Of all the weird, cultish beliefs that the made-in-Silicon-Valley start-up culture has given rise to, the weirdest is the cult of failure. 'Fail early and fail fast' is the mantra that started in the world of venture financing of tech companies but seems to be permeating the wider world of business. This deification of failure, of viewing failure as a rite of passage and as a sort of a qualification, is a strange phenomenon.
On the face of it, it seems to reflect the sayings that exist in many cultures that say that people learn from their mistakes better than in any other way. It's not a new idea. I myself have written more than once in my columns that investors do not really get a feel for investing well unless they have seen a bad situation and made some losses. Only when a market cycle is complete and an equity investor has seen the heady gains of a bull run as well as the sharp setbacks of a decline, can he or she be considered a complete, experienced and mature investor. So, am I not advocating the same thing as this new 'learning from failure' cult?
Not quite, for there is an important difference. I'll narrate something that Nassim Nicholas Taleb explains in his classic book 'Skin in the Game'. This will explain the difference between the two kinds of failure. First case, one hundred people go to a casino to gamble a certain set amount. Some may lose, some may win... Now assume that gambler number 28 goes bust. Will gambler number 29 be affected? No. You can safely calculate, from your sample, that about 1% of the gamblers will go bust. And if you keep playing and playing, you will be expected to have about the same ratio, 1% of gamblers go bust over that time window. Now compare to the second case in the thought experiment. One person goes to the casino a hundred days in a row, starting with a set amount. On day 28 he is bust. Will there be day 29? No. No matter how good he is, you can safely calculate that he has a 100% probability of eventually going bust.
Instead of gamblers, think about businesses. Case 1 is from the venture fund's point of view. It invested in a hundred companies; 99 went bust; one became a 1000x or a 10,000x winner. The venture fund has won. Case 2 is like an individual using his own money to invest or to start a business. When he fails, he fails. He has to quit the game and go home. There is no day 29. He cannot afford to fail.
Every investor sees bad days eventually. In theory, all equity investors know that such a day will come but the theory can never teach us what the actual experience does. One day your investments are worth, say, Rs 10 lakh. A few days later, it's nine. Then eight, then maybe seven. A certain kind of investor became attracted to equities or equity funds only towards late 2007. Then such investors became desperate to avoid missing the bus and invested substantial amounts of money into really pathetic investment ideas. Some of these investments lost 60-70 percent and a certain number never came up again.
The difference was that those who kept their eye on quality, as well as practised diversification across companies and sectors, recovered quite smartly. Some of them were confident enough during those days of the quality of their choices and did not sell. Some of them even bought quality stocks once the worst of the crash was over and prices were at a rock bottom. For these chosen few, the 2007-08 crash eventually turned out to be a positive experience. Everyone saw a big failure of investments, but it was not a permanent failure for those who had fundamentally sound investments and were diversified amongst them.
Bull runs are dangerous
For equity investors, it's a dangerous time right now. The raging bulls are creating an impression that everything is worth buying. The other day, I read someone's tweet that in a bull run, everyone's IQ is 30 points higher. No matter what you buy, there will be an illusion that it was a brilliant decision.
So, where does Value Research come into this story? Value Research comes in by giving you the tools, the knowledge and the confidence to ensure that when you fail at some piece of investing (which is inevitable), it's a small and affordable failure, most likely a temporary one. Instead of it being a catastrophe that wipes out an investor, it's a small setback and in fact a good failure because it teaches a lesson instead of doing lasting damage.
Value Research Stock Advisor makes sure that everything that you buy today will not only look like a great decision today, but will not become an embarrassment when the markets take the inevitable U-turn. Typically, if a stock is worth buying and is part of our recommended list, then it is even more attractive during the time when the markets are weak or even that stock itself is weak. This is contrary to general trader behaviour and undeniably, contrary to most human instinct. This is the point of time when the difference between just being a list of stocks and providing a genuine advisory service comes to the fore.
So, head over to www.valueresearchstocks.com. You will find a total of 47 recommended stocks of which 17 are 'Best Buys Now' and 10 are 'All Weather'. Take your pick and cook your dish.