Preston Pysh 6:23
So I think there’s a practical example right now that you’re seeing in the market with IBM, and I hate to use like current event because a lot of our listeners are listening to this in the future. But IBM, when Buffett bought IBM, I want to say he got in like the 165-ish range, something like that, maybe 167, or something like that. And so you saw a ton of people from the market start flooding the market at that price point in the $160 range. And so obviously, as the, as the supply and demand changed on the, on the pick, it went up. You saw it up over $200, and then recently, they had this, this past earnings call, where they basically, you know, had a lot of things that came off their balance sheet onto their income statement. And you saw no earnings basically reported for this last quarter, and you saw the thing plummet. And you saw the thing plummet right back down to that $165 price point. And I–it was funny because that just happened recently within this month. And reading your book, and I saw that what you were talking about with these support levels and resistance levels. It reminded me exactly of that scenario that, that you were talking about in the book.
Ravee Mehta 7:30
Yeah, I mean, and also support level is also linked to behavioral finance. So, so for example, when if a stock is at, let’s say, $50 for a long period of time, and you know, a lot of people bought the stock around $50, then it goes to 55. All those people that bought it at 50, made money. And a lot of them might have sold at 55 or reduced their position at 55. But they–they’ve disassociated a positive outcome by buying it at 50. And so that’s called, diassociation bias. And so, even if something changes fundamentally with the stock, they have a bias to want to buy back or add to their position that they might have trimmed back at 50.
Stig Brodersen 8:05
Ravee, I can’t help to think, and, you know, I, I might be completely off here, but some of the audience might think that–speaking about technical analysis–that is, say short sighted. Where if you look at a lot more fundamental, more classic value investing techniques that is more long-term thinking. Would you think that is–that will be presumptuous to, to see that way?
Ravee Mehta 8:28
No, because technical analysis can be used, you know, by long-term investors as well. So some of the things I’m talk–talking about, right? Probably people in IBM, who were, you know, holding their stock for multiple years because they just don’t want to realize the loss. And so, that resistance level–that can stay around for a long time.
Preston Pysh 8:46
So Ravee, I like to tell people that I think that my two greatest assets are my time and my intuition. And your book, you give intuition a lot of focus, and you even talked about it already with the Soros comment. Can you give the audience the best advice for honing your intuition? Like how do you know, when it’s something like what source? You said it was his back, and how can other people hone this skill; this intuition that you talk about in the book?
Ravee Mehta 9:13
So intuition is just pattern recognition. That’s the first thing to kind of just understand what intuition is. For example, you know, I used to play a lot of chess. And chess players heavily rely on intuition, they can’t possibly think about every possible move that that’s available to them, right? So they, they, they look at the pieces laid on the board, and they recognize certain patterns based from their experience of what’s successful and what’s not. And so, they rely on their gut instinct to kind of evaluate a specific type of move, and then, they spend most of the time to safeguarding; making sure that that move is safe. And, you know, I think the best investors do something similar. You know, Warren Buffett doesn’t look at every possible investment that’s out there. He tends to gravitate because of his experiences; he knows what he’s good at. He gravitates towards certain investment ideas. And then, he spends majority of time making sure those investment ideas have downside protection and good risk reward characteristics.
Preston Pysh 10:09
One of the things that you broke out in the book, Ravee, was that you don’t necessarily have to have a lot of experience. I think for a lot of the people that are listening, they don’t have the experience that you have, or like 10 years of experience. So maybe to transition into your discussion into that point, so, you know, it’s pattern recognition, but you don’t necessarily have to have 20 years of experience. And you talk about that in the book, and I think it was a great point.
Ravee Mehta 10:34
Yeah. So I think there’s certain things that people are good at, right? Or good at recognizing. People already have–even if they’re not professional investors, a lot of them have intuition of what’s gonna be successful; what kind of businesses are gonna be successful and what aren’t. And, and the key is–the most important thing is to invest in what you understand. So I think too many people want to getting out of their circle of competency, and they want to, you know, investing in biotech stocks or something. They have no idea about it. You need to have a view on everything out there, right? You just need to invest in areas you know well and patterns that you recognize are successful.
Preston Pysh 11:09
It’s kind of like, whenever I go out with my wife, and I go across, and I see maybe a business that I really like. I tell her, “I think that this business is going to be wildly successful,” when you’re not really basing it on much, you’re just kind of basing it on gut and a perfect example would be Chapolei. Like you go in there and the food’s fantastic. It’s a really simple model. You just know that that business as it continues to expand, its gonna be successful. So I–is that kind of more of what you’re kind of referring to as far as your intuition and pattern analysis of sticking to things that you understand and your competency?
Ravee Mehta 11:40
Exactly. Yeah!
Stig Brodersen 11:41
Great. So let’s, let’s continue to, to speak about emotions because there’s really strong part in your book or actually sell strong points in your book, where you were talking about us as investors being influenced by our emotions. And I think I can definitely testify to that, and I know Preston can do as well. But do you have like, like, the secret to how we can apply this to our advantage and definite enough to, to our disadvantage as for instance, we so under the, the financial crisis?
Ravee Mehta 12:13
Yeah, first step is self-awareness, you know? Every–everybody has certain behavioral biases that impact our investment decision. Best way to understand what biases you have is by going over where you may be lost money, or understanding your prior mistakes, and, and seeing if they have a pattern. For example, some people tend to take extra risk after they’ve had some good returns in their portfolio. Other people take extra risk that they have losses in their polio. So the only way to really understand which camp you’re in is by going over your past mistakes. You know, one of the things I like most about investing is that it’s a vehicle for self-analysis. And, you know, I’m constantly learning things about myself, and then incorporating what I learned about myself into my investment process. For example, I wrote in my book that I have this bias towards selling my winners too early. You know, this, this link to my fear of regret. I, I would rather lock in a gain, even a small one than feel regretful for having a potential loss. Fear of regret can also lead me to have too many positions. I would rather have at least a small position than regret missing out on, on a specific stock going up. And so, understanding that about myself has changed my investment process. So I have specific rules for when I can sell stock, and I can’t sell stock just ’cause it’s up. And then, the other rule, right, to avoid to having too many positions and over diversifying. I have a limit to how many positions I can have in, in my portfolio. And I also try to make sure that my top 10 positions are a minimum percentage of my fund.
Stig Brodersen 13:44
Okay. Another thing I, I actually do like to return to is, is loss. Because you said that sometimes you behaving irrational, when you are locking in gains. Buts how is it that we as people act to losses in general? And–because you have this great example of, of…econo–manage (*inaudible*) into actually gain in your, in your book. Soap, could you please just very quickly elaborate on, you know, how do investors typically react to losses?
Ravee Mehta 14:12
Different investors react differently. Most people tend, you know, losses make people unhappy. And there’s those–there’s a lot of research out there that when people are unhappy, they tend to take less risk. But then, actually some other people, when they, when they have losses, they actually increase their–the risk profile. They add to those positions, even if something fundamentally might have changed with the stock, so it depends on the person. I don’t think there’s a specific rule you can, you know, apply. That–this is why self-awareness is really important.
Preston Pysh 14:43
So that’s a great point, Ravee. In Chapter Five, you talk about why it’s important to match your personality to your investment style. So if you think you’re just going to go out and be like Warren Buffett, that might not even be possible because of the way that your personality, and the way that you’re wired might not match the same wiring that maybe Buffett has. And you might be really–it might be very difficult for you to make the same decisions in the same thought process because you’re just emotionally involved in a completely different way than the way Buffett would be involved. So I just found that that was really fascinating. And is that something that you could, you know, just talk to our audience a little bit more about as far as matching your personality with your investing style?
Ravee Mehta 15:22
Yeah. So, for example, Buffett is very conscientious. He has relatively low emotional sensitivity. He can continue to make very rational decisions, even if he has a lot of losses in his portfolio. He also had his motivation for investing revolves around understanding businesses and understanding competitive advantage. So his personality traits led him to be more of a longer term investor that tries to understand the fundamentals of companies. Soros is actually very different. He is more emotionally sensitive. He’s a bit more impulsive, and he–motivation for investing revolves around his philosophy. He tries to prove out his philosophical hypothesis with his investing. And so those kind of traits tend to make him a better trader than the longer term investor. Myself, I’m more towards the Buffett than Soros, but I don’t think I have the–as low emotional sensitivity maybe that Buffett does has. So, you know, I’m not the kind of person that can take a ton of risk and have all my money in a couple stocks. I have had modest concentration.
Stig Brodersen 16:23
So, Ravee, I think a lot of people might be polarized. I know I was for sure, when I started out investing. So what I mean by polarize is that either they are very quantitative, so they’re really based on numbers, or they might be very positive, when they are accessing stock investing for the first time. What is your take on that? How do we, how do we actually blend that?
Ravee Mehta 16:48
Well, first of all, I think we have to have a blend because we’re increasingly competing against computer algorithms in the market and computer algorithms are obviously much better at just quantitative analysis. And so, while quantitative analysis is always important, investors need to increasingly rely on things that the computers can’t do well. And there are a lot of qualitative things that the tool can’t do very well. So for example, computers cannot evaluate how good a management is. Computers cannot, at least at this point, empathize with other market dispensing (*inaudible*); maybe take advantage of their behavior biases.
Preston Pysh 17:24
You know, it’s funny ’cause whenever I was looking at all these computer algorithms that are calculating and making these trades, and you hear about these billionaires with this momentum trading and stuff, and, and i think it scares a lot of people ’cause they’re like, “Wow, there’s no way I can beat a computer. There’s just no way I can do it.” And I obviously have the exact opposite opinion because at the same time, I read articles about how I guess there was an article about Anne Hathaway, and on days that her–that this, that articles on Anne Hathaway were published. Berkshire Hathaway was traded at a higher level because these algorithms were picking up these articles on Anne Hathaway. And there’s actually manipulating the trading on the stock. So I think for a lot of people it is scary because they, they automatically think, “Oh, there’s no way I can beat a computer. There’s no way I can beat software that’s calculating this stuff. But at the same time, I think a lot of the analytical software that’s doing this stuff is doing it on a short-term basis. And it’s, it’s trading based off of statistics that it’s calculating for today, or tomorrow, or maybe a week from now, and not necessarily something that you would plan on owning for 10 years, which is, you know, the obviously the approach that Stig, and I, and Ravee, you know, endorse. If you’re gonna own a business, you gotta treat it like a business. So, I just want to throw that out there ’cause I find that a lot, a lot of people out there get scared, when they start hearing about these computers and things. And it goes back to Ravee’s point of just qualitative analysis is just as important as your quantitative analysis. And you have to balance those two. It has to be a hybrid approach. And you have to be able to call foul whenever you see me movement because maybe there’s an Anne Hathaway article out there. So let’s go to the next question. This is one that I was really excited to ask you: What is the most important investment advice that you can provide the audience from your time at Karsch Capital Management; maybe from like a personal experience or something like that?
Ravee Mehta 19:18
Yeah, I think I learned a lot of things, when I was at Karsch. But the biggest thing was just kind of constantly review my mistakes. Most people, when they have a loss, they just kind of take the loss, and move on. But Michael Karsch he really instilled in me in a–attitude of constantly reviewing and understanding what caused the loss. And so, that constant reflection is really what made me who I am today. Just, you know, one specific example is relatively early in my career there. I would not necessarily think as much about an industry versus a specific company. When the overall industries improving, the best companies tend to have higher valuations. And so, I would tend to stay away from them. The, the worst companies, I would stay with them just ’cause they’re the worst companies. And so, I would, I would tend to gravitate towards companies in the middle. They’re relatively cheaper, but when, when an overall industry is improving, what actually happens is the best companies outperform just cause they’re the best company. And then, the, the worst companies outperform because they go from maybe losing money to making money or something like that. And the companies in the middle actually underperform. One of the things he taught me was kind of, kind of think about the whole industry and to, you know, gravitate more towards the best and maybe the worst companies equal (*inaudible*).
Preston Pysh 20:37
Huh! You know, it’s interesting that you say that looking back and looking at your mistakes was the, the most important thing that you learned because Stig and I were just reading a book by Guy Spear. It’s called, The Education of a Value Investor. And that was one of his biggest points in the book was, “Don’t just move on to the next thing and just keep picking. You got to look at what were my biggest mistakes? Why did they go wrong? Go back and assess all the variables that led to what you missed. What was the critical variable that I missed that led to the demise of this pick?” And I, I find that that theme spreads through people like Mohnish Pabrai, and Guy, yourself. I know Warren Buffett; Charlie Munger. All these guys–they’re very introspective–always looking at how can I improve on what I’ve done in my past, so that I can perform better in the future. So I really like that point.
Stig Brodersen 21:29
And, and what’s really interesting is that Monish Pabrai and Guy Spear had like a checklist that they run through with with all the mistakes that they had made previously. And what they actually chose to do was to look at all the great investors like Warren Buffett, and the mistakes that he admittedly had done as well. Then, added that to their list to make sure that they don’t make the same mistake as Buffett himself. And I think that’s a really, really strong say, competitive advantage to have to other investors because it’s not fun to look at mistakes; not fun to look at what you have done wrong. It’s much more fun to look at what you have done good.
Preston Pysh 22:03
Right.
Ravee Mehta 22:04
I also operate with a checklist. And so for example, when I was talking before about–when I sell a stock, I have to sell it for a few different reasons. You know the things I’m, I’m very into journal writing. And so, actually every night I, I try to think about maybe some mistakes I’ve made, either on that day or the past, and I try to learn from the mistakes. I think it’s very important to give your losses voice, and let that, let those scars kind of be ingrained in you, so that you don’t make those mistakes again.
Preston Pysh 22:35
Yeah, there’s two ways of looking at it. You can look at it as, “Hey, I made a mistake, and I don’t want anybody to see that,” or you can treat that mistake as one of your biggest gifts in that I’m never going to make this mistake again because I learned this lesson, and I’m gonna annotate it in a checklist, or however else, you know, somebody might incorporate that. And so I look at my biggest blunders as my biggest gifts. And I think that that’s very important for a person if they really want to be successful in investing, they’ve got to treat it that way. They can’t treat it as, you know, something they’ve got to hide or act like it didn’t happen. They need to wear that on their sleeve as a, as a battle scar, I guess.
Stig Brodersen 23:10
Yeah, and it’s like, you know, thousands of dollars worth of education. Right, Preston?
Preston Pysh 23:15
Let me tell you, there’s, there’s lots and lots of dollars that have paid for my education. Yes. Hahaha!
Stig Brodersen 23:24
Ravee, a question that we like to ask to our guest, and especially an author like you is: Which books have influenced you the most? And perhaps you can also comment with a book recommendation to our audience?
Ravee Mehta 23:36
Sure, well, you know, I, I honestly, I think all the Jack Schwager books–the Market Wizard books are great. On technical analysis, there’s a book that I think is probably the best book on technical analysis from Stan Weinstein. I think it came out of the 80s. Stan Weinstein’s, Secrets of Profiting in Bull and Bear Markets. On intuition, the most important, influential work is–been done by Mr. Gary Klein. Specifically, I think I really like The Power of Intuition. On self and social awareness, I, I really like Emotional Intelligence 2.0 by Travis Bradbury. And then, you know, I saw–I’ve seen all these Nassim Taleb books, and Howard Marks, The Most Important Thing–very helpful.
Preston Pysh 24:18
So, Ravee, awesome having you on the show. Thank you so much for coming on here. For anybody that’s interested in reading Ravee’s book, The Emotional Intelligent Investor, it’s a–just a fantastic read. Stig and I thoroughly enjoyed it. And if you’re wondering how psychology and your emotions impact your decision making in the stock market, you’ll definitely want to pick up this book. Next week, we have Guy Spear coming on the show. If you have any questions that you want us to give to Guy, make sure that you go to asktheinvestors.com, and type that up, or record it for us, and we’ll play it on the air. So our question this week comes from Benoit Defreney, and he asks us, “If I have $50,000 to put aside, what do you think about the strategy of taking half of that money and dropping it into a couple different ETFs, and then taking the other half of the money and putting it into individual stock pick?” So Stig, what do you think about that question?
Stig Brodersen 25:11
The first thing, and, you know, Preston, I really hate disclaimers. But it really depends on what the person is–who the person is. Because if the goal is really to spend still–as possible time and energy on, on this. You might as well put a hundred percent into his ETF. And if his goal is really to be proficien; being like not necessarily the next Warren Buffett, but spend a lot of time in picking stocks, then the right strategy might be to, to put a hundred percent into value stocks. But I gotta say that if you want to pursue a strategy with ETFs, one thing I’ll definitely be looking at–that is low fees, so that’s the first thing. And the second thing is look at what is the underlying assets. So make sure that you have some really solid underlying assets. And what I mean by solid is I would probably pick new, great American stocks something like S&P 500, for instance. And I would probably not go into more exotic type of investment like emerging markets. So, so if you want to pursue ETFs that’s probably the two, two short takeaways I want to give you.
Preston Pysh 26:22
So I guess my advice really comes to what Ravee was talking about in this episode is, you’ve got to really understand yourself first of all. You have to be honest with yourself. If you feel like you are really good at accounting, and you really understand how to assess an individual stock pick, well, then, you know, your, your entire portfolio could be individual stock picks because you know how to assess the risk and what could go wrong and owning whatever particular stock you pick. But if you’re the type of person, who doesn’t have that firm grasp on all the things that could go wrong, and let me tell you, there’s a lot of things that can go wrong in individual stock picks, you probably need to have a larger portion of your portfolio and indexes, if not the entire portfolio and indexes.
Stig Brodersen 27:04
I also think that what we discussed with Ravee about emotions is really important because if you tend to get very affected by a market swings, then you might more go into ETFs. I know that the markets still have like wild swings, but at least I should say you lose money with the rest of the population.
Preston Pysh 27:22
Yeah. Yeah, I, I totally agree with that, Stig. I think that if you’re the type of person that you already know you’re emotionally charged, and if you see your account, go down by 20%, tomorrow, and you’re going to be really kind of wigging out, you probably need to be more into indexes because you’re going to have this psychology; this mindset that everybody else lost all that money, so it’s not something that I personally did wrong. It’s just that the way that the market’s moving. Whereas if you invest in an individual stock pick, you’re going to be questioning your own ability in order to pick and select the right asset. So I think that knowing yourself; knowing how you’re emotionally gonna react to things is vital to making that decision. Okay, so Benoit, fantastic question! I think there’s a lot of people out there that are wondering that exact same thing. So we’re going to send you a free signed copy of the Warren Buffett Accounting Book. And we really appreciate you typing up that question for us. So that’s all we got for today. Like I said earlier, we’re having Guy Spear on the show next week. He is a heavy hitter in the value investing community. So if you don’t know who he is, I recommend you look him up on Wikipedia. Also, go to asktheinvestors.com and record your question for Guy, and he can answer it next week on the show, so make sure that you go there and do that. So thank you so much for joining us this week, and we look forward to seeing you next week!
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Outro 30:35
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