Reflecting 2021 - Lessons


We have yet come to the end of a stunning year, we approach every single year as something new, which fills us with promises and hopes, some take the time to reflect and others just keep going. Reflecting back on the lessons and learning from the outcomes is the fastest way to shorten our learning curve. Thus this year is yet another learning experience.


Here are some of the lessons which I've learnt from this year and hope to apply them.


Life is filled with Uncertainty which is a big part of what we went through in the past 2 years, For me Risk and Uncertainty are 2 different terms and trying to model and predict uncertainty is foolish, Risks can to a certain extent be mitigated but uncertainty are Unknown Unknowns, So this year and in years to come I am thinking more some questions like what is Risk ? What is Uncertainty ? How people take decisions under Uncertainty ?


Learning to Swing for the fences and bet big


This year I analyzed and read 24 annual reports, that is 1 AR every 2 weeks and I am happy with my reading, but I repeated a similar mistake I made the previous year which is there were at least 2 companies which were within my circle of competence, where I had a reasonable understanding of the businesses, management was good and the stock was available at a valuation I liked and with good margin of safety, yet I bought only a small quantity when I should have backed up the truck, the opportunity cost is huge and which does not show in the overall results. The main learning is always be prepared and hold a few % in cash, when time comes don't fall for the Ready, Aim ,Aim ,Aim syndrome but pull the trigger. This could be a result of Analysis paralysis or decision paralysis too. now that I have learnt a lesson I'm working on being more nimble.



Think in probabilistic terms and not in Certainties

I had to overcome my Old mental process of thinking whether the intrinsic value of a company is x or X + 1 which is trying to be very precise, I use models like Kelly's and Bayes analysis to size the positions, despite that thinking in certainty led me to miss a golden opportunity. I re-read Thinking in Bets by Annie Duke which resonated with my mistakes and had to change my mental tools.


When analyzing an intrinsic value now I think in terms of ranges and assessing likelihoods of the outcome which was a liberation and helped me broaden my horizons and think more broadly.



DO- Something Syndrome


When I read 24 Annual reports I felt like reading everything and doing nothing, which led me to think like I was wasting my time, but to an investor nothing could be a worst enemy then activity. At sometimes I was forced to call by broker and place buy orders despite knowing it wasn't the right time. Charlie Munger's lessons stuck with me " Extreme patience with extreme decisiveness" and I opened another account to transfer accrued funds and create more Friction by deleting apps etc This gave me a fair amount of understanding of the power of patience to wait and when time arrives buy in truck loads.



Scaling up Investment


Scaling up your investment position as the management executes and as you find it cheap is an art, I learned this year that positions are not built entirely in 1 go, thus thinking in % terms helped me reduce the effects of a big portfolio, When you handle a 100 Crs and think about how do I build a 10 Cr position in 1 stock ? which looks a bit scary, thus to scale positions I learnt from a few peers its easy to Reframe it in % terms like let me build a 10% position in stock X, Reframing it made me easier in scaling up positions which previously was not comfortable with.



Batting average Vs Slugging percentage


I was aware of this but only after reading Jim Simons - The man who solved the market did I get to know the importance of this concept, One of the biggest learnings for me in 2021, The mathematician, most secretive and discreet cracked the code in the market, their no of average trades per day were around 1,50,000 to 3,00,000 trades a day, and most astonishing of them was their success rate was just 50.75 % (Astonishing right) Yes of the 100 trades they make, the success rate is just 50.75 trades and rest were losses, despite that their average rate of return is a whooping 66.1% from 1988 to 2018.


How can that be despite only winning in 50.75% of trades ?

Assume you make 10 investments with 10 Rs, On each stock you invest 1 Re, and your winning rate is just 50.75 % , At end of year 1 assume that 4.25 stocks have gone to 0 and rest 5.75 % of stocks each has doubled in time, now your portfolio will look like this


5.75 x 2 = 11.5

4.25 x 0 = 0

total = 11.5 Return on inv of 10 Rs is 15%


The underlying fundamental is when you win you win big, and when you lose, keep it very low. In the above if the 4.25 stocks or % gave a modest return your portfolio would be better overall. Thus batting average is looking at just how much winners we have and not focussing on the expected value, With this lesson I am more aware and planning to improve my slugging percentage vs batting average.



Best books I read in 2021


Wanting - Luke Burgis


The psychology of Money


Filters against folly


Poor Charlie's almanac


Fooled by randomness


Diamonds in the dust


The man who solved the market


Kochland


King of the World - Muhammed Ali


The Consolidators


Noise - Daniel Kahneman




Wishing you all a wonderful and a Happy new year 2022 .




















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