Dayadhvam means to be compassionate – Brihadaranyaka Upanishad
My Compassionate Mother
From the time I have grown up, I have always seen my mother having compassion for most of the people. I always used to say this person is bad or did this to me. My mother had an opposite reaction, She said consider there must be some circumstances which you don’t understand. As a young foolish person, I always ignored her. Now I understand how powerful and wise the thinking of my mother was.
Business – The bumpy ride
(This example is just for discussion it is not a stock recommendation)
Let me take you on a ride, you are a long-term thinker, happy go lucky person who is toying with an idea of buying a home textile company in 2001, It is a new field in India, You come to know of a company which has never had a single sales decline since inception 1987 (which is 14 years or so before). As you understand the textile industry you get looking into same:
It is a debt free company. It seems to be a fairly good balance sheet.
Next you go for operating numbers and you are shocked (Return on net assets (34%)), then you check the Cash flow to determine whether the company is generating any profits or these are fake, In fact, CFO from last 10 years is more than ~CPAT
The company is a high-end silk cloth manufacturer and it is a supplier to very good companies in the U.S (high end to all the BIG Exporters in U.S)
Some other Facts, Return on Net operating assets (34%) Sales per metre of Rs 672 and capacity of around 2 million linear metres.
You check the company numbers for the last 5 years, their sales per metre has risen more than 150% cumulatively in the past 5 years and the capital invested has risen at the same rate. Considering, it is a textile company, the high-end silk segment still at nascent stage, you understand the capital intensity.
Next, comes another company, which has a different balance sheet and numbers:
This company size is bigger but its balance sheet is not as good as the previous one. Their balance sheet has debt and investments. So you leave the company as it is.
The Investors Saga
The truth of the matter is both are pictures of the same company. First figures are for the year 2001 the next one is for the year 2011. The income statement for 2011 is here. The company has turned into losses, It has further forayed into retail and bed linen (which is not so highly profitable). Certain mistakes have turned out to be brutal. From an entirely profit-making perspective, good balance sheet company it has turned for the worse.
Thought Experiment (Mind of an investor)
Let us assume you did proper business analysis and industry analysis, (management is excellent) while taking all factors into consideration we bought the company in 2001. You go through tumulus period of 2001 to 2011 in which the company made terrible decisions as per you as an investor as it forayed into retail and bed linen for the luxury market in India which is a tough place to be and really tough to be considered as a good investment. The vision of the company was to become a home textile leader.
You bought the company in 2001 and till 2011 your investment only grew by 1.5% CAGR per year while the Sensex grew by approximate 5% per year during these years. Your friends consider you as a loser as a poor stock market investor and they are making 100 baggers or talking about them. Under the tendency of social proof and stress, you sell your entire position. Even inflation has taken a toll on you.
As you fail to consider the consequences and you have never operated a textile business yourself you fail to have compassion for the management and you quickly sell your entire position rather than selling it slowly over a period time (Your brain automatically assumes the management is bad, rather than finding faults in the industry (System), you arrive at a (fast conclusion)
Each time you question the company, the company says it is building up capacity in retail and bed linen (as environments change it needs some dilution may be in the form of debt or additional equity). It needs to save its business. You think what they have done is bad, I have lost my money and stock market price reconfirms the fact.
Though the company has increased sales per metre tremendously it has diluted its balance sheet numbers have changed for the worse even circumstances. You consider it as a di-worsifier. Social Proof further enhances the effect along with the envy of your friends getting richer.
2016 – Game Changer
The company has again turned profitable and the CAGR of the investment made in the company in 2001 is 18% which is about 2% higher than the market return. The management of the company was right all along.The quality of the business is better as it has compounded capital at a better rate and for 17 years. (The name of the company is HimatSingka Ltd, This is just for thought experiment as prices can change a lot over time, while value of the business may still be intact)
Now you want to kill yourself as you understand what a difference of 2% return can make over 17 years. (Power of Compounding).
(Example: It is to be taken as metaphorically not real investment case)
The entire part of this exercise to remember the power of Compassion as an investor. Entrepreneurship is tough, an entrepreneur has to play every ball whether he wants or not. Have compassion for the small mistakes.
In addition, the power of multidisciplinary thinking is required. One needs to have a detailed understanding of each part of the system and each important decision an entrepreneur makes depends on the circumstances (Context) of a situation. Entrepreneurs are humans they will and make mistakes, we have to be cautious of only the ones which will affect the business permanently.One needs to understand the limits of the system and try to find faults in the system rather than easily blaming a person.
As Isha Upanishad Quotes “The self is everywhere.”
Who is the self? It is our inner-self which is everywhere and in all human beings. Like if we ever think someone is foolish, oh he made a bad decision and his business failed or oh how foolish he was to not capitalise on the opportunity, Just try and running yourself a business and think (Try to sell something on eBay or run a small restaurant in your town, you will find the answers). Have compassion for people and try to solve their problems. A person obsessed with numbers does not see the story behind it and is obsessed with using only one model which he has learnt in his life (Nail with a hammer tendency).
Another way is to wait when the decisions really start impacting the company. Some small mistakes are always good.
Remember this quote –
“It’s easy to be wise after the event”
Never under appreciate luck while thinking about others failures and successes.
Speaking about investing is easy going through the psychological mistakes reading them is easy but it is the practice which makes a man perfect. Thinking we have a long-term vision is easy, doing that is super-tough. Like the author of this article is just thinking doing now. (In Life there can be periods of long-term pains).
The journey of a person is filled with mistakes and learnings. It is important to learn. As Mr Charlie Munger rightly says, You can learn to make fewer mistakes than other people. It also means you cannot avoid mistakes.
That all said there will be always be more destroyers than value creators which leads to the discussion regarding empathy.
Warning: Over compassion may have bad consequences and it may damage our cognition. We may start empathising with yourself and not learn from our mistakes or get up from the failures of life. We may even start empathising with the entrepreneur when not required. There is a difference between empathy and compassion(Altruism).
Other Side of the Coin – Empathy
Empathy – The word itself involves some kind of kindness or compassion. In his book Against Empathy Paul Bloom, makes a distinction between two – Rational compassion and Empathy. I would really recommend you to read his book.
Empathy can harm us, when we start developing pity for others we may distort the real picture and stop seeing the facts. An example can be when we become in love with our stock and we stop seeing the facts (wishful thinking). When selfishly people exploit our mind to extract money from us by showing us images rather than facts. There are endless cases when people are exploited by the same.
A small distinction between the two comes from the line, Compassion may be described as feeling what others are feeling without attachment to results. However, I will not go into details it is a topic of debate.
I can tell what I have learnt and what I am practising to improve this aspect.
One way is to learn about various fields and use a multidisciplinary approach to thinking. Learn about the various fields using basic elementary education (Mental models) which help us explain the reality of the world. This should include the basics models from psychology, philosophy, physics, mathematics, neuroscience, etc. More can be read about the same in various blogs and books. By this basic approach, we can learn to think about systems (holistic approach). You can read more about the same here.
Meditation for half hour a day, each day can lead to miracles over longer periods of time. This way over time we can clear our minds and realise what we really are as a person. You can refer to the ted talks given by Matthieu Ricard or read the books by Eknath Easwaran or Dalai Lama. (Links Below)
The crux of the knowledge rises when one begins to appreciate the interconnectedness of all fields (Mind, Matter, Psychology, Physics, Philosophy, Neuroscience, Biology, Evolution, Chemistry, Economics) this can happen when we start reading about multiple disciplines and start practising the same in our day to day thinking.
An ignorant mind sees the difference in all fields in life while an enlightened one appreciates the interconnectedness of everything.
Final Learning: Compassion or empathy it matters in the context of what they are applied. Moderation with the context is always better.
Remember: The author of this article is foolish and will make many more mistakes than you.
DISCLAIMER: This discussion is not for any kind of recommendation on stocks. It is only for educational purposes. Please consult your financial advisor before investing in stocks or do it yourself on the basis of your thinking. This article neither endorses nor recommends any stocks discussed here. I am SEBI Registered Investment Advisor (No: INA100008425), though please judge me on my thoughts and record.
- Farnam Street – https://www.farnamstreetblog.com/
- Matthieu Ricard – https://www.ted.com/talks/matthieu_ricard_on_the_habits_of_happiness
- Eknath Easwaran – https://www.bmcm.org/about/about-eknath-easwaran/
- Dalai Lama – https://www.dalailama.com/