1.
Stop Loss in Business, Investing & Life
Nikhil Kamath has started a podcast and it is one that I try and listen to every episode. Recently he had one with Kiran Mazumdar Shaw where in one part they discuss the lessons that can be learnt from Vijay Mallya’s life.
I have always been a strong proponent of using stop losses. Some investors, especially hardcore value investors feel that stop loss is a bad concept and we should buy more as the price keeps going down.
Averaging down, in most cases, is a terrible concept. You don’t know where you have gone wrong in your thesis. So unless you have some great insights that the market does not, which most of the time we don’t, it is a surefire recipe for financial disaster.
I have taken an extract from the transcript and made some slight modifications in punctuation and edited some superfluous words to make it more readable.
NK: If we were to learn something from Vijay Mallya's story and have to take a lesson from that book what do you think people should not do that he did?
KMS: I think it's about not being in denial and to recognize failure when you start seeing warning signs. I think all of us procrastinate the decision to pull the plug and I think that's what happened to Vijay.
I remember during the days of trying to cope with the Kingfisher Airlines crisis I kept telling him, I said, Vijay downsize, you know, cut your losses. You don't have to make this into a huge international airline and I think you know if you just downsize your airlines and focus on the Indian market for the time being and make sure that you cut your losses I'm sure it will do you a lot of good.
But he kept saying, no, I think I know what I'm doing. I think I can overcome this. I know that I'll be able to pay this back and I know I can raise debt and revive this whole business.
So I think he was in denial.
The YouTube shorts for this part is here:
2.
Solon’s Warning
I had first read about Solon’s warning in Taleb’s classic, Fooled By Randomness. Just as an aside, this is one of the best books you can read so if you haven’t, go ahead and grab a copy. And thank me later ;-)
In this article, we go slightly in-depth into the event which came to be known as Solon’s warning. I have made some small edits for readability.
Croesus, the ancient king of Lydia, was once visited at his palace by Solon, a wise sage and Athenian lawgiver.
King Croesus said, “I cannot resist my desire to ask you a question: who is the happiest man you have ever seen?”
Solon went ahead and named, upon prodding, three people who were commoners and who had performed noble deeds, achieved greatness and also had died.
Upon hearing the names of three common people and yet no mention of himself, King Croesus was livid. “That’s all very well, my Athenian friend; but what of my own happiness? Is it so utterly contemptible that you won’t even compare me with mere common folk like those you have mentioned?”
Solon explained that while the rich did have two advantages over the poor – “the means to bear calamity and satisfy their appetites” – they had no monopoly on the things that were truly valuable in life: civic service, raising healthy children, being self-sufficient, having a sound body, and honouring the gods and one’s family. Plus, riches tend to create more issues for their bearers – more money, more problems.
More importantly, Solon continued, if you live to be 70 years old, by the ancient calendar you will experience 26,250 days of mortal life, “and not a single one of them is like the next in what it brings.” In other words, just because things are going swimmingly today, doesn’t mean you won’t be hit with a calamity tomorrow. Thus a man who experiences good fortune can be called lucky, Solon explained, but the label of happy must be held in reserve until it is seen whether or not his good fortune lasts until his death.
“This is why,” Solon finally concludes to Croesus, “I cannot answer the question you asked me until I know the manner of your death. Count no man happy until the end is known.”
Thought of the Week
"The opinion of 10,000 men is of no value if none of them know anything about the subject."
- Marcus Aurelius
Video of the Week
I have always admired Rakesh Jhunjhunwala for the courage of his convictions. I have watched probably all his interviews on TV or YouTube, but this is the one I have bookmarked as perhaps the best. Here he discusses every aspect of his journey, trading and investing. Worth spending the time to listen to this a few times.
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