With 15+ good quality businesses bought at reasonable prices, odds are in your favor. The evidence is in crores of Mutual fund investors who do better than 90% of day traders over 5-10 year periods.
I can try to explain Bayesian reasoning with an example →
I screened a company that is a quasi-FMCG/commodity in early 2023. I studied it briefly and rejected it initially, thinking that the company was selling a commodity and had no evidence of competitive advantage.
Last year, during a bike trip to Kaza (a remote Himalayan location), I spotted this company’s niche product prominently displayed at a busy grocery store. This observation made me wonder why the company would place its product in such a remote location. I noticed the product had decent appeal among foreign tourists and bikers who frequent the Himalayan regions.
While this single data point wasn’t revolutionary, it sparked curiosity about whether the company had developed a wide distribution network - possibly indicating some moat. This new insight led me to gather more information and dig deeper into various aspects of the business and develop a more comprehensive view.
Further digging revealed that the company has actually become stronger over the years, has developed a formidable brand, but had been struck by “lightning” twice - rare but probable in business. Following these setbacks, investors had harshly punished the stock, driving down its valuation.
By updating my belief based on this new information, I could recognize that most of the pessimism is already priced in, resulting in an attractive valuation opportunity.
Fantastic thought process, being a contrarian is not easy however you will generate a large alpha if your thesis is right and it plays out well. I have created huge gains in bets where i had contrarian outlook and market neglected due to short term under performances. Best part is you can allocate a large capital as safety of margin is high due to low participation. Once it comes to momentum, not easy to make large alpha.
I finished reading Annie Duke’s “Thinking in Bets” and it’s one of those rare books that changes how you think about decisions, especially in investing.
The core concept: We’re terrible at separating decision quality from outcomes. e.g. Stock went up 5x? We were geniuses. Stock tanked 40%? Bad luck or unforeseen events.
Annie Duke (professional poker player) challenges this line of thought with a comprehensive approach. Life is poker, not chess. You can make all the right moves and still lose the hand. You can make terrible decisions and get lucky.
The “wanna bet?” framework is powerful. When you force yourself to think “what’s the probability I’m right here?”, you move from certainty to humility. From “I’m right” to “I’m 70% confident.”
The book also talks about building a truth-seeking pod: people who challenge your thinking, not confirm it. Echo chambers kill returns.
Not a long book, very readable. If you invest seriously, worth your time.
Main takeaway: Focus on improving your decision-making process, not judging yourself by outcomes. Good process + probabilistic thinking = better odds over time.
The Book reduced to equations
This is purely for easy retention of key concepts - please don’t take these as rules, do read the book :)
Outcome ≠ Decision Quality
Good decisions can have bad outcomes; bad decisions can have good outcomes.
Decision Quality = (Expected Value × Probability) - (Ego × Certainty)
Your best thinking happens when you maximize EV while minimizing ego-driven overconfidence.
Life = Poker ≠ Chess
Hidden information + luck makes life probabilistic, not deterministic.
Truth-Seeking Group > Echo Chamber
Surround yourself with people who challenge your thinking, not confirm it.
Regret = |Actual Outcome - Imagined Outcome| × Hindsight Bias
We torture ourselves by comparing reality to what didn’t happen but could have happened.
Hindsight Bias × Motivated Reasoning = Self Deception
We remember our past predictions as more accurate than they were.
Bet Size = Edge × Confidence × (1 - Ruin Risk)
Even with an edge, sizing matters: over-bet and you risk catastrophic loss.
