Whose mind is it anyway

Whose Mind Is It Anyway!

Relax | Black and White Blobs | Robo Rats | Headbanging Caterpillar 

(read in sequence, please don't scroll down)

Before we begin, lets have a "thought experiment" :)
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Rest yourself. Relax. Be in a place where you are not disturbed.
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Now close your eyes and focus on your thoughts... just observe them... let them come and let them go... don't resist them... just be there for couple of mins and come back here...
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Please do, would be worth it
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So what did you experience? Where did your thoughts began? Where did they actually end up? Where all did you wander?
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Let's do something again... Go in the same space and...




DON'T THINK...



Yes... just stop thinking about anything. Be thoughtless and come back....

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Do it, I am waiting... :)




How was it?


If you were able to keep your mind away from a any thought.. you need not read any further. You have attained bliss :). Others, mere mortals, you may continue...

So what are these thoughts? Where do they come from?

What happens when we say we are thinking?

Do we control what we are going to think? How free are we when it comes to thinking?

"It may sound extremely complicated, but it is surprisingly easy to test this idea. Next time a thought pops up in your mind, stop and ask yourself: ‘Why did I think this particular thought? Did I decide a minute ago to think this thought, and only then did I think it? Or did it just arise in my mind, without my permission or instruction? If I am indeed the master of my thoughts and decisions, can I decide not to think about anything at all for the next sixty seconds?’Just try, and see what happens."

- Yuval Noah Harari in Homo Deus

This post is about how thoughts come to us and how they shape what we do. 

For this, I am relying on some books and articles that I have read, especially Sapiens, Homo Deus, Thing Fast and Slow, Power of Now, etc. along with certain other programs and experiences that I have gone through that has helped me look at my own thought patterns. Hence, strictly based on desktop research and hypotheses that I carry. These are just some musings that I am sharing.

Small Voice

We all have a small voice. Something that reside in our mind. This is probably the same voice that just asked "What small voice?"

Its a constant process whereby the biochemicals or electric signals in our brain are constantly evaluating the world around us, trying to give us an edge to survive. These signals just try to guess the situation that we are in by looking back in its "Experience Bank", trying to make a sense of it.

But what if certain situation is not in your experience bank?

Here's an example... can you tell what this is?




What do you see here??

Right now, your brain is probably going crazy and dipping into your experience bank and trying to make a sense of this picture... trying to guess what best these black and white blobs are are. This is what our mind does always, trying to look for a pattern from the past for a situation that we are in.

Kids don't know that they have to be careful while crossing the road or to be careful with hot stove cause they don't have any pattern concerning these life situations.

However, when they experience what its like touching a hot stove or when they learn from other's experience, like watching it on TV or parents' constant nagging about being careful on the road, they form a pattern of this bad experience or in other words form an "opinion".

Thus, as we grow up, our millions and trillions of experiences, conscious or unconscious, shape which of our neurons get fired when we are in a "similar" situation. A lot depends not on what you have seen in this world, but more on what the world has shown you.
(Did we actually choose to get goose bumps and feel proud when we see Indian flag fluttering high in mountains with the patriotic music running in the background?)

This automatic process of constantly assessing your life situation is that "small voice" that keeps on running in your head, constantly dictating how "you" should be reacting, behaving and feeling!

By the way, if your pattern seeking mind is still trying to guess what those black and white blobs were in the above picture.. it was ...

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"The world" has now shown you what those black and white blobs are. Now that its in your experience bank.. when you look at this picture or another random black and white patterns again...



the small voice will probably tell you its a snake .. and that you should feel in a way how you generally feel when you look at a snake picture... (even when this picture actually is not a snake!)

This is just a small example. But there are constant events that happen in our life whereby our brain neurons get fired in a certain way, shaping our thoughts and beliefs that drive our own behavior and decisions.


Decisions

Get present to what all you are doing right now... physically...

slouching on a chair?... biting nails?... scratching?... where are your hands?... how are your legs placed?

Did you decide to do all that?

We all have some small habit that keeps us comforted and lowers our anxiety.

Again, these are the small things. But do we do the same things when it comes to big decisions from our life? Do we have fixed patterns on how we decide onto things?

Whatever we decide to do, consciously or unconsciously, the same mechanism is at work. Decisions are nothing but predictions and best guesses, based on again, our experience bank.

"Predictions are basically the way your brain works. It’s business as usual for your brain. Predictions are the basis of every experience that you have. They are the basis of every action that you take." 

 - Lisa Feldman Barrett, Neuroscientist

It is this prediction business of mind that chooses emotions, decisions and how we react to situations for us. A lot of decisions and actions are already decided by the small voice even before we actually "think" of taking a decision... A lot of decisions about a person are already taken (or opinions formed) for a person even before we speak with them...

The small voice actually is faint voice. We can listen to it only faintly, that too when we actually sit down to not think at all. (remember "don't think anything" experiment above?). A vast magnitude of the small voice is hidden deep inside in our neural patterns, some of which are even primal, like hogging onto as much sweets as we can, whenever we find them.

So, based on above, do we control anything? Do we really have a free will..

Yuval Noah Harari has articulated the free will pretty well.
(caution - this may actually be a bit depressing thought :) )

"Today we can use brain scanners to predict people’s desires and decisions well before they are aware of them. In one kind of experiment, people are placed within a huge brain scanner, holding a switch in each hand. They are asked to press one of the two switches whenever they feel like it. Scientists observing neural activity in the brain can predict which switch the person will press well before the person actually does so, and even before the person is aware of their own intention. Neural events in the brain indicating the person’s decision begin from a few hundred milliseconds to a few seconds before the person is aware of this choice. The decision to press either the right or left switch certainly reflected the person’s choice. Yet it wasn’t a free choice. In fact, our belief in free will results from faulty logic. When a biochemical chain reaction makes me desire to press the right switch, I feel that I really want to press the right switch. And this is true. I really want to press it. Yet people erroneously jump to the conclusion that if I want to press it, I choose to want to. This is of course false. I don’t choose my desires. I only feel them, and act accordingly. 

For example, robo-rats could help detect survivors trapped under collapsed buildings, locate bombs and booby traps, and map underground tunnels and caves. Animal-welfare activists have voiced concern about the suffering such experiments inflict on the rats. Professor Sanjiv Talwar of the State University of New York, one of the leading robo-rat researchers, has dismissed these concerns, arguing that the rats actually enjoy the experiments. After all, explains Talwar, the rats ‘work for pleasure’ and when the electrodes stimulate the reward centre in their brain, ‘the rat feels Nirvana’. To the best of our understanding, the rat doesn’t feel that somebody else controls her, and she doesn’t feel that she is being coerced to do something against her will. When Professor Talwar presses the remote control, the rat wants to move to the left, which is why she moves to the left. When the professor presses another switch, the rat wants to climb a ladder, which is why she climbs the ladder. After all, the rat’s desires are nothing but a pattern of firing neurons. What does it matter whether the neurons are firing because they are stimulated by other neurons, or because they are stimulated by transplanted electrodes connected to Professor Talwar’s remote control? If you asked the rat about it, she might well have told you, ‘Sure I have free will! Look, I want to turn left – and I turn left. I want to climb a ladder – and I climb a ladder. Doesn’t that prove that I have free will?"


Time for some creepiness

Recently I came across a creepy TED talk by Ed Young (watch here). It is about discovery of certain parasites, animals and organisms that live on bodies and brains (yes brains!) of other animals and organisms and control their neural networks for their own benefits.

There are parasitic wasps that lay eggs in caterpillar's head. The eggs that hatch eventually go on to control caterpillars brain to defend their siblings, making caterpillar bang its head... a headbanging caterpillar... put on some rock music and see the below video..

There are examples of parasites that make crickets and grasshoppers drown in water (suicide mission!).

There is an example of Toxoplasma Gondii (pyaar se usse Toxo bulaate hai) which infect mammals. When Toxo infects rat or a mouse, it makes them into cat seeking missiles.

"If the infected rat smells the delightful odor of cat piss, it runs towards the source of the smell rather than the more sensible direction of away."

"This thing is a single cell. This has no nervous system. It has no consciousness. It doesn't even have a body. But it's manipulating a mammal? We are mammals. We are more intelligent than a mere rat to be sure, but our brains have the same basic structure, the same types of cells, the same chemicals running through them and the same parasites."

The idea that Ed Young wanted to present was that these "manipulations" are common in the world around us and there are chances that even we can be infected by such parasites considering our construct as a mammal is same as that of rats or a mouse.

"...opinion is divided as to whether the parasite is truly influencing our (humans) behavior. But given the widespread nature of such manipulations, it would be completely implausible for humans to be the only species that weren't similarly affected."

Whose mind is it anyway?

Mind or brain is nothing but a hardware that fires some biochemicals or electric pulses to make us happy or sad. It process its information much like a PC or a mobile phone on which you are reading this (A bit exaggeration, but you get the point).

Do we actually control how and when these neurons fire? Do we really choose how we behave? Do we really decide what we want? Or we are made to do something?

We don't!

Our thoughts, our actions are shaped by things external to us. So can we call it ours?

However, we have something which probably no other life form has. Something that can help us re-wire and create. But that's probably a discussion for some other post.

But what I'll do is just leave you with a quote from the movie Inception.




Sources:
https://vialogue.wordpress.com/2018/01/03/ted-lisa-feldman-barrett-you-arent-at-the-mercy-of-your-emotions-your-brain-creates-them/
https://www.wbur.org/npr/470535665/can-we-fall-prey-to-hidden-parasites
various other web sources, books and articles.

The more things change, the more they stay the same

"The more things change, the more they stay the same"
- Jean-Baptiste Alphonse Karr

In a nutshell, this is my take from The Match King, a book on Ivar Kreuger by Frank Partnoy.

The official name of the book is "The Match King: Ivar Kreuger and The Financial Scandal of the Century." It tries to bring out a long forgotten "scandal" from the period of 1920s rapid expansion in US, followed by The Great Depression. Ivar Kreuger is the "architect" of this scam, whose story is well captured in this pleasant narrative.

Hailing from a small Swedish town. Ivar went on to control 3/4th of world match sticks production. He became one of the largest financier, taking over from Jack Morgan (son of JP Morgan), and bailed out many war torn (WW 1) European governments. 

After establishing match monopoly by borrowing and consolidating the industry in Sweden, Ivar sets out for US with a brilliant idea. Because of stringent monopoly regulations in US, there were no major monopolies for US citizens to invest in. Enter Ivar, who has ability to raise capital and lend it to European countries, in return for match monopolies in those countries. In return, there was a promise of high dividends for the optimistic American investors.

This was the time of poor disclosure norms for listed entities. Financial statements were at best a page long, and that too infrequent.

"In 1926, only 242 of 957 companies listed on the New York Stock Exchange published quarterly reports. Nearly a third of listed companies did not issue reports at all, primarily because they had been members of the Exchange for many years and had nondisclosure agreements that were grandfathered from when they first joined. Newly listed companies filed quarterly reports, but they lacked detail. Listing requirements varied by company and were open to negotiation."

This was also the time of 1920s where optimism of Americans were running high.

"Radio sales doubled in 1923, then tripled in 1924. On average, nearly every family had a car, and drivers were branching out from black Model Ts to an assortment of new makes in colors ranging from “Florentine cream” to “Versailles violet.” Average people bought items they hadn’t imagined spending money on just a few years earlier: from Listerine mouthwash and crossword puzzle books to vacuum cleaners and meat slicers to new golf clubs and even property in Florida."

"As stock trading became more popular during the early 1920s, so did this kind of cognitive error, and the widespread passion about markets led investors to focus on winners more than losers, like gamblers who vividly remembers cashing a winning ticket from a particular race at the horse track, but conveniently forgets that she lost money overall."

This was the perfect time for Ivar to raise money with his "too good to be true" offering and he orchestrated this amazingly well. The book claims that he was inspired by Charles Ponzi. But unlike Ponzi, he intended to create real businesses and assets and not defraud anyone.

All this was made possible with multiple holding companies and subsidiaries in different countries and havens. This ensured that there were multiple auditors with limited sight. Innovations like "B shares" helped him keep the control and keep raising money.

Throughout his efforts went in managing his and his investment's perception in order to keep raising money and pay high dividends to older investors along with purchasing business interests.

"He knew markets reflected emotions and perception. In finance, there was no such thing as reality. There was only, as Pierpont Morgan had intimated, what traders thought of a man's character. If everyone saw Ivar as shining beacon of confidence, his securities would maintain their value, even if the rest of the market crashed."

But as it happens each time, with 1929 crash, things started to become tight. Panic reined in and liquidity dried up. People's optimism started to fade away and questions poured in about how Ivar is earning so much.

He was cornered when he failed to raise incremental money at a critical due date. The result, he shot himself, leaving all the mess for his bankers and investors and governments to clear.

His death brought in "changes" in the system in US. A new Securities Act was passed in 1933. A year later, Securities Exchange Act, which created Securities Exchange Commission (SEC). This act also gave american shareholders a right to sue the companies for fraud. One of the most important and controversial right.

World has seen many regulations come in with respect to raising money and protecting the interests of shareholders. The disclosure norms have become highly standardized and stringent. In fact, non-reporting of results has now become a major red flag on the company. Yet, time and again, we have seen frauds being committed by companies world over. World continues to encounter Ivars and resultant financial scandals.

As author says, "Financial scandals are complicated and their investigations typically lead to the search for a human face: John Law of the Mississippi Scheme, Robert Harley of the South Sea Bubble, Michael Milken of Drexel Burnham Lambert, Jeff  Skilling of Enron, or Bernard Madoff . Ivar Kreuger became the face of the International Match scandal".

There are things certainly beyond a face committing a fraud.

This book and every mania shows that a fraud is a culmination of entire system. Overeager investors, sloppy auditors, independent directors, vague regulations, lack of law enforcement, etc. Each scandal brings with it a new lesson, new regulations and new systems.

But the underlying fundamental principles remain the same, driven by how people behave. History keeps on rhyming and things remain the same.

Overall, a worthy read to understand how scandals (or unsustainable businesses) build up bit by bit, over the years, and how they keep getting fragile with time, before their ultimate collapse.
   

An Old Chaddi Worth Millions

The moment I heard "Jungle jungle baat chali hai.....", I got goosebumps. It brought back all the memories from my childhood. Those Sunday 7.30 evenings started flashing in front of my eyes, when I used to wait for this song to play on TV and watch my favorite show The Jungle Book.

Listening to this song made me immediately decide that I will be watching the 2016 remake of The Jungle Book on the very first weekend. I decided that this will be my 3 years old son's first movie in a theater hall.

I did go and enjoyed the movie to the fullest. I was happy to see my son sitting on the isle besides our seats, with a tub full of popcorn, trying to identify animals in the movie. I not only cherished an old memory, but created a new memory.

What happened to me?

I was getting a sense of nostalgia. It's called as a desire to return in thought or in fact to a former time, to one's homeland or to an old relation. It returns you to happy time lived in the past. It activates release of happy chemicals like dopamine. No wonder that one yearns to go back again and again.

There are many such songs and things that have made a come back in my life over last few years that makes me nostalgic. Tamma Tamma, Tan Tana Tan Tan Taara, etc. (It is said that music is a powerful source of nostalgia). There are  many products that I have seen and had desire of having or owning since I was a child. A bongo, a mechanical kit, having a pet dog, eating Maggi, etc.

These are highly emotional bonds that I have with these memories. However, at the end of the day,  all these are consumer products. They fetch a value. I don't mind spending money on them, just to make myself relive those moments. These products carry what I call as Nostalgia Value.

The moment I saw The Jungle Book song, apart from deciding to go for this movie, it also struck me that this movie will earn at least Rs 100 crores because of this song itself. It ended up being the highest Hollywood grosser in India with collections of Rs 250 crores.

This is the power of nostalgia. The memories and emotions from childhood becomes a valuable source of income for the product owners. They own my memories. Because I am the decision maker now, because I have the spending power, I get to make myself happy by reliving those moments. This emotional bonds are very hard to make. But once made, it provides the product with longevity. The product owner can monetize my feelings purely based on that emotion attached to it. It's a durable bond.

This is how an old chaddi song made millions from Indians.

(By the way, the song Tan Tana Tan Tan Tan Tara also made me shell out Rs 500 this weekend. This is despite reading bad reviews about the movie. It has also entered Rs 100 crores club.)

Maggi could make a come back after getting banned by striking an emotional chords. It enjoys 30+ years of bonds with today's earners and decision makers. Remember #WeMissYouToo campaign?

I am sure Patanjali noodles would find it difficult to make a comeback if something unwanted is found in its packets.

Products and brands like Royal Enfield, Vespa, Nokia, etc. could think of making a come back purely by banking on this nostalgia feeling that it enjoys among its erstwhile users / aspirers.

Though there are things beyond nostalgia that are at play as well, like relevance of product, scale at which it can operate, re-investments required, etc. that one needs to be mindful about. People have memories with Jawa Yezdi as well, but it depends on many other conditions if M&M will be able to resurrect those emotions from people's mind.

All in all, a business owning such emotional connects needs to be considered as a strong business. These emotions are hard to build and generally are very durable source of competitive advantages. They carry a story. Even if knocked down, they have a capability of coming back.

India is a young country. Median age of Indians is around 26-27 years. This is the age when people start to earn and get their spending powers.This is also the age when prime nostalgia forming age of 12-22 years is passed. Products and services that help people relive their adolescent moments can thus be highly valuable. Look out for them.

A DeMo of CAS

"The whole village could not sleep. Even I was under stress as to what will happen. I had Rs 2,000 in 500 notes."

This was our young guide Raksha on what was the situation the day government announced demonetisation of 500 and 1000 notes. We were on a village home stay last trip last weekend. Raksha was our guide and was on a long Diwali break from her college in Wada.

When asked what's the impact of demonetisation on the people of small hamlet called Dehene (Maharashtra), she informed that most people here do not have so much money. People have been able to exchange money at a bank in Dolkham, a town 10 kms away from that village. On inquiring with other villagers, it appears that not all of their money is exchanged as yet. They are not able to even withdraw money from banks. Bank has been running low on cash. "Don't know when we will be able to exchange all the money. Who will go Dolkham everyday and stand in queue", said another villager.

They have not been able to move their harvest as well. Predominantly rice and nachni producing region, people here are unable to move goods easily because of cash crunch and uncertainty.

This village though may not be entirely dependent on agriculture. Many males from the village work in Mumbai or other town. Raksha's uncle Dashrath in fact works at a hydro power plant some 15 kms away. Being base village for Aaja parvat trek and such home stay initiatives, people here are not dependent on agriculture for their income. It is a seasonal occupation here and only surplus harvest is sold. Thus, Dehene may not be an ideal rural India to gauge impact of demonetisation in hinterlands.

But people here seemed happy that those with lots of money are losing sleep and being punished for their greed. Just like most salaried and organised players feel in the city. "The adhikaries would be spending sleepless nights. It is a good step by Modi" said Raksha.

Though it emerged that adhikaries there as well seems to be trying to find loopholes and convert their black money into legal tenders by depositing money in different names, distributing among keen, etc. (made me think if these influential people, who can misuse their position, be the reason for cash crunch at banks?)

So what will be the full impact? Will black money cease? Will unorganised economy turn organised? Will corruption go away? Does the costs involved justify potential tangible and intangible benefits?

It appears that I was left clueless even after my short on the road (toll less :-) )trip.

Google search says that the word "Complex", when used as an adjective means:

1. consisting of many different and connected parts.
2. denoting or involving numbers or quantities containing both a real and an imaginary part.

This is indeed a complex situation. An economy in itself is a Complex Adaptive System (CAS). A system made up of many micro level, partially connected structures that intermingle. The result of these intermingling is not a simple aggregation (i.e. not 1+1=2) but something different altogether. These micro level structures self organize to systemic changes or change initiating events with the intent of survival. This process results in increased survivability or robustness of macro structure. Demonetisation is one such change initiating event.

Trying to outguess outcomes or arrive at a linear "logical" consequences can be a futile exercise. Thus statements like "there will be short term pain, but good for the economy over long term" should be read as "I don't know, but this seems to be most likely scenario". Yes, our logic states that things will move from unorganised to organised will be better for the economy over long term. But there can also be any unknown unknowns that can work against this move. How will micro systems learn and reorganise? What impact each micro system will have on others? What will be the end result on the adaptive system called economy when things settle? Only time can tell.

In that sense, as an alternate view, government reacting to situation by bringing in new rules every day, as situations unfold, is a better strategy as compared to "pre-plan" everything and then implement. When we are dealing with CAS, one can never be fully prepared.

How things will unfold, only time will tell. All we can do is try to arrive at most likely scenarios (plural) and adapt accordingly.

As an investor, I have learned that stock market (a complex adaptive system in itself) does not like uncertainty and is currently reacting to that. It will take its time to learn and organise itself from this event. There will be winners and there will be losers as the system tries to improve its robustness. Some people will be able to pick winners (Investing falls towards luck side of luck-skill conundrum) and will be called geniuses few years down the line whereas some will return to mediocrity. All one can try and do is have a process and build a portfolio with enough diversity of robust companies and try and improve portfolio survivability.

Lofty Business

It's festival time. Festivities results in one very important annual ritual in every Indian household. The ritual of cleaning your house! It's time when every nook and corner of the house is turned upside down to make it spotless. There are many things associated with cleaning the house before Diwali. It is done to welcome Goddess Lakshmi or to welcome new year with the motto of "doing away with old and bringing in new".

This ritual happens in my home as well. It's a family affair. Things that require climbing and reaching out is done by male members. Recently, I was given the responsibility to clean the loft. Loft, an area of home that remain untouched for rest of the year. This is the time when old boxes and bags are removed and checked.

I realized there are 3 types of boxes or bags...

While some bags contain things that are kept with the hope of using them next year, there are also certain things that are no longer relevant and needs to be "donated" to maids and watchmen. Some items can be scrapped, providing that source of money to pay for bakshis to maids and watchmen.

Sometimes we also come across a third category are those boxes that brings the thought of "What the hell is that?" to mind. Boxes that are not touched for ages or we do not have any recollection of..

Some of these find their way to one of the above two categories and are either dumped back or scrapped.

On the other hand, there are some pleasant surprises in store too. Things that you've been looking for for a long time. Your favourite jacket or some memories. This year I stumbled upon the my childhood photographs, back from the days when photos were physical, rare and very valuable. Certainly cleaning the loft was worth the effort!

Something similar goes with investments as well. There are a set of investors, whom I call as "Closet Investors" (can probably be rechristened as "Lofty Investors"), who get active during bull markets and shy away from it after making losses when market crashes. They just resurface every bull market. They hold shares of 100s of companies in their closet, some dating back to pre-demat days as well, hard, physical share certificates, forgetting they ever existed or were left behind by parents.

Like Diwali, when bull market returns, these investors conduct the ritual of checking their lofty portfolio. Some companies that are making them some money are sold of for whatever profits they have made for them while other loss making ones are kept back on the loft, hoping they will pay back some day!

There are some positive surprises in store too... 

Have heard quite a few cases where old forgotten investments for some people turned out to be worth millions. Physical shares of Bajaj Auto found while moving houses worth Rs 80 lakhs, investment in yester year's bluechip textile company turned out to be worth Rs 60 lakhs on account of real estate boom, a mis-selling by a private bank sales person of Rs 25000-30000 in some closed ended real estate fund turned out to be worth Rs 4.5 lakhs (a structured product by a prominent AMC!).

One of the veteran from the industry had once told me that all this analysis and strategy is meaningless. Over the years, he has observed that it is wise to stick to 15-20 stocks based on informed decision making. One should be ready to lose money in some of them whereas let winners make up for that and over the years most of us will be much better off than investing very actively.

However, I have also seen many other portfolios that has probably done a mediocre job for investors. They hold nothing but collector's edition stocks and have done a mediocre job for the investors. 

Michael Mauboussin has defined success as : 

Success = Skill + Luck

Great Success = Skill + Great Luck

I think all these anecdotes and experiences largely are a function of the luck element involved with investing. They are more towards luck as compared to skill. In his book "The Success Equation", Michael has placed investing success more as a function of luck vs skill. This should not be taken in wrong context. Skill is very much required for investing success, but it plays out over a long period of time. In the interim, luck can play a major role in driving portfolio returns.


Picture source

Thus, some of those lofty investors have an interesting dinner table conversations on how they had great vision in identifying those great investing trends while some continue to hope for being right every bull market.

As for the lessons, I hope to make "checking my portfolio" a systematic affair rather than just during Diwali (bull markets). Just like we do not clean our loft everyday, it also does not make sense to check the portfolio everyday. But whenever we do, just need to ensure to properly identify useful things from the hopeful things. If things are not used for say 2 or 3 years, they ought to be scrapped away to pay for bakshis or other useful things. In the same way, if investment thesis has not played out over last 2 or 3 years, instead of hoping to be right, it might be beneficial to have a re-look at it altogether.

Happy Cleaning...

The Path

"I can only show you the door, you are the one that has to walk through it."

 - Morpheus to Neo in the movie 'The Matrix'

This was an iconic moment from the movie. But unlike movie where Neo had one Morpheus, in the world of investing we are surrounded by many Morpheus. There are whole host of investing schools for a novice investor to follow. Fundamental, quantitative models, technical analysis, value approach, growth approach, finding structural shifts and value migrations, momentum, short term, long term... and the list can be further complicated with mixture of many.

There is always a question of what works the best. The answer to that was aptly put by Howard Marks when he noted that he has seen all type of successful investors so far. Be it value investors, speculators, growth investors or any other type. He is correct. We can see all types of people making money, globally as well as in India. 

So which path to follow? Well, we need to choose a path, walking on which we find most suitable to our character and personality. The path on which you can walk longer as compared to any other path. The beauty is that you can take pavements from different paths and even create your own, and the creation can be an ever evolving process.

Why to do this?

Each human being has a different set of beliefs. The world that he has seen is different. The circumstances that the world has thrown at each person are different. I have known twins who have personalities that are poles apart despite being raised by same parents, attended same school, same college and despite both ended up being Chartered Accountants. One is introvert where as other one is extrovert.

These beliefs are difficult to change as the person grows old. They are hard wired in our brains. These beliefs play a large role in the way we act. This is our nature, our prakruti. And if we are acting against it, we are exposed to higher chances of committing a big mistake over longer term. This is because at some point of time, the animal within will start playing its part. And then the same old story of "anything multiplied by zero, is zero".

First half of this video beautifully explains how our brain is structured.

  

The most important thing in my opinion of creating a path, suitable to your temperament, is that it gives you a longevity in the market. The longer you are able to deploy your ideology in the market, better the rewards can be. Now again, everyone cannot be Warren Buffet or Rakesh Jhunjhunwala or Howard Marks or Damanis. They are outliers. But then we are maximizing our chances of utilizing our capabilities to the fullest and generate returns that are best possible given our temperament.

I am in no way suggesting of sticking to our comfort zone. Learning is a perennial process and it is in our interest to be comfortable with as many types of hunting grounds that can come in our path as possible. We may not be able to change the existing hard wires, but with persistent learning, we can surely create new ones.

Moats

Moat refers to a water body surrounding a castle. It is said that moats surrounding the castles even had predators like crocodiles for extra safety. This moat protects the castle from being attacked.

In investing, the term is made famous by Warren Buffet and refers to characteristics of a business to protect itself from competition. Warren Buffett likes to invest in companies with large moat so that they can survive and are relevant even after 10 years, 15 years or 20 years. The idea is to remove / minimise the business risk while taking investment decisions and not overpay for it so that the inherent compounding in the business can take care of the returns.

The term these days have been made sort of generic. Everyone likes to use this term in their analysis. And the general feeling that I get is that companies with moat are now being considered to have been given a right to survive. Long-term investing in moat companies has become a holy grail for accumulating wealth.

But is it that simple?

Well, yes the answer to this is NO.

All that an "impenetrable" moat provides to the company is time to protect its castle. Presence of it just allows the company to first know that is being attacked, identify the attackers and then formulate strategies to protect itself. By very nature, the moat companies are in advantageous position to defend itself. Wider the moat, more the time company gets to protect itself. To protect itself, companies need to be proactive and act upon it when under attack rather that just relying on moat to defend the castle. Else, sooner or later, crocodiles and sharks in the moat will be killed and the walls will be breached.

Thus in no way there is a writing on the wall that moat companies can survive any catastrophe. By nature, they have been given a chance to protect themselves. But the rules of :Adapt or Perish" still apply to them.

Microsoft, in my opinion has (had?) one of the strongest moat. It has network effect whereby large number of user base and software developers are tied to each other. It has high tangible and intangible costs. Moving to other operating system can be expensive in terms of money as well as time invested. Lots of data resides on its Office suite, making it difficult to migrate. Can spend a large amount on R&D or sales promotion and spread it over millions of units. And of course the intangible in the form of a brand. Kids grow up looking at the Windows logo while starting a PC. It has become generic like Xerox.

Most of us have grown up looking at generations of windows logo while starting our PCs

However, Microsoft' moat has been under attack for some years now. Google and Apple are moving the world towards mobile computing. They have changed the way we use "computers". I am writing this blog on a tablet at 4.30 in the morning and will give a finishing touch tomorrow morning at work. That's the power of internet that these companies are exploiting.

The game is disrupted and first movers have found themselves in an advantageous position. They are changing how the world computes. Microsoft is finding difficult to come out with products that can compete with Google. Future will go to the person that holds and controls maximum (online) data and it is Google's products where maximum amount of online data is generated (and stored).

But Microsoft has recognized this and is thus trying to defend itself. It is trying to get control on the search market by integrating its Bing platform in a lot of ways. It is pushing its Office cloud solutions aggressively. Currently, it is advantage Google (and other online platforms). But will Microsoft be able to get its lost glory? Only time can tell that. As for now, it is struggling to protect its moat (relevance) since mid-2000s.

Anyways, to conclude, having a moat is not something that gives the companies a right to survive over longer term. Risks still exists with these companies as well, though in lesser proportion as compared to others since in case of disruptions, you still may have some time to protect against permanent loss of capital. And of course, valuations is something that shouldn't be overlooked in this case as well since:

A great company need not be a great investment any all points in time.