduct their analysis and invest with a multiyear time horizon rather than focusing on the month or quarter ahead. 8. Consider truly great investment ideas to be rare, often resulting in portfolios with fewer, but larger, positions than is the norm. 9. Understand that beating the market requires assembling a portfolio that looks quite different from the market, not one that hides behind the safety of closet indexing. 10. Focus on avoiding permanent losses rather than minimizing the risk of stock‐price volatility.

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11. Focus on absolute returns, not on relative performance versus a benchmark. 12. Consider stock investing to be a marathon, with winners and losers among its practitioners best identified over periods of several years, not months. 13. Admit their mistakes and actively seek to learn from them, rather than taking credit only for successes and attributing failures to bad luck. As it comes out clear from Tilson’s view, at its most basic level, being a value investor it means seeking out stocks that you believe are worth considerably more than you have to pay for them. But all investors try to do that! Thus, as Tilson also adds, it’s also about behaving well, which involves…

• Accepting mistakes • Learning from others • Thinking long term • Focusing on risk more than return • Respecting business and stock market cycles • Being contrarian

Value Investing is Not Esoteric There is nothing esoteric about value investing. As we have understood from the above points, it is simply the process of determining the value underlying a security and then buying it at a considerable discount from that value. It is really that simple. The greatest challenge is maintaining the requisite patience and discipline to buy only when prices are attractive and to sell when they are not, avoiding the short-term performance frenzy that engulfs most market participants. You see, the focus of most investors differs from that of value investors. Most investors are primarily oriented toward return, how much they can make, and pay little attention to risk, how much they can lose. If you consider the large, institutional investors, they are usually evaluated – and therefore measure themselves – on the basis of relative performance compared to the market as a whole, to a relevant market sector, or to their peers. Value investors, by contrast, have as a primary goal the preservation of their capital. It follows that value investors seek a margin of safety, allowing room for imprecision, bad luck, or analytical error in order to avoid sizable losses over time. of 30



A margin of safety is necessary because valuation is an imprecise art, the future is unpredictable, and investors are human and do make mistakes. It is adherence to the concept of a margin of safety that best distinguishes value investors from all others, who are not as concerned about loss. Here is what Seth Klarman writes in his Margin of Safety… If investors could predict the future direction of the market, they would certainly not choose to be value investors all the time. Indeed, when securities prices are steadily increasing, a value approach is usually a handicap; out-of-favor securities tend to rise less than the public’s favorites. When the market becomes fully valued on its way to being overvalued, value investors again fare poorly because they sell too soon. The most beneficial time to be a value investor is when the market is falling. This is when downside risk matters and when investors who worried only about what could go right suffer the consequences of undue optimism. Value investors invest with a margin of safety that protects them from large losses in declining markets. Those who can predict the future should participate fully, indeed on margin using borrowed money, when the market is about to rise and get out of the market before it declines. Unfortunately, many more investors claim the ability to foresee the market’s direction than actually possess that ability. (I myself have not met a single one.) Those of us who know that we cannot accurately forecast security prices are well advised to consider value investing, a safe and successful strategy in all investment environments. All Intelligent Investing is Value Investing Looking at the above pre-requirements of being a value investor, it comes out clear that apart from a quantitative aptitude – ability to understand numbers – you must have the intelligence and sensibility to behave well in your act as an investor. But this has been said for years. In fact, Ben Graham talked about sensible behaviour in investing in 1949 when he released his seminal book – The Intelligent Investor. Then, Buffett and Munger have been stressing upon this for years. So why do most investors don’t behave sensibly? And also, if most people appreciate sensible behavior, why are most people not value investors? Here’s Buffett explaining why…

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It’s Human Nature, Stupid! The reasons most investor aren’t value investors are deeply rooted in human nature – and, therefore, unlikely to ever change. We are averse to losses. We perceive the pain of a loss about twice as strongly as the pleasure of a comparable gain. Due to its contrarian bent, value investing can sometimes fail to work for long periods of time, causing plenty of pain. To avoid such an outcome, most of us would get drawn into a sucker’s game of rapidly trading our portfolios rather than waiting out the inevitable periods when they don’t perform well. Then, value investing is a get-rich-slowly approach, even as we are all hard-wired to pursue actions that offer immediate gratification. Finally, we find it hard to go against the crowd. If you didn’t own real estate and infrastructure stocks during the late 1990s, not only did you suffer lousy returns, but you also felt excluded! Going against the crowd is equivalent to going against the ‘norm’ or being ‘abnormal’, which is not easy to do, and this you won’t find many true value investors out there. of 30



You Have Less Competition Because of all reasons I mentioned above, you have very less competition in becoming a value investor…a true value investor. Value investing is less dramatic (Who wants to read those boring annual reports?), and would thus never attract the crowd. But if you were to walk down this road less travelled, you will not just compound your money safely over the long run but also sleep well at night. So, I would say that investing is easy, and you can learn it in a few hours. But investing sensibly and successfully is very hard. Like it’s hard to pick up Graham’s The Intelligent Investor and read it at least three times. If you haven’t done it, read and re-read this book if you want to better understand the value investing mindset. Before I end, here are a few words from the legendary Howard Marks of Oaktree Capital on what it means to be a value investor… I’ve heard it said many times that value investing is not as much about doing smart things as it is about not doing dumb things. Avoiding mistakes, resisting market fads, and focusing on allocating capital into ideas that are highly likely to produce satisfactory returns and that offer a margin of safety against permanent capital loss – these are the dominant themes of the value investing approach. Contrary to how it sounds, these elements don’t make value investing easier than other approaches. In fact, cultivating the discipline to avoid unproductive decisions, refining the craft of valuing businesses and assessing risk, and developing the emotional and mental equilibrium required to think independently in a field in which there is tremendous pressure to conform requires constant diligence and effort. Long-term-oriented value investors have greater scope to produce superior risk-adjusted returns when the seas are rocky. The valid response when there’s chop is to focus on the end destination — what value investors call intrinsic value — and not worry about whether the next wave is going to push the boat up or down. If you don’t invest with a very clear notion of underlying value, how do you do it? Nothing else makes sense. Your ability to maintain focus on the long term comes from experience. You go through a couple cycles where everybody else is screaming at you not to try to catch a falling knife, and then when you do so and make some money, it does wonders for you…and for your ability to do it next time. Here I repeat what Marks says, and how it gels so well with Tilson’s points about being a value investor…

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• Value investing is not as much about doing smart things as it is about not doing dumb things. • You must learn to avoid mistakes. • You must resist market fads. • You must focus on allocating capital into ideas that are highly likely to produce satisfactory returns and that

offer a margin of safety against permanent capital loss. • Value investing isn’t easy to practice, as you require constant diligence and effort to cultivate the discipline to

avoid unproductive decisions and develop the emotional and mental stability. • But if you can do this, you have a great scope to produce superior risk-adjusted returns over the long run. • Your ability to maintain focus on the long term comes from experience.

You see, the tools and analyses for value investing may change over time, but the mindset remains the same. If you can create the right mindset to become a value investor and then practice it with diligence, it would indeed be an investing life well-lived. Finally, in any event, reading all this and working on the Mastermind Course for the next one year alone will not turn you into a successful value investor. As I mentioned above, and as Buffett, Marks, and Klarman have been saying for years, value investing requires a great deal of hard work, strict discipline, and a long-term investment horizon. Few are willing and able to devote sufficient time and effort to become value investors, and only a fraction of those have the proper mind-set to succeed. Plus, there is a risk of being seduced, and no style is immune to mistakes. This Course most certainly won’t provide you a sure-fire formula for investment success. There is, of course, no such formula. Rather I intend to help you with a blueprint that, if carefully followed, offers a good possibility of investment success with limited risk. I believe this is as much as you can reasonably hope for. Exercise In your “Diary of a Dumb Investor”, write down the following “Being a Value Investor Checklist” as mentioned by Tilson in his book, The Art of Value Investing…

• I will focus on intrinsic value – what a company is really worth. • I will define my circle of competence and search for ideas within it only. • I will always conduct in‐depth, fundamental research and analysis rather than relying on tips from others. • I will avoid making macro-economic forecasts and instead spend time analyzing a business (its competitive

advantages and growth prospects).

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• I will understand and profit from the concept that business cycles and company performance often revert to the mean, instead of blindly relying on the past performance.

• I will act contrary to popular opinion, after a careful, independent research. I won’t buy what’s popular. • I will think long term (10-20 years) rather than focusing on the month or quarter ahead. • I will consider truly great investment ideas to be rare, and thus have the patience to wait for the right pitch. • I will focus on avoiding permanent losses rather than minimizing the risk of stock‐price volatility. • I will focus on absolute returns, not on relative performance versus a stock market index or even an office

colleague’s performance. • I will consider stock investing to be a marathon, and remember that winners and losers best identified over

periods of several years, not months. • I will admit mistakes and actively seek to learn from them, rather than taking credit only for successes and

attributing failures to bad luck. After writing down this checklist, ponder over which of these points are missing from your investing practice currently. If a majority of them are missing from how you practice investing currently, visit the Mastermind Forum via this link, and answer this question – “I have not been a value investor all these years because (Fill in the blank). Hint: Your answer could be any or all of these…

• “I have been greedy to earn fast money.” • “I never wanted to do the hard work that value investing requires.” • “I lacked time to practice value investing.” • “I never knew what value investing was all about.”

Anyways, after you fill in the blank, write down why you think you can get over your past and become a value investor in the future, and follow the checklist Tilson suggests above. See, I told you value investing requires hard work. Here again is the Mastermind Forum link where you must write your answer to this exercise. Further Reading

• The Intelligent Investor – Benjamin Graham • The Art of Value Investing: How the World’s Best Investors Beat the Market – Whitney Tilson

Disclaimer: This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Skylab Media & Research. This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual investors.

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The Safal Niveshak Mastermind Reinvent the Way You Invest, Work, and Live www.safalniveshak.com

Vishal Khandelwal, Chief Tribesman, Safal Niveshak

What Participants of My Art of Investing Workshops Say... “I wish Vishal’s workshop was conducted 20-25 years ago, I would have been a multi billionaire by now!” ~ R.K. Chandrashekar “Vishal’s passion to teach Value Investing is contagious and his informal yet definitive style of teaching is par excellence.” ~ Gautamjit Singh “Very few people take out the time and energy and go out of their way to share the knowledge they have gathered over the years, Vishal is one of them.” ~ Ashish Kila

The Safal Niveshak Mastermind is a one-year self-study course to help you reinvent how you invest, do work that matters, and create your financial freedom.

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If You Want to...

• Take control of your financial life but don’t know how to do it • Make your money work hard for you by learning how to invest sensibly • Do the work you love to do and still live with high financial security • Make a dent in the universe by doing something meaningful for others

…join me, Vishal Khandelwal, as I take you behind the scenes for a closer look and a deeper education on how you can manage your money and earn a living without having to slog for years. The goal of The Safal Niveshak Mastermind course is simple – To help you get richer every single day.

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ideas on investing and personal Finance, exclusive interviews with people who are in complete control of their financial lives, and book reviews.

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Mode: Online, Self-Study

Duration: One Year

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Value Investing Course: Modules & Content

Module 1 Module 2 Module 3 Module 4 Module 5 Module 6 Module 7

Start Human

Element Generating

Ideas Building the

Case Calculating Valuations

Making Decisions

End

Investing Vs. Speculation

The Value Mindset

Building Circle of Competence

Competitive Moats

Understanding Value

Power of Checklists

Creating a Philosophy

Being a Value Investor

Psychology of Investing

Analysis of Three Key Sectors

Financial Stat. Analysis

Key Valuation Methods

Value of Process and Discipline

Immutable Laws of Investing

Is Value Investing Really Profitable?

Building a Latticework of Mental Models

Gathering Relevant Information

Ratio Analysis Putting DCF to Practice

Dealing with Risk and Uncertainty

Understanding the Role of Luck

Benjamin Graham’s Tenets

Screening for Quality

Identifying Moats through Numbers

Margin of Safety Fat Pitch Investing

Deadly Sins of Investing

From Graham to Buffett

Financial Shenanigans

Paying Up for Quality

Contrarian Investing

Can You Really Beat the Market?

The Most Important Things

Assessing the Management

Identifying Value Traps

Constructing a Portfolio

Go, Compound

The Dividend

Dilemma Concentration Vs Diversification

How You Will Benefit? • The Course will take you through the entire process of becoming a value investor, including:

Creating the right value investing mindset Building a behavioural framework to avoid biases and create the right investment thought process Widening your circle of competence Assessing business quality and calculating intrinsic valuations Creating and managing a portfolio of sound businesses

Key Features:

• 100% online, members-only, self-study course • 50+ print lessons, several hours of videos, excel templates, and “members-only” forum for discussions • All lessons followed by reference materials and exercises • “The Safal Niveshak Mastermind Certificate” of participation on completion of the course

For further details, please visit: www.safalniveshak.com/mastermind or write to [email protected]

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