Narrative fallacy, halo effect and Power of a Story.

Narrative fallacy, halo effect and Power of a Story.

Woke up with a sudden and loud music of my phone,(ringtone of ACE ventura’s favorite dialogue, ‘ALL Righitie Then’) and while i was still rubbing my eyes, my over zealous value investor friend on the other side urged me to open my computer and check professor’s latest BLOG

And so i did and read the whole 23 pages first thing in the morning. Imagine that!!! well you cannot say NO to a value investor can u, for he will not let you in on his next big thing.

Anyways, before i pen down my exact thoughts arising out of my cynical, skeptical, contrarian and part crazy, part paranoid mind, let me get disclaimers out of the way.

I have huge respect for Prof Bakshi and do not doubt even for once his credibility, Integrity and selfless love for teaching and imparting knowledge. I have learnt a lot from him.

Formalities out of the way, lets get to business. Seven Intelligent fanatics of India.

Anytime I hear a story of greatness, achievement and its corresponding reasons, use of the word ‘BECAUSE’, somehow my antenna stand up for potential baloney. This special antenna facility is partly developed by extensively reading Mr Taleb and partly because by nature I m a non believer.

“Finding reasons of success, after the fact is called Narrative fallacy”.

Now, I don’t want to be a contrarian for the sake of being one. I want to evaluate a situation, take my stand on it and if that stand happens to be a contrarian one then be it. And I would like the readers (including hardened value boys) to at least hear me out before discarding this article.

Lets start with a story as narrated by Nasim Taleb in his book the black swan.

The story of the drowned worshipers.

More than 2000 years ago, Roman Orator and Stoic, Cicero presented this story.

One Diagoras, a non believer in the GODS, was shown painted tablets bearing the portraits of some worshipers who prayed, then survived a subsequent shipwreck. The implication was that praying protects you from drowning.

Diagoros simply asked, “where were the pictures who prayed and then drowned”?

The drowned worshipers, being dead, would have a lot of trouble advertising their experiences from bottom of the sea. Would’t you think.

Or in our example, those bankrupt companies who had all the ingredients of integrity, passion and intelligence will have a hard time finding a professor to promote them.

This bias extends to the factors responsible in success of any idea, religion, business, illusion of skill etc. What system followers also call as a survivor ship bias, Nasim Taleb calls it the problem of the silent evidence.

“Silent Evidence pervades everything connected to the notion of history. History, i will repeat, is any succession of events seen with the effect of posterity” Nasim Taleb.

A bias is an error between what you see and what actually is. A bias is about seeing patterns. In that sense both technical analysts and moat investors are alike. One sees head and shoulders (H&S), the other finds pattern in success, finds the “because” of success. Gives it names, calls it integrity, Intelligence and passion (II&P)

Madonna said it best in her song “Frozen” to be honest, You will only see what your eyes want to see, thats coz ur heart is not open, ITS FROZEN.

So what am I saying. Is Integrity, passion and intelligence bad. Not at all, these are definitely good traits to have. What I am saying is that to form an axiom that these traits lead to successful business, we need to invert this on its head.

Do companies without these traits struggle all the time. Well I know a 1000 people who actually became financially independent through Reliance Industries. And they don’t really set the scaling machines on fire when it comes to integrity. In fact if there was a Integrity weighing machine, and Reliance was standing on it, a warning would come, “please stand on the machine before the stipulated time”

How about UNITECH or JSW I can go on and on. Normally 01 black swan is enough to prove that all swans are not white. In this particular scenario, there is very little correlation between the II&P indicator and success. In fact, I m tempted to say, its Risk reward is worse than (H&S) not sure back test needed.

I regret to say, all the fanatics mentioned by prof (including the 8th one) are just the beneficiary of disproportionate luck compared to their peers. There is nothing more to it.

Its very easy to pick a winner and build a STORY around it. By mechanism of retrospective determinism we will find the “cause” that we are searching for. You will find whatever you are searching for, if you try hard enough.

Don’t get me wrong, I am not saying these are bad companies. They are awesome companies. What I am saying is that their UNIQUENESS is not that UNIQUE. The same II&P indicator in a not so lucky company is bankrupt now, and you didn’t even hear of it precisely because nobody will make a story out of it.

The reason I am writing this is that Authority and Expert create its own BIAS. Another devil to handle. The friend who called me has taken position in all of the companies and sipping on them every month. I am not saying its a good decision or bad, that is outside the scope of this article anyways.

What i am alluding to is something you guys must have noticed in Autobiographies too. You see, losers don’t write autobiographies, do they.

The entire notion of biography is based on arbitrary ascription of a causal relation between traits and subsequent events. So if Rahul Dravid writes in his biography that shagging has helped him in his forward defense. Lo hold and behold, you will see a million impressionable minds spending too much time in bathroom.

Let me end this article by saying that its a journey for me too. I may look back 10 years from now and feel naive about this piece. But as of today this is what I feel. The role of luck is understated so much that we start seeing patterns where none exist. And our default state is so lazy, that we despise actual thinking and are more than eager to find a guru and ape him blindfolded.

Comments are welcome…..

This Post Has 35 Comments

  1. Sanjay Bakshi

    This is a fabulous post because it makes a very important point. Thanks for writing it.

    My comments:

    1. The seven guys I profiled – I have had the privilege of investing with six of them. The ingredients which contributed to their being intelligent fanatics were present (in my view) at the time of investment at least to me. They may or may or not be visible to other people at that time. So, while the discussion happened ex post the investment happened ex ante.

    2. Let’s do one thing. Let’s write the names of 10 intelligent fanatics (different guys not these ones) on a piece of paper. I will write those names with the help of some friends and colleagues who agree with the idea of identifying intelligent fanatics and investing in them. We will seal the envelope and keep it in a bank locker. You will break the seal and open the envelope in 10 years and see if ex post results turn out to be be excellent, mediocre or poor compared to Nifty or any broad based index. Of course, my bet is that they would be excellent.


    Sanjay Bakshi


      Dear Prof,

      what an honor to get an answer, how a person responds to his/her critic says a lot about his/her character. My respect for you increased manifolds further.

      Your point 01 (if its true, i trust it is) very much nullifies the narrative fallacy, doesn’t it. If your investment was made before they became a success, then your indicators are potent and profitable.

      2. Point 02 . I would like to have a look at those 10 names before you seal the envelope 😉 you see contrarian or not, i would not mind a few multi baggers in my PF. (Lol )
      on a serious note lets make it a little more interesting, I will have my set of 10 names that I think are in a multi year bull run. (they might or might not have II&P) and see after 10 years how each of the 03 portfolios did. (yours, mine and Nifty)

      1. Sanjay Bakshi

        I think you’ve raised an enormously important issue in value investing. It stated with Buffett’s talk at Columbia. I saw your tweets on it so I assume you know what he said there. If you look at it like Taleb would, there is survivorship bias there. I mean there were so many students in Graham’s class whose track record Buffett never knew about. He picked a few guys. He talked about their track records. They were stellar. They are obtained from different stocks (which was important of course otherwise it would have been one track record). He then concluded that common element in those people is that they studied from Graham.

        Take Charlie Munger. He talks about learning by studying great failures and great successes and identifying common elements. He wants you to recognize patterns. If there’s a pattern associated with success, he implicitly assumes causality. If there’s a pattern that’s associated with failure, he does that again. He said avoid the patterns that cause failure (all I want to know is where I am going to die, so I never go there). He says look for patterns which “produced” extreme successes and if you find them, back up the truck on them. Let’s talk about the elements of success – a great business, run by an intelligent fanatic and acquired at a reasonable valuation. For every such businesses he identifies, there are many many he misses. Does he measure how well or badly the ones he missed, did? No! So, you get the same survivorship bias there.

        Let’s look at Tweedy Browne or Classic Graham and Dodd. Take cash bargains. Graham says if you find them, and if you buy them in a group you will do well. For every cash bargain that went in his portfolio there would be many which didn’t. Did he measure how the ones he didn’t invest in performed? No!

        Take any idea in value investing and you’ll find the same survivorship bias. But extreme success in investing has come to those who have found patterns that have worked really really well. ONE pattern amongst many which has worked well is that if you buy a great business (or even a reasonable one) but which is run by an intelligent fanatic then provided you pay a reasonable price, you should do very well in the long run on a portfolio basis.

        I think sometimes people overdose on this whole idea of trying to be perfectly rational. A perfectly rational human being if there’s one will ALWAYS be skeptical of seeing extreme success even over long periods of time even if it’s associated with patterns which other people say cause that success.

        Take endowment effect the idea that one should not fall in love with your ideas. It’s an elegant model. I like it. I teach it, just like I teach survivorship bias. But is it a good idea to never be under the influence of endowment effect? I don’t think so. If you survey 100 investors who have really done well over a long period, they will overwhelmingly be dominated by people who bought into a good business and never sold it. What made them never sell? Well, the answer, of course, is endowment effect. They just fell in love with their BRK or their HDFC Bank or Asian Paints and never sold. They were not affected by the fact that stock was, at any given time selling at 20x multiple or 50x multiple. They just held on to it. And they became fabulously rich.

        Aha! But for every such person who became rich, aren’t there people who bought crap, and never sold it and are now crying? Well yes. So we have survivorship bias again.

        But lets go deeper. The guys who never sold, what did they own? Did they own high quality businesses run by really good managers or did they hold poor businesses run by poor managers? I think we know the answer. They held great businesses run by great managers.

        Aha! Now the skeptic says: “But we know about the great quality of the business and the manager today, we did not know it earlier.”

        To which I say, maybe, just maybe there’s a pattern which helps us understand what’s a good business and whats a bad business ex ante and not ex post. And maybe there’s a pattern which helps us figure out if this is a great manager or not a great manager ex ante and not ex post. And we look for those patterns by studying how others investors spotted those patterns and we try to imitate them.

        Aha! The skeptic says you can’t study the track record of great investors because we don’t they they are great investors without looking every other investor who had identical intelligence and seeing how he or she performed.

        So we are back to square 1. The utterly rational fellow does’t believe in endowment effect, or hindsight bias or survivorship bias. Every piece of info you give him he comes up with some objection. Oh that can’t be true because thats survivorship bias! Oh that can’t be true because that’s hindsight bias! Or hey that’s stupid endowment effect. That can’t be the reason for superlative returns because we haven’t done a controlled experiment.

        And while the skeptic keeps on making objections the so called irrational fellow who looks for patterns for success and failure, who studies great investors and tries to copy their methods, unsuccessfully at first but with deliberate practice over a long time, starts seeing success. He comes into his own form. He smiles at the skeptic who is rational and poor and tells himself: I am richer and wiser.

        Mr. Taleb has roughly said (I am typing this from my memory here) that there won’t be enough data in Mr. Buffett’s lifetime to know if he had any skill or whether he was just lucky. Think very deeply about that before you read Mr. Buffett’s letters and try to copy him. Or for that matter, copying the methods of anyone with success in investing.


          Dear Prof,

          this is going to be a long reply so bear with me. The way I see it, this conversation is fast moving towards the realms of spirituality, the age old argument between manufacturing luck vs predestine.

          So by your own admission, Warren Buffet Cherry Picked his good boys to paint a rosy picture for value investing in his Superinvestors of grahamville lecture.

          The not so good boys, with Graham on their resume would at least have been working as sell side analysts in some mundane brokerage house.

          Warren himself acknowledges the role of luck in his success. He says if you take out even a single attribute (gender, country, skin color, dad, college, teacher, first few big bets, charlie munger) the results would not be half as good.

          Lets not go far, If I look at my own excel sheet, 02 of my 30% bets Quadrupling has generated majority of alpha. One of your ex students, Puneet Khurana who is a good friend of mine says that while I have talent, I have been ‘Lucky’, inefficiencies in spinoffs and demergers don’t play out this magically all the time.

          Lets take your example, if you don’t mind. Wat probability would you assign to your being at the gesco meet right when someone asked the question to the management about relative cheapness of the scrip and further more what odds do you assign to your having a childhood friend with the required financial muscle and the willingness to pull out a coup.

          To which you say, if not this, something else would have transpired and I would have carved my own niche, I would have manufactured my luck. Serendipity is all about opportunity meeting the prepared mind.

          and I totally agree. If not this, something else would have transpired and you would have been successful. Point is, is it “because” you are doing something or some bigger power at play

          So we are back to square one. Prof Bakshi has been blessed with sniffing out moats. For every 01 such amazing professor, there are a 1000 others, who in name of moat, are holding excreta of goat.

          How about demographic dividends. Moat investors in japan have nothing to gloat

          You cannot rule out the role of LUCK.

          this discussion from here on moves to spirituality whether this LUCK is predestined or can it be manufactured.

          I am not the authority on the subject, so will refrain from strong statements. I have had some interesting conversations with one Gary Weber (who is supposedly enlightened) (scientifically proved, they put him under FMRI and results showed no red waves or what we call as System 1 (daniel kahneman) or no constant chit chat blocking his mind (untethered soul) and he claims that EVERYTHING IS PREDESTINED, right from your birth to your death and everything in between including the experiences you are supposed to have.

          So did Ramesh balserkar who said, “you can will what you want, but cannot will what you will”.

          Now if you are not enlightened (i presume you are not, I definitely am far from it) it is rather stupid and naive to even think and live like everything is preordained. so this is a vague topic and lets not go there.

          For all practical purposes (non enlightened), Lets keep believing in this idealism that we are responsible for our success and failure. And that we create our own luck. And that if we do the right set of things, right set of results manifest. and going by that If you buy great businesses run by fire in the belly guys at a reasonable price. Good things should happen to your portfolio.


          1. rajesh

            Sometimes i wonder why do ppl think in term of ‘luck’ & ‘free will’ in terms of either-or relation only. It can also be ‘this and that’ realtion.
            p.s: taking a stance from perspective of’ free will’ give the vitality to do things. Which u beautifly did in the last part.

          2. Sanjay Bakshi

            Manish I have no issue with you on the role of luck in life. I have been speaking about that subject in my class for years. What I am saying is that there are some people, who by their nature are predisposed to be lucky. Can luck be manufactured? Maybe not, but one can position oneself to get lucky. How? There are many ways.

            One, have an open mind to multiple possibilities. Recognise the importance of serendipitous encounters or insights (flashes of inspiration).

            Second, have focus (talked about that in the talk) but also be able to spot very unusual patterns which seem distracting but may contain answers to the questions you’re trying to solve. Sherlock Holmes had that ability (as Peter Bevelin described so well in his book on him).

            Three, have a positive frame of mind. Be optimistic, even over optimistic. You need over-optimism for capitalism to survive. Keynes called it “animal spirits” and even Danny Kahneman talked about the role of optimism. He writes:

            “Optimism is normal, but some fortunate people are more optimistic than the rest of us. If you are genetically endowed with an optimistic bias, you hardly need to be told that you are a lucky person—you already feel fortunate. An optimistic attitude is largely inherited, and it is part of a general disposition for well-being, which may also include a preference for seeing the bright side of everything. If you were allowed one wish for your child, seriously consider wishing him or her optimism. Optimists are normally cheerful and happy, and therefore popular; they are resilient in adapting to failures and hardships, their chances of clinical depression are reduced, their immune system is stronger, they take better care of their health, they feel healthier than others and are in fact likely to live longer. A study of people who exaggerate their expected life span beyond actuarial predictions showed that they work longer hours, are more optimistic about their future income, are more likely to remarry after divorce (the classic “triumph of hope over experience”), and are more prone to bet on individual stocks. Of course, the blessings of optimism are offered only to individuals who are only mildly biased and who are able to “accentuate the positive” without losing track of reality. Optimistic individuals play a disproportionate role in shaping our lives. Their decisions make a difference; they are the inventors, the entrepreneurs, the political and military leaders—not average people. They got to where they are by seeking challenges and taking risks. They are talented and they have been lucky, almost certainly luckier than they acknowledge.”

            I am overwhelmingly in sync with Kahneman here. But I have also seen what “animal spirits” in dumb fanatics do. We have plenty of those. I won’t name them but they follow a pattern. The pattern is that they have crazy over optimism, they borrow money like crazy (witness what happened in the India Real Estate Bubble), they often bet the company on a deal which if fails cause ruin. Those kind of entrepreneurs are fanatic all right but they are dumb fanatics, not intelligent ones.

            An intelligent one is willing to experiment. He appreciates he might get lucky through chance, but if he does, he grabs the opportunity. And if it doesn’t work, it wont cause ruin.

            Can such people be spotted ex-ante? I think they can. Can students be taught how to spot them ex-ante? U believe that’s possible. I am sure going to try! Am I being over confident? Well, only time will tell.

            The other big point I was making was that this whole idea of trying to be perfectly rational – looks kind of ridiculous to me. You have to recognize that:

            (1) over-confidence drives capitalism and the payoffs of backing an over-confident, but intelligent fanatic early (when valuations are reasonable) and when the business is not horrible (if it was horrible then the fellow who is running it can’t be very intelligent in my book) are asymmetric. Charlie Munger’s words “never under-estimate a man who over-estimates himself” is very valuable advice especially if you use the framework of an intelligent fanatic i.e. you don’t foolishly appreciate the abilities of a gambler or a leveraged entrepreneur or one who doesn’t have integrity.

            (2) Endowment effect plays a huge role in the super investment outcomes of buy and hold investors;

            (3) Investors can learn a lot by imitating the thought processes of very successful investors and business managers. Books like “The Outsiders” (recommended by Buffett) and Thomas Phelps “100-to-1” and the letters of Warren Buffett have very useful lessons for someone who is willing to learn, imitate, and copy. Who knows, he might just get lucky and maybe, just maybe there is a pattern there that is worthy of being observed, intrernalized and copied.

            One day, when I have a bit of time, I will write a blog titled “In Defence of Survivorship (and other) Biases”. Until then, this is all I have to say on the subject.

            Thanks for the engaging conversation!


            Thanks a Ton Prof. I have gained more insight in last 02 days than reading close to 150 books in last few years. Any logic pulled to its extreme, becomes wrong.

            Market is always efficient (EMH) is equally wrong as Market is never efficient.
            While it is very important to be aware of your biases and not get taken for a ride, taking to its extreme would make you paranoid and miss on opportunities.

            and final and most important learning, since you cannot get more than what you think you deserve, it is no coincidence that, over optimistic people do well in life.

            Once again, thank you for sharing the knowledge.

            Manish Dhawan.

    2. Dr Aniruddha Malpani

      This has been a very enjoyable discussion.

      I agree that energy, intelligence and integrity are necessary – but they are not sufficient 🙁

      Let’s also try a counterfactual – let’s make a list of energetic, intelligent and honest entrepreneurs who failed 🙂


    3. Benzene

      A group of 10 and all beating index ,I will take that bet. Gaussian distribution in infallible

  2. krishna

    Hi Manish,

    I thought it was a brillinat article.And i enjoyed a lot.

    I have just one question what is the basis on which you are saying that all the fanatics that professor has mentioned are beneficiaries of disproportionate luck compared to their peers?

    Can’t it be that they have superior execution skills, apart from IIP

  3. Kanv Garg

    I think the best way to look at the investments is by looking at the probably of the sustainability of the company.
    Now the factors which most of the value investors look at (like competitive moat, high ROCE etc) increases the probability of selecting the companies which can sustain and grow. Wisdom of people who are there in the industry for more than 5 decades and books by people who were there earlier, strengthens this “FACT”.
    Now from the portfolio of 10 companies which one have selected taking above parameters into account, even if 3 companies give multibagger returns, then the loss of 3 companies which gets busted and remaining 4, which gives normal returns can increase the return of portfolio substantially.

    Now we need to understand that it is a heuristic approach and the economics of a company, at this very moment, with all the parameters that value investors take into account, will substantially be better than the companies which fail on those parameters .

  4. Prasad

    Good one with contrarian views, appreciate the independent thought without falling for any of the effects mentioned. But here is my concern if we want to gain big, we may have to find or define our own set of companies run by intelligent fanatics, be it 7 or 70. But disproving a positive hypothesis with a one/few black swan event/s is not sufficient. That we can use for determining what to avoid though, like blind faith on gurus in this case. Not more not less.

  5. Raag

    Well said. When I saw Prof Bakshi’s “intelligent fanatics” shared madly on twitter, my immediate thoughts went to an interview of Sanjoy Bhattacharya (aka Bhatta) which was also shared madly on twitter. Bhatta essentially said that ignore management and all that, better to focus on industry and company. Talk of consistency. Someday, we seem to believe that one person can define a company (Can a person with high II&P do well in, say, aviation?) . Another day, we seem to believe a good company in a great business will do well even if one puts a mediocre manager in place!

    1. Indraneal

      @Raag: Buffett once said that “When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact”. Sanjoy Bhattacharya was echoing this idea. I think it boils down to a case of when you are dealing with large sample sizes, on average the businesses with better economics will do better, although you may have cases of individual brilliance in management that creates a fantastic result in a tough industry (Southwest Airlines for example).

    2. Sandeep

      Hasn’t Buffet himself said something along the lines “Invest in a business that is so good that even an idiot can run it because eventually an idiot will run it”.

  6. Raag

    In case anyone interested, here is the interview of Sanjoy Bhattacharya.

  7. Kalpen

    I haven’t learnt as much in a decade as much in this exchange of notes and ideas. Brilliant thoughts by each one of you


      kalpen sir, you don’t have to be this modest. You are a learning machine as much as i know.

  8. Dilawar - Cape Town

    I want to echo Kalpen’s comment above. Much food for thought to be found on this page. Thanks.

  9. SK

    It is possible to identify parameter(s) and to write a good story – by analysing ‘winning’ companies with hindsight – ex-post analysis.
    ‘Built to Last’, ‘Good to great’ or ‘Firms of Endearment’ are some books that invoke such approach (and suggest key success factors of ‘winning’ companies); – these books tell a good story.
    Therefore, with ex-post analysis, and good story telling one can propose/suggest several parameters/patterns/success factors.
    Now, coming to parameters in the post:
    Entrepreneurs (or businessmen) are relatively more zealous (fanatics, if you may) and intelligent too. ‘Focus’ (if that is a subset of energy and intelligence) can be a differentiator; however there are good examples of winning conglomerates.
    ‘Integrity’ is possibly the only differentiator – it is a grey area – not easy to objectively measure integrity. However, if you take a vote on ‘companies/organisations with integrity’ you will find the usual suspects failing here. (Unanimity about winners is tough, but unanimity about losers is quite certain)
    Integrity is personal – it is about consistency in thoughts, words and deeds. Integrity at a business/organisation is an extension of this ‘manasa, vacha, karma’ alignment. It is also about putting the business (and interests of its stakeholders) ahead of oneself. This is not just for the moment, but for the foreseeable medium-term.
    If there is a way to objectively analyse/define integrity, you might test it (and patterns) ex-ante.

    Notwithstanding this, finding an approach/pattern for investing is necessary; – I would say a must. You could cultivate on your own or draw from the likes of Buffet et al. However, all things considered, you need to evolve something that works for you. What worked for Buffet (and others) may not necessarily work for you/others.

  10. chaos

    discussion of luck vs skill will never get over, and is mostly useless because we can only focus on skill. the question here is regarding this rule of investing in good sound businesses with great management. though this statement is more of truism, may be prof implies high ROE, reasonable earnings growth, ethical management, and so on collectively (all traits present). more than the fact that prof managed to invest in these stocks 10 yrs back, we would love to know if there were any names which exhibited all these traits and then deteriorated / sold / faltered away. secondly, 2 important questions to ponder about, for most people success is concentrated in 1-2 stocks, remaining 10-20 stocks do nothing… but i would believe that this is inherent to investing, and nothing wrong with that, just that we need to account for this information in our rules… secondly, success in high quality moat type businesses is concentrated between 2010 – 2015. can we say something specific about this period which might be different from other times. stocks quoting at 50+ multiples is considered ok, and this learning is because of immense love of such stocks. a normal investor might have sold at some price, so what are rules for exiting such stocks? never is a good answer to buffet, and might work for people with 10 yr horizons, but still merit in trying to understand it.

  11. harinee

    First time visiting your site and absolutely loved the post. I havent read the fanatics post but still like the exchange between both of you.
    I have read Taleb’s Fooled by Randomness and agree on the “Luck” factor which constantly gets ignored. In fact we put people on pedestals making assumptions on some great quality which put them there while all the time it is randomness 🙂
    Everybody knows Martin Luther King and his speech “I have a dream” but no one outside US probably has heard of Bayard Rustin the man who actually organized the March and stage for the speech and influenced the late King to go the non-violent way.If he had been the one who gave the speech we would never know King. Just a example of destiny !

  12. Sreeselva

    “Luck” as a word and the role of it has been loosely used almost everywhere because most believe a) It is too old/orthodox to even talk about spirituality, let alone have a guru to understand some of the subtle meanings of luck and other important concepts b) People simply don’t wan’t to work and hence put all the blame on “luck”. Remember Bertrand Russell’s famous “Most people would rather die than think; many do.”

    How to perceive luck/destiny in one’s life is explained lucidly by a famous and widely followed spiritual master. Just so that we don’t take refuge in inertia by placing all emphasis on destiny, it is clearly laid out in some of the scriptures as follows:
    Every human being is endowed or baggaged with two things the moments he sets foot (in fact even before he takes shape) on this planet.

    1. Praarabdha – This is a bag full of punishments and rewards one will be subjected to in this life because of the deeds/misdeeds of past lives. This is what we choose to loosely refer to as “luck” 🙂

    2. Datta swaatantrya – This is where it becomes interesting. While the above can’t be helped because it is preordained, one is also blessed with freedom (swaatantrya) to operate in this life. Now, what one does with this part where he can control/shape his future differentiates him from a guy who simply chooses to wallow/worry about what is happening to him because of 1. Here’s where consistency of IIP matters and only those who’ve stayed consistent for longer periods in doing the right things (either by following someone or through self realization) have succeeded.

    The best part here is that if one does good and positive stuff to such an extent using 2 above, that the positive actions far far outweigh the negatives, it can even nullify some of the punishments expected to be meted out as mentioned in 1.

    The same thing is corroborated in the third chapter of Bhagavadgeeta.

    Hence, the focus should simply be on what one has to do either by identifying the success patterns or otherwise and not worry about the luck aspect of it at all. If it is supposed to be luck/destiny, it’s not in your hands any ways (by definition). I’m sure these gentlemen wouldn’t have had too much time to think about “luck” when they were busy building their empires.

    So why should we??

  13. Harbeer S Chadha

    First of all let me congratulate you on an excellent post. It is a rare piece of a useful needle on this internet full of haystack. For me, the credit goes to Prof. Bakshi as it is through his medium that I got to learn from your insightful counterview. Prof Bakshi is a great pedagogic influence in my life. Intelligent counter arguments are a rarity and are an important learning tool. In this spirit of sharing and learning I submit hereunder my contribution to this intelligent debate.

    1. Harboring extreme views work very well in making strong counter-arguments, if that is one’s ultimate purpose, but once you reach your intended end (i.e. making a strong counter) you have closed your mind from achieving any benefits in the form of new information that you have had to dismiss in order to arrive at your strong views.
    The basic premise of being a “Rational Being” is to give equal attention to your opponent with the intention of improving upon or maybe even correcting your own existing notions/views, so you become a better thinker.
    By blindly labeling a success story as being attributable to mere “Luck” and nothing else is myopic and entails dismissing any/all other factors that may have very important contributions.

    2. Your quoting of the story of the drowned worshippers by Cicero as a counter argument to Prof. Bakshi’s narrative of the various businesses being successful, is in my view, irrelevant and weak. The simple reason for that is where the survivors attributed their escaping death at sea, solely to the factor of “Praying” , Prof. Bakshi did not attribute only the characteristic qualities of the Key Men as being solely responsible for their companies being successful.

    The story of the survivors of the drowning boat has much fewer variables which were used in the narrative (1. A boat hitting rough waters, 2. The presence of holy tablets on-board, and 3. The only act on the part of the survivors being the commission of “Praying” and nothing else). Whereas on the contrary the variables involved in the various businesses being successful are much more complex and numerous which would require much detailed study.

    So, while the attribution of “Survivorship Bias” for the Cicero story is apt, it is not so pertinent in the case-study of the successful businesses.

    3. In your post you expressed disapproval of your friend taking position in all companies listed in Professors recent post and also that he is committed to adding to them on a regular basis. Later you envisioned a rather humorous analogy of various impressionable wannabes attributing Rahul Dravid’s cricketing skill set to a certain “self-pleasuring” activity and thoughtlessly emulating. That was funny.

    But I wish to thank you to shining light on a very important lesson behind this humor. There are many amongst us who are suffering from this Anchoring Bias as they rely too much on either the very first piece of information or maybe even an anecdotal piece of information and go as far as committing very heavily upon such notions, what is worse is in the field of investments, they might even profit from it, initially.

    This is an example of behaving while being committed to an extreme view. There are many such specimens who follow blindly in a lemming like fashion. But I feel it is inherent in human nature to avoid actual thinking and commit such follies.

    I thankyou for pointing out this lesson.

    But, don’t you think that blindly committing to the other extreme and being a pure skeptic leads to its own unique set of follies?, as Prof. Bakshi pointed out in his reply, that being a 100% rational can have the potential of stopping yourself from being richer and wiser. The erroneous act of commission at one end becomes equally erroneous act of commission in the other.

    4. The argument between luck and skill in business as well as in investing shall continue as long as there exists a metaphysical element contributing to the long term successes or failures in commercial ventures. That’s just the way it is and will continue to be so till the time a scientific discovery is successful in describing long-term outcomes in and exact scientific language.

    Coming back to Prof. Bakshi’s narrative profiling the successful entrepreneurs, who are each possessing the unique and respect-worthy traits of “Integrity, Intelligence and Passion” I will say that it reminded me of the famous Warren Buffett quote that:

    ” You should invest in a business that even a fool can run, because someday a fool will”.

    Well, now imagine that such a business is being run not by a fool but instead by a prodigious and intelligent fanatic like the examples Prof. Bakshi highlighted, and they are allowed to compound their combined peculiarities (the businesses and theirs) for a very very long time. What do you envision the long term prospects would be for a person who is a partner in such a venture ??

    I’d reckon that the probability of it being a highly prosperous one would be very high.
    But even at such a point of time in the future, we will have the skeptics much too eager to dismiss the success as nothing but “Survivorship Bias”.


    The problem with storytelling is that, since it is forced to being concise, the focus is more on context rather than raw data and there’s absence of statistical evidence within the short narrative, which weakens the description. It is this weakness which is exploited by skeptics in their arguments.
    I have very much enjoyed learning from both of you and shall save your intellectual exchange to re-read and re-learn from it again and again.

    Thankyou Gentlemen.

  14. amber

    On Luck:
    While in our texts luck is defined as good/bad happening due to past life karma , text also stress that this life karma strongly cut affect of last life karma. So what matters is what you are doing which defines outcome. Luck always flow from present karma….Do it right and change your luck

  15. Two wise men discussing

    Two thoughts
    1) we are all 1 out of 6M Sperms that started the journey. What about remaining 5.99999 Million?
    2) luck is the junction where opportunity meets preparation. Bakshis last post on July 15, exactly expands the whole world of preparation!

  16. ZenoOfElea

    Behavioral finance has explanations for everything after the event but doesn’t help in predicting much

    If you buy shares and it falls, you suffer from “over-confidence”. If it rises and you didn’t buy then you suffer from “myopic loss aversion”. Someone who responds quickly to new information overweight “availability” and those who respond slowly are “anchored” by prior beliefs.

    Even the questions asked about the above story are not complete. It’s not only those who prayed and then drowned. It’s also those who did not pray and then drowned.

    If you go by what someone means by the word luck, then if someone says that they manufactured luck or they made themselves lucky by being in the right place at the right time they are not most likely keeping with the meaning of luck. If you can manufacture it is by definition not luck.

  17. Sanjay Bakshi

    I think it’s absolutely crazy to say that one has nothing to learn from studying extreme successes and extreme failures.

    I would go on to say that people who have read Taleb’s three books and The Halo Effect (I have read them all and prescribe them in my course) and, as a consequence, have a strong belief in randomness as if it was some kind of religion, are missing a big point.

    If you have to learn you have to learn from both extreme success and extreme failure. You have to try, of course, eliminate as far as possible extreme success and failures caused by randomness (luck)— there is little to learn from the techniques used by a “successful” gambler in a casino— but if you become as stringent about that idea as a mathematician, you are left with nothing to hold on to that will teach you something useful.

    Most students who sign up for Career Launcher do not get into IIT, but some do. And the guy who just missed it was no worse than the guy who barely made it. Does that mean there is nothing to learn from how Career Luncher conducts its classes, what kind of instructors it has etc?

    Most students in Graham’s class did not become successful investors? Does that mean that there was no real logic behind Graham’s teaching?

    Charlie Munger once said:

    “People will think I’m a paid salesman for Value Line. But I do think their graphs and reports are wonderful. Indeed, I would pay for a Value Lie service that took all of the major corporations way back to 1910. And if I were running a business school, I’d teach it in part from those 80-90 year histories of leading corporations and relate the data to what was actually happening – like the invention of the automobile, the rise in dominance in one corporation and the fall from dominance of another, etc. So I’m a great believer in all that background.”

    Narratives play a huge role in cognition.

    This is true, even if the world may largely be random. Are people who are strict believers in randomness and who therefore claim that there is no point doing any analysis because in the end its all random luck, just being lazy?

    The other thing about pattern recognition in a pari-mutuel system of securities markets is this: If you wait long enough to be absolutely certain that the unusual pattern that you are observing are not in fact the outcome of some random process, and you wait till you are absolutely certain, there is no money to be made anymore. That’s because your conviction will then be shared by thousands of others and you are competing with them and their behaviour will show up in the price.

    So, you you just have to have the ability to recognize patterns – and possible independent causal factors which may be random but when they occur in unison, they are unlikely to be caused by some crazy co-incidence.

    And you have to be willing to take a risk based on hunches like “no this just cannot be random.” The big reason for that is the pari-mutuel system of the stock market where the odds change as prices change. The consequences of being right in a such a marketplace very high. And the consequences of being wrong are very low, provided you have taken adequate care (diversification, no debt, long-term view etc). In such a system what really matters is not how often you are right or wrong. What matters is how much you make when you’re right and how much you lose when you are wrong.

    Paradoxically the is exactly what Taleb prescribes in his books. But people who overdose on his thoughts on randomness tend to forget it.

  18. Siddharth

    An extremely enlightening exchange of thoughts. Thanks to both!

  19. Shreyans

    Hi Manish,

    Thanks for sharing this. There have been a lot of comments already and I have learnt from almost all of them.
    I am a fan of Taleb as well and as much as I agree about people trying to find reasons in stuff that have none, I think there is another way of looking at what Prof Bakshi described!
    Before you go on further, please spare a few seconds to watch this video from 18:55 to 20:29.

    This is a framework of thinking from Elon Musk (who in my opinion is among the greatest thinkers today). He says, instead of trying to find analogies in everything, you can break down stuff to their very fundamental truths (The Physics principle) and reason from there. Now this is something which though is very simple sounding but not a lot of people do it today. I think even Munger has said that – To make decisions try to break them down to the core math behind them and reason with that.

    That being said, if we apply this same principle to a business.

    A business is run a by a real person and what he does or does not can make or break it. Would you agree that a business being run by a person who has Integrity and thinks about his customers, who genuinely thinks about solving their problems, who doesn’t cheat them; is the business that has a high probability of doing well in the future? (How many wonderful businesses in the world have survived by cheating and dis-honesty?)

    Would you agree that a business being run by a pro-active person, who is full of energy is willing to not lose his focus Come what may! is the business that can survive? (How many times have successful businesses been successful just from the very beginning, if they have then you can again argue the role of Skill vs Dumb Luck)

    Would you agree that a business being run by a person who is Intelligent and understands what it takes to get it right, or has the capability to learn what it takes to get it right, is a business that is likely to survive in fickle times?

    If you do, then you are breaking down a business to it’s very fundamental truth (The man (or men) behind the show!) and you are arguing from there.
    There is always the power of a story and the halo effect, but in my opinion, this is a question that tests the very roots of a business!


  20. Obu


    You display a lot of Chutzpah in the writing of this post. It’s not easy to write frank opinions and critic an Expert and Approved Investor like Prof Bakshi and getting reply from him as well! This is the first time I am reading your blog and feel absolutely lucky that my first post read in this blog is this one. Also there are such wonderful comments and the commentors seem high profiled as well. Most of them go way over my head. My respect for Prof Bakshi also increased manifold; his eager defence seems to be because of ardent passion for teaching this as a method which can be followed as a general rule. It was mouthwatering when Prof Bakshi said about the 10 IIP CEO envelope! 🙂 Please do share with us if you are going ahead with that experiment!

    However, whether it is luck or casual pattern, as an investor with an average IQ, irrationality and biases, I believe things can go wrong even if you are absolutely rational and cover all check list. I am willing to take bets which if successful make me rich and if fails don’t make much difference. Though I may sit with a lot of IIP goat crap, a few IIP successes is enough for me to achieve a decent alpha much better than Nifty for the effort put.

    It was serendpity I landed on this blog.

  21. Dedicated servers

    Kahneman points out the impact of recent events that register as relevant are likely to become candidates for important elements in a causal narrative. The importance and impact of the halo effect is discussed in some detail in this part of the book. Kahneman reports that the

  22. Manoj Kaushik

    Some Great thoughts and learning grounds here…..

  23. Sanjay Bakshi

    Manish, the owner of this excellent blog, nudged me on Twitter to rejoin this “investigation” Like CBI says “join the investigation” and then promptly arrests the person who goes to the police station. LOL!

    I do think it’s a good time to revisit the debate in this thread and what was said in my now very famous (infamous?) talk given that ,many years have passed by. There is another big reason which is this. People change over time. We all do. There’s this lovely quote I think about a lot:

    No man steps in the same river twice. For, it’s not the same river. And it’s not the same man.

    Those of you who follow me would have noticed that I do not do anything remotely similar to what I did in that talk anymore. All those case studies? Interviews with entrepreneurs? No more. What I mean by that is that I don’t publish them anymore. I do them in classroom of course because if you have to teach investing, you have to do it in real time.

    A very good friend of mine, who shall remain unnamed, advised me to not “attach my name” to any particular entrepreneur or business or stock by endorsing it in public. For two reasons. One, commitment bias. We have seen vicariously how some funds got flamed for defending the companies in which they owned a stake when they should not have done it. I won’t go there!

    Two, shit happens. Everything changes. Businesses encounter difficulties. People change etc.

    Of the people I cited in that talk, one of them turned out to a huge mistake. I have said so in great detail in many a classroom and most recently at Flame University too. Cost me a bundle too. Some lessons learnt and more than adequate tuition fees paid…

    Another one turned out to be too conservative with no growth mindset. While I loved the conservative nature of the fellow, over time, I saw the lack of growth mindset would be a huge detraction from returns.

    A third one bragged a lot about his profits and that, among other reasons, attracted huge competition. – became a case study in many of my lectures.

    Some have made business mistakes. Don’t we all? I sure do. But none of those mistakes turned out to be life threatening for the business. Which is a good thing, especially if we look at what’s happening in the corporate world around us.

    Why am I not naming these people? Because I have somewhat taken Buffett’s advice to heart (again at the advice of another very dear friend) who told me to praise by “name” but criticize by “category.”

    Many of the businesses profiled in that talk are, in this environment, selling at market valuations which are way below those that existed only a few quarters ago. At least a couple of them were selling at truly ridiculous valuations. And so actual investment returns would be quite different from point to point returns computed today with equal weights etc.

    Coming back to the debate. What do I now feel about Manish’s original blog? My answer today: I agree with him more today than I did when he wrote it. A lot more.

    No egos here!


    – –
    Sanjay Bakshi

  24. Varenya

    I guess the Intelligent are not Fanatic

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