Long Gamma. Short Beta.

These are Hemingway quotes from his books, interviews and letters. Substitute ‘writer’/’writing’ with ‘investor’/’investing’ and they could as well have been from somebody like Buffett - bringing together two of my favorite legends. This also reinforces my belief that all art at its best is the same. 1. The most essential gift for a good writer is a built - in, shockproof, shit detector. This is the writer’s radar and all great writers have had it. All kinds of tall stories are pitched in a bull market. Avoiding something too good to be true can save a lot of capital. I often actively try to short ‘story stocks’. 2. Never confuse movement with action. Action bias is one of the most prevalent behavioral biases in our industry. This is what makes most goalkeepers dive to one side while defending a penalty kick when the optimal strategy is just staying put in the middle. In our industry action bias leads to overtrading and unnecessary churning. The inclination to be seen...

At any point in time the value picks are far outnumbered by shorting opportunities. This is because 1. more companies fail than succeed (even fewer beat cost of capital) and 2. there are multiple institutional biases against shorting. Although the path from identifying the short candidates and the execution of the trade leading to capitulation can be torturous.  Following are three, non exclusive, frameworks for identifying shorts: Kathryn Stanley Trail Signs / Triggers Management lying or obscuring events Accounting Gimmickry Inflated stock price / speculative bubble Insider sleaze Deteriorating macro environment for the company Stellar price rise Cash burn / Deteriorating balance sheet Scott Fearon / James Montier Trail Signs / Triggers Fraud            (Bad Managers) Overvaluation Fad               (Bad Companies) Deteriorating Fundamentals Failure      ...

Ben Graham said to be a successful investors one needs first, reasonably good intelligence; second, sound principles of operation; and third, and most important, firmness of character. What did he mean by “firmness of character”? Operating in an intensely competitive domain with limited information and high stakes is psychologically demanding. We have to constantly work against our evolutionary instincts (conformity, attribution bias, loss aversion, narrative fallacy etc) while trying to generate sustainable returns in markets. Hence good investors are often contrarians, have high tolerance for uncertainty and are loners.  Studies have shown that being a contrarian and standing against your social peer group activates anterior cingulated cortex and the insula in your brain which are also activated in case of real physical pain. As a contrarian investor you are buying what everybody else is selling and selling what everybody else is buying and this is to an extent biolo...

Need for Guiding Principles      In any stochastic domain, we frequently ascribe causality and see patterns when there are none present. Our evolutionary need to weave a series of events in a coherent, intelligible narrative amplifies this phenomenon. We often fail to take action at inflection points and act aggressively at inopportune moments. This is especially true in a noisy environment when there is constant comparison with short term/incorrect benchmarks or the performance of other’s pursuing similar goals.      Its essential to have a set of guiding principles assisting us navigate this chaos and keep us anchored, especially when we are under pressure. They are the basis for the framework within which we want to operate and processes we want to develop and follow. They could be rudimentary thumb rules or an evolved set of values that we keep coming back to for inspiration and for validation. Sound guiding principles make us more focused and...