Variant Perception can be explained as the difference of opinion between you and the market. That is, when your perception of a situation is different from that of the general market.
To make serious money in the markets, it is important to be able to take a position that is opposed to the general market view. A "margin of safety" is only available if the majority of market participants believe that a particular stock is not worth buying or is actually worth selling. In those instances, where the majority view is in one direction, and you believe that exactly the opposite is true, that the stock is worth buying into, then you have a contrarion viewpoint or a variant perception.
In any transaction in the markets, there is a buyer and a seller. Both are transacting at the same price. So, it is very important to think form the opposite point of view. Why is the person on the other side of the transaction selling to you? If your logic for buying is better than what you can think of for that of the seller, then you have a good case.
This ties in with the concept of "dis-conforming" evidence as popularized by Charlie Munger. [Note: There is no such word as dis-conforming and I think Munger wanted to mean nonconforming.]
Looking for dis-conforming evidence requires that before taking a position you list down points that is opposing to your existing view point. For example, if you are about to buy a stock of a company, think of why you would not want to buy it, what can go wrong in the business, how the business can be ruined or can go bankrupt and other such points.
If you force yourself to think in these terms, it usually brings sanity and rationality to the overall-thought process and helps clarify the decision in your own mind.
Tuesday 2 November 2010
Monday 1 November 2010
Measuring Portfolio Performance - Do it like a mutual fund
There is an old Chinese saying which says "what cannot be measured cannot be improved". I have thought about how I invest in the markets. As I get a monthly salary, I tend to put money into the markets also in monthly tranches. After a while it is difficult to measure the returns that I have got from my portfolio as a whole and not from individual stocks. All the websites that are out there that I have used does not really give a true picture of portfolio performance because it tracks the current holding and provides the percent gain or loss. I looked at various softwares, websites and did not find anything that actually helps me in doing this. So, I built a rudimentary spreadsheet in Microsoft Excel which helps me track my portfolio as a mutual fund on a NAV basis.
If you want you can use a similar concept. The concept is fairly simple and straightforward. The initial amount you start off with, say, Rs 1000 is your initial capital. Take an arbitrary face value (I chose 10 more out of convention, you could take 1 or 100 or whatever number takes your fancy). The number of "portfolio units" you allocate yourself are calculated by the total portfolio value divided by the face value (in this case, 1000/10=100 units).
Once you have the basic framework in place, it becomes easier from here. Every time you put money in your stock account, just calculate the number of "portfolio units" you would get. For example, if your initial capital of Rs1000 has grown to Rs 1200, your NAV would be 1200/100=12 (portfolio value divided by units equal new NAV). So, if you add Rs 60 to your portfolio, you will get 60/12=5 more units. So, you will have 100+5 units. So, your portfolio would be now 105*12=1260.
Keep track of a benchmark index if you are interested to know if your stock picking skills are good enough for you to continue at it. Over a period of time (not less than 3 years) if you are not doing better than the index, it is probably better to get out of managing your funds and hand it over to a mutual fund or an exchange traded fund (ETF).
If you want you can use a similar concept. The concept is fairly simple and straightforward. The initial amount you start off with, say, Rs 1000 is your initial capital. Take an arbitrary face value (I chose 10 more out of convention, you could take 1 or 100 or whatever number takes your fancy). The number of "portfolio units" you allocate yourself are calculated by the total portfolio value divided by the face value (in this case, 1000/10=100 units).
Once you have the basic framework in place, it becomes easier from here. Every time you put money in your stock account, just calculate the number of "portfolio units" you would get. For example, if your initial capital of Rs1000 has grown to Rs 1200, your NAV would be 1200/100=12 (portfolio value divided by units equal new NAV). So, if you add Rs 60 to your portfolio, you will get 60/12=5 more units. So, you will have 100+5 units. So, your portfolio would be now 105*12=1260.
Keep track of a benchmark index if you are interested to know if your stock picking skills are good enough for you to continue at it. Over a period of time (not less than 3 years) if you are not doing better than the index, it is probably better to get out of managing your funds and hand it over to a mutual fund or an exchange traded fund (ETF).
A New Blog
I started an all-new blog just to focus on the stock markets (typically Indian) and my thoughts and learning related to value investing and contrarion investing.
I expect this to be my single repository where I will put everything related investing that I consider important at that point in time.
I will also migrate the most important posts from my other blog holdyourthoughts.blogspot.com that are related to investing. I will continue to post non-investing articles to that blog.
I hope you enjoy this blog.
I expect this to be my single repository where I will put everything related investing that I consider important at that point in time.
I will also migrate the most important posts from my other blog holdyourthoughts.blogspot.com that are related to investing. I will continue to post non-investing articles to that blog.
I hope you enjoy this blog.
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