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A Big Investing Secret I Learned from a Game of Cricket

Oct 29, 2015

In this issue:
» Retail investors running low on enthusiasm for IPOs
» Big oil companies scrap projects as low oil price may be here to stay
» ...and more!

In the society premises where I play my weekend game of cricket, there are a few gifted fielders everyone wants in their team. No matter how hard a ball is hit, these guys seem to always find a way to stop it and then dart it back to the bowler.

I often wonder what is it that makes them such great fielders.

As far as I can tell, none of them is calculating air resistance or ball trajectory. Their dexterity seems to be the result simply of a sharp intuitive sense that has been honed through years of practice.

'It all boils down to a few simple thumb rules,' one of the fielders commented. 'I keep my eyes firmly fixed on the ball the moment it leaves the bowler's hand and start taking small steps so as to be able to quickly move in the direction the ball goes. You keep doing this year in and year out and over time, you become very skilled at it. That's it, there's nothing more to it,' he concluded rather nonchalantly.

It is amazing how a process that appears complex and requires sophisticated techniques can be so easily mastered with just a few thumb rules.

If a physicist were to tackle this problem, no doubt a complex array of factors would be involved. And yet, I doubt their track record would be as good as the acrobatic fielders I play with.

Noted psychologist Gerd Gigerenzer views the act of catching a ball as nothing but dealing with uncertainty. It is highly complex and involves lots of variables. And he argues that complex, uncertain problems cannot be solved through complex methods.

On the contrary, the more complex the situation, the better it is to use a few simple rules. In other words, the most potent weapon against complexity is simplicity. The fielders I play with prove that it works in the real world.

Where would investing lie on the uncertainty spectrum? If Gigerenzer is to be believed, it lies right where uncertainty is at a maximum. He says investing is another exercise in uncertainty, and therefore, simplicity and a few thumb rules will outperform complex methods.

Of course, Gigerenzer is a psychologist, not an investor, so you might be sceptical.

Let us, then, turn to the greatest investing minds to see what they have to say.

Here's what Benjamin Graham once said about using higher mathematics in investing:

Mathematics is ordinarily considered as producing precise and dependable results; but in the stock market the more elaborate and abstruse the mathematics the more uncertain and speculative are the conclusions we draw there from.

Looks like Ben Graham agrees with Gigerenzer.

Here's Warren Buffett on the subject:

If you need to use a computer or calculator to figure it out, you shouldn't [buy the investment]. Those types of [situations] fall into the 'too-hard' bucket. It should be obvious. It should shout at you, without all the spreadsheets.

Even Buffett seems to be in favour of simplicity over complexity in investing.

One of Peter Lynch's golden rules of investing dictates:'Never invest in any idea you can't illustrate with a crayon.'

There you have it: Three of the world's best investors seem to agree that complex methods have no place in successful long-term investing.

In fact, the moment a situation turns complex, it is a sign that an investor is taking undue risks. He should quickly drop the idea from his consideration and move on to something simpler.

Whether you are valuing a company or creating a portfolio, do yourself a favour and ditch the complex for the simple.

What is your view? Do you think following few simple rules is all it takes to be a successful long-term investor? Let us know your comments or share your views in the Equitymaster Club.

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 Chart of the day
Just yesterday, we wrote to you about how the probability of fetching a good stock at cheap valuations in its IPO is minimal. And how it is essential that you follow a checklist to better your chances of doing well in the IPO market.

Luckily, retail investors seem to becoming increasingly aware of the unfavourable odds on offer in the IPO market. According to a report in business daily Mint, retail investors have given a response to IPOs this year that can at best be described as lukewarm. Citing data from Prime Database, the daily goes on to highlight that out of the sixteen IPOs this year, seven have seen the portion set aside for retail investors remain undersubscribed.

In fact, the average retail subscription across IPOs this year has been 1.82 times. This is a far cry from the 18.42 times seen in 2007 and 7.33 times in 2010. Many retail investor had terrible experiences after investing in the IPOs that came out around those times. And it looks like those experiences have succeeded in making investors more cautious and sceptical this time around.

However, it often only takes a few IPOs listing at a premium to get retail investors tempted enough to come back to IPOs with a lot of enthusiasm. With a much talked-about large IPO closing today, this is a good time to remember that caution and scepticism are not only your best friends as investor, but also friends you should not easily part with.

Retail investors running low on enthusiasm for IPOs this year

Retail investors are not the only bunch that are shying away from investments these days. Crude oil prices languishing at low levels over the recent past has meant that the oil industry downturn is becoming increasingly savage. As per Financial Times, oil company Royal Dutch Shell suddenly axed a large Canadian oil sands project this week, a project on which it had already started work on.

When the rout in the oil market first happened, many did not believe that oil will remain at low levels for long. However companies are now increasingly realizing that oil prices may not go up in a hurry. And as a result, new projects needing oil prices upwards of US$ 60 a barrel are quickly being either scrapped or deferred by oil companies as per the report. What's significant about this oil price level is that it is almost half of the peak the commodity hit as recently as a year back.

Does all this mean that oil prices will remain at these low levels permanently? Hardly. Oil prices are quite infamous for having little respect for predictions. Neither the big oil companies, nor anyone else can be sure where oil will be in the future. So it is never a great idea for investors to bet on the direction of oil prices. Whether up, or down.

The Indian stock markets were trading on a weak note today on the back of sustained selling activity across most index heavyweights. At the time of writing, the BSE-Sensex was trading down by around 160 points. Losses were largely seen in FMCG and power stocks.

 Today's investing mantra
"We work really hard never to get confused with what we know from what we think or hope or wish." -Seth Klarman

This edition of The 5 Minute WrapUp is authored by Rahul Shah (Research Analyst).

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1 Responses to "A Big Investing Secret I Learned from a Game of Cricket"

Prashant Changrani

Oct 29, 2015

An amazing article and analysis - simple to understand + precise.
Could you please sign me for more such information / guidance

Equitymaster requests your view! Post a comment on "A Big Investing Secret I Learned from a Game of Cricket". Click here!
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