Got my hands on the Fifth Discipline - the Art and Practice of the Learning Organisation - Peter M Senge, yesterday, and started leafing through it this morning, and after just 5 pages - started jumping up and messaging my investor friends and Guru friends
Most MBA students might dismiss it from earlier reads (as something known, already), but there is huge value-add in the new version. Here are my enthusiastic initial comments s sent to friends, so treat them with a good pinch of salt, but hey you cant ignore this seminal value-additive topic, anymore!
The latest edition is significantly improved - with 100 new pages - the author stresses how the complexities in the world has changed drastically over last 15 years, and how in latest version - the scope has widened that much more - and more learnings incorporated from discussions with other leading management thinkers of last 15 years, and the refinement in the fifth discipline practice of last 15 years in major corporations around the world. There is an entire new section, Part IV: Reflections from Practice, that might be immensely valuable in the context of our fast changing world.
Fifth Discipline - the Art and Practice of the Learning Organisation - just leafed through first five pages, and am mesmerised - just the book I needed at this stage of our quest in Understanding Complexity (Systems Thinking), Mental Models and Reflection, and Aspiration (Personal Mastery, Shared Vision) - as described by The author Peter Senge. Rated as one of the most seminal management books of the last 75 years by Harvard Business Review, sold more than 2.5 million copies worldwide, in its first edition.
Amazed again at how things HAPPEN - when the quest is intense and sincere. P sharma responded to our self-reinforcing model thread at VP quoting Senge, and highly recommending us to read the book saying - you guys may be onto something!
After a very long time I am reading a Management Book - and I am hooked - because it combines a bit of everything we are grappling with at the moment - Art side of Investing and its practice, Science and what is measurable and reinforcing loops, fallacies in thinking, and power of win-win collaboration in Investing over competing, and more.
Highly recommended reading for the “Curious” - on what makes for a superior business?
Check our Self-Reinforcing business model thread for context, behind the excitement
An insight to Jim Paul , how he made billions, then bankruptcy with came back like a roaring lion. More importantly a short book with loads of behavioural finance, I am heavily biased with this books…must have gone through more than 9 times in last 3 months!
The book will blow your head off, a speculator/investor and his lessons with action plan!
Here are key lessons in case you are still not convinced:
Differentiating between external and internal loss
Some losses are internal such as self esteem and control, your love or even your mind. Other hand external losses arise due to game, content, bet etc. External losses are objective where as internal losses are subjective. The catch is you how you interpret, when you loose in market its an objective loss; majority of people make it as subjective loss. And ego is foremost reason behind making objective to subjective loss.
We tend to regard loss, wrong, bad or failure as a crime. But if you look at road side vendor in morning or night when he opens shop or wind up for the day, you will find throwing out the products are not saleable ….that’s loss; inevitable part of life.
Then key is why do we make external losses as internal? Participating in market place is not about right or wrong nor even defeat but making decisions. Decision making is a conclusion after careful consideration, choice between alternatives not between right and wrong. We think loosing money in market is wrong, make it as matter of reputation and pride. That’s where we bring ego to decision making which turns objective loss to subjective loss.
How do I know it’s an internal loss? Jesse Livermore the greatest trader ever lived in world gives some indication to stages we go through when we have internal loss.
Stage 1 is denial- no way, I cant be wrong. I will try more trades to justify myself correct.
Stage 2 is anger- if I cant contain denial then it’s replaced with anger and displayed in all
directions, with family, office and everywhere else by started venting frustrations.
Stage 3 is bargaining- unable to manage anger we turn to god, please bring back my cost price. I will sell and runaway!
Stage 4 is depression- it’s a pervasive feeling of sadness, distancing yourself from loved ones.
Final stage is acceptance- finally we admit inevitable and accept the loss or book it.
And these stages doesn’t happen only when you are sitting in loss, even during profit time as well. For example price moved from 40 to 80 and slip back to 60. We get married to the price of 80 and rue over loss and somehow pray to god ….please bring back to 80.
Knowing discrete events and continuous process
Discrete event is one which has a defined ending point e.g. you bet on a cricket match. If you don’t win the matter ended as soon as match is finished and result declared. A continuous process is an activity not having defined end. Like stock market, where another battle resume next day from where it left……goes on and goes on. Losses from continuous process get internalised as we get to chance fight another meaningless battle.
Take an example, I buy a stock at 50, expecting a 20% gain ore more. Instead of going upwards it fall to 40. This is where market gives me an opportunity to ask me it can still go up and there are so many examples where stock came back strongly. I kept on buying, stock falls further; beyond a loss I took at as matter of prestige and that’s precisely market strikes you.
Now let’s understand what is investing, trading, speculating.
Investing is parting with capital in expectation of safety of principal and return on capital in the form of dividend, capital appreciation. Because the returns are periodic payments like dividends it requires separation of capital from us. Basically investing is a long term horizon.
Trading is where a dealer makes money from bid and offer spread. They stay net flat (nor long or short).
Speculating is buying for resale, parting with capital in expectation of capital appreciation not dividend.
Betting is an agreement between 2 parties where one goes wrong and compensate the other.
Gambling though sounds like betting is actually is playing a game for excitement for money involved. These people come for entertainment not money.
Fallacies held in popular beliefs have a catastrophic effect in continuous process events.
First one is tendency to overvalue a high gain of low probability and undervalue high gain with a low probability. Next is interpret probability of successive events as additive than multiplicative. Then we think law of averages where we interpret after some failures success is bound to come. Lastly we have a habit to over estimate the outcome of these random events.
There are 2 kinds of reward one is profit or money, second is recognition. Market is for profit motive. No point in congratulating yourself after pricing is going up or going into slumber after pricing is driving down!
I am not among crowd
A popular misconception as we tend to feel we are not among crowd, we are exceptional. The fact is we are faces among crowd who needs to behave in a manner beneficial to self interest. Whether the behaviour is in line with crowd expectation or not doesn’t matter.
Emotions are not bad but when they start affecting decision making it becomes major pain. When someone says don’t follow the crowd first lets understand what a crowd is. Crowd is not a mad fool, after all people are like you and me. They react to patterns such as displacement like war etc, Or opportunities in sector and economy or credit expansion. Sometime all patterns take over human as euphoria leading to irrational investment decision making.
Another side of crowd is , when we are among crowd we feel safe… a sense of invincible power. Some time you get hypnotised by price changes, tv commentaries etc. These are crowd behaviour you need to avoid.
Ok this is a petty much platform for behavioural finance, how do we manage such illusions and emotions then.
Rules and tools that doesn’t fool you
Future is uncertain, never completely reveal to us. We have to accept choices either investing or speculating. Investor knows everything he needs to know while putting a money. He built margin of safety to his calculation to eliminate fringes if any of uncertainty. On other hand a speculator doesn’t have the advantage of investor but has some knowledge about what determines the outcome of his activity. It’s the application of intellectual examination and analysis of uncertain future.
Successful investing is combination of investing and speculating skills. Speculation is a forethought and demands reasons for decision making. He thinks before acts! Even investment god Warren Buffett is 60% investor and 40% speculator. Now we can correlate when we don’t get answers to many checklist questions , yet we have to take a decision and move on.
Speculation does require a PLAN. Plan is a method need to be worked out before hand before accomplishment of objective, not to think and act simultaneously. Without a plan either you are bettor or gambler.
To make an effective decision making in investing process is 1. decide what type of participant are you going to be - investor or speculator? 2. Select a method of analysis 3. develop rules 4. establish controls 5. formulate a plan.
To me if some one asks a plan, this is what I think.
If I don’t have a plan in hand then I haven’t thought things out ahead of time. And by default I am betting and gambling. Both of these involve ego that means I am personalising market. Without a mental effort and plan my conscious is out of control, emotions are ruling me and I am part of crowd who are making emotional decisions.
The Alchemy of Finance, Soros - First 100 pages are pure gold, no other book has done more for me than this book. My entire mental model of how to assimilate macro economic data points, the impact on various asset classes and how to connect the dots is based off this.
Common stocks and uncommon profits, Philip Fisher - Exhaustive work, enough said about this on the thread
Antifragile, Taleb - Not so much an investment book but a treatise on how to think
The investment checklist, Michael Shearn - Process, process and process
Micahel Mauboussin’s notes - By far the best I have seen when it comes to combining the science of business analysis and the art of valuation
I find this guy’s insights brilliant as well, though he’s more of the “view the macro picture & figure out what’s baked into the market prices” type. A very good source to complement the ground up research that most of us here do with a top down macro view
All textbooks. Practical advice that you can actually use not some high level advice that you will feel goo after reading but completely clueless about how to use it. The ones I read were older editions of these books but I am assuming these will be updated. Not much would have changed though as these are basics.
Both books are best selling from same author - Jim Collins. It is subjective whether they would fall under the topic of this thread - Investment Basics. My perspective, both books are must read for every investor especially - Good To Great.
1. Build to Last (released first) - Why some companies lasted for so long whereas others faded away. Companies like 3M, Walmart, P&G, HP, Disney
2. Good to Great (released second) - How 11 average companies transformed themselves from being average for many decades to becoming great organizations. Author compares these great companies with their peers who were operating in same sector, similar revenue, similar profits, yet these 11 companies took off whereas their peers perished. The stock performance of these 11 companies beated mighty Walmart, GE, P&G many fold from their transformation date for next 20 years
Dead Companies walking by Scott is nice read too. Author shares his experiences of identifying companies which will not survive in future and thus shorts it. Last chapter is really worth reading where he highlights how government can manipulate the system.