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Cognitive Illusion of Control over Outcomes

Has this happened to you before? A wrong decision you took turned out to have an incredible positive outcome that you didn’t expect. And the outer world like your friends, communities lauded your brilliant decision. This could have happened to many leaders, sports team managers, captains. Now the interesting aspect is that you dont realize it was a wrong decision at that point of time before execution but rather at a later point of time after the event occurred.

Or the other way around. A perfectly right decision you thought ended up being a complete failure! Why do these things happen? Because we often underestimate the influence of multiple extraneous factors like luck, probability on the actual outcomes and we overestimate our ‘cognitive illusion’ of control over the outcomes.

Behavioral scientists Daniel Kahneman and Amos Tversky demonstrated with numerous examples of what are known as “cognitive illusions”. The cognitive illusions that they introduced delivered empirical evidence that people’s reasoning abilities are deficient with respect to the laws of logic and probability. People give too much credit to the Outcomes and very less credit to the process behind.

So What can we really control?

What we can control is the process behind and fine tuning that process in such a way that we improve the odds of our decisions going right in our favor. Basically stacking the odds (probability and luck) in our favor by focusing on the process and preparation. We should not obsess over the destination but rather focus on the journey. Now the key thing here is you need to love the journey or the process so much that you are able to focus and follow that consistently, and sometimes even improvise. Warren Buffett, one of the world’s most successful investors, is a perfect example of process over outcome.

As Stoic philosopher Marcus Aurelius said, “it’s insane to tie your wellbeing to things outside of your control. If you did your best, if you gave it your all, if you acted with your best judgment—that is a win…regardless of whether it’s a good or bad outcome.”.

But my favorite lines on this topic was said by the famous actor Will Smith. He said “You don’t set out to build a wall. You don’t start by saying, ‘I’m going to build the biggest, baddest wall that’s ever been built.’ You don’t start there. You say, ‘I’m going to lay this brick as perfectly as a brick can be laid.’ If you do that every single day, soon you will have a wall.”

Human Brain is wired for linear thinking. Learn how to shift to Non-linear thinking to gain the Edge

Shortest distance between 2 points is a straight line and our human brains are wired to think straight and linear. Decades of deep research in cognitive psychology shows that the human mind struggles to grasp nonlinear relationships. But the world is a non-linear one out there, whether its relationships, technology innovations, business growth, climate change or even making wealth.

While like in any bell curve, thinking straight and linear helps in our day to day activities which occupies 80% of our mind/ time space, we need to shift our thoughts to exponential when it comes to gaining edge in careers, innovations, businesses or networks. That shift to remaining 20% of the bell curve helps.

How to Shift to Non-Linear Thinking? Lets understand with some practical real life examples.

1. Understand Leverage (Archimedes Lever):

Story of Facebook and Threads: It took 4 and half years for Facebook to reach first 100 Million users on its platform. The same company now called Meta launched Threads to compete with Twitter (now called X). And guess what? Threads took 5 days to reach 100 Million users on its platform. How did this happen with no promotions? Threads allowed Instagram users to automatically follow their users on the new service, giving it a quick boost in amassing new signups. Meta just leveraged its massive 2 Billion user base in Instagram. This word “Leverage” will repeat a lot because its closely linked to non-linear results. One of my favourite quotes was from the most influential scientists in history Archimedes who said “Give me one firm spot on which to stand, and I shall move the earth.” 

Even ancient Egyptians used levers to lift heavy stones like 100s of tons in order to build the pyramids and obelisks. The concept of leverage can be applied across areas of life like building a business using financial leverage, building a network leveraging the connections. Concept of applying leverage simply means small changes applied at the right points in optimal balanced way can achieve super normal large outcomes (Non-linear)

2. Lindy Effect: Power of Consistency with Incremental Gains:

The Lindy Effect is the idea that the older something is, the longer it’s likely to be around in the future. And the old idea of building brick by brick consistently leading to incremental gains will never die and this idea is likely to lead the world for centuries ahead.

Examples: India`s Growth Story:  In 1820, India’s GDP was 16% of the global GDP. For over 1700 years, India was the richest country till British colonized and looted the country and left to rags. India took Independence in 1947 and the GDP of the country at that time was less than $30 Billion. It took 60 years for India to reach the First Trillion Dollar GDP. The next Trillion came in less than 5 years and the next in 3 years and the next could be in a year.

Tesla Growth Story: It took 12 years for EV leader Tesla to build its first million vehicles. Recently Tesla Just Built Its 4 Millionth Vehicle, Seven Months After It Crossed 3 Million Mark.

Whether its a country or a company, these growth stories are perfect examples of Non-Linear Applications in life.

3. Compounding (Snowball Effect):

Einstein called it the 8th Wonder of the world for a reason. Principle of compounding is difficult because human minds cannot perceive geometric progression. We can easily calculate linear progression in minds but when it comes to geometric progression, it gets extremely difficult beyond a few steps. Warren Buffett compares it to the Snowball effect.

When you push a small snowball down a hill, it continuously picks up snow. When it reaches the bottom of the hill it is a giant snow boulder. The bigger it gets, the more snow it packs on with each turn. The snowball effect explains how small actions carried out over time can lead to big results.

Compounding is mostly considered as a wealth creation phenomenon but it applies to every aspect of life. Whether it is compounding knowledge or skills or relationships or habits, this non-linear principle applies.

The best book I`ve read in recent times was Atomic Habits written by James Clear and he has best comprehended compounding in a picture. Take a look at the image below.

Crypto is back? A Dollar Cost Averaging strategy for Bitcoin that worked in 2023!

First Some basics:

Bitcoin, the first cryptocurrency was first launched in January 2009 by a computer programmers group under the pseudonym Satoshi Nakamoto. Each Bitcoin is divisible to eight decimal places. The smallest unit is a satoshi (sat), which is 1/100,000,000th of a Bitcoin. The Bitcoin supply was capped from the beginning by Nakamoto. The maximum number of coins stipulated to be in existence was 21 million. And around 19.5 Million BTCs are mined so far. The first Bitcoin real-world transaction was carried out by Laszlo Hanyecz who paid 10,000 BTC to have 2 Papa Johns pizzas delivered to him. The pizzas costed about $25. At the peak of BTC`s pricing in 2021, the two pizzas would have been worth north of $680 million.

Crypto rising back

There were many Crypto frauds that happened and a series of exchanges including Sam Bankman`s $32 Bn FTX filed for bankruptcies. A series of crypto related fiascos followed in 2022 and 2023. But finally Bitcoin has started showing resistance in its pricing and has started climbing the wall of worry again.

Bitcoin prices fell all the way to $16,500 in Nov 2022 from the peak of $65,000 in 2021. And BTC is up 82% just in 2023.

There was recent article in Barron`s that Crypto is back from dead which was relating to a favorable court ruling that a token trading on crypto exchanges is not an unregistered security as the Securities and Exchange Commission wanted crypto to be treated like a stock from a regulatory standpoint.

Bitcoin, the oldest and biggest cryptocurrency, is the only crypto that the SEC has suggested is actually a commodity. Now none of us are sure whether Bitcoin will crash again to $18,000 levels or will it hit 1 Million$ as some pundits prophesize. One thing to remember before writing off Bitcoin is that it has survived a couple of market cycles over last 13 years.

Bitcoin – Dollar Cost Averaging Strategy:

But recently I deep dived into an interesting business model followed by the BI analytics company Microstrategy company owned by Michael Saylor. He is a staunch proponent of Bitcoin just like some of other Entrepreneurs and investors like Jack Dorsey, Elon Musk and Cathy Wood. Microstrategy is the biggest corporate owning 150,000 Bitcoins in their balance sheet followed by Coinbase, Square.

Microstrategy adopted a strategy in 2020 to use Cash flows from their Cloud based BI Analytics business and buy Bitcoin in their balance sheet every quarter on almost following a Dollar cost averaging strategy. I found this quite intriguing since they have been successfully averaging out the buying price of Bitcoin since 2020.

This has helped the company build a solid BTC position in their balance sheet worth over $4 Billion over last 3 years.

Microstrategy stock is best performer in 2023 being up 216% YTD. The stock has outperformed over last 3 years basis as well outbeating FAANG, NVIDIA and all buzzing AI themes.

How it works?

Now I was never invested in bitcoin or any crypto for more than 2 months since I could never ever muster conviction to hold. I have always been agnostic about its prominence till date and am quite not sure how to value Bitcoin or any cryptos for that matter. So just like dollar cost averaging of stocks, I find dollar cost averaging of Bitcoin very interesting strategy since Bitcoin is not going to go away soon. The biggest risk in buying Bitcoin is the price volatility and dollar cost averaging helps neutralize that risk. And Microstrategy is at the forefront executing that strategy.

Carrying Value Vs Holding Value:

Digital Asset Impairment charges is a huge loss carried in MicroStrategy’s balance sheet which means under standard accounting rules, the value of digital assets such as cryptocurrencies must be recorded at their cost and then only adjusted if their value is impaired, or goes down. But if the price rises, that does not get reported unless an asset is sold. Currently the carrying value is determined based on the lowest price of bitcoin during the reporting period.

Example of Digital Asset Impairment:

On October 1, 2021, a reporting Entity acquired one unit of crypto asset for $20,000. On November 15, 2021, it was observed that the price of the crypto asset had declined to $18,000/unit. Reporting Entity deemed this a triggering event for impairment and wrote down its crypto asset to a new carrying value of $18,000 and recorded an impairment loss for the decline in value. On December 31, 2021, Reporting Entity’s year end, the price of the crypto asset increased to $19,000/unit. But still the Reporting Entity should reflect a carrying value of $18,000 for its crypto asset at year-end and report the full impairment loss of $2,000 in earnings for the period.

So for Microstrategy, aggregate cost of acquiring BTC was ~$4.2 billion and carrying value of the same was ~$2.0 billion, reflecting ~$2.2 billion in cumulative impairment charges.

On March 23, the FASB issued an exposure draft for comment that would cause in-scope digital assets, such as bitcoin, to be measured at fair value. If this gets approved, then real fair value will reflect much stronger valuation for Microstrategy with a simple conversion of holdings of 140,000 Bitcoins.

Microstrategy is also a decent business generating cash and growing:

MicroStrategy is a good business still with lots of marquee clients. They are further investing in and enhancing the artificial intelligence (AI) capabilities within its analytics platform, MicroStrategy One. The initial use cases are expected to range from natural language capabilities for generating new visualizations and dashboards, to productivity enhancements related to code, workflow, schema, and content creation. The partnership between MicroStrategy and Microsoft will also aid to their AI related growth. Their cloud based subscription services are growing north of 15% yoy.

Just on sales basis, MicroStrategy is valued at 9-10 times which excludes any Bitcoin holding value on the balance sheet which gives the cushion for downside from this levels.

Asymmetric Bet with Long Term Prospects:

And even better the stock is currently valued at $5.8 billion at par with their Bitcoin holdings of 150,000 which is worth around $4.6 Billion. This might be an asymmetrical bet with low downside but high upside for long periods to come due to factors like:

  • Very low upside due to cheap valuations if fair value reporting comes into effect for Bitcoin pricing
  • Huge upside for many years to come due to a strong underlying cloud based business (AI and Analytics) that generates cash
  • Price Derisking with Dollar cost averaging strategy for buying BTC
  • Multiple tailwinds for Bitcoin ahead like 4th Halving, Fair value approval, Regulatory streamlining, Corporate adoption, Wide scale Sovereign adoption ( US is the largest holder of Bitcoin among all countries by the by)

Disclaimer: This post is just a discussion on the successful strategy of Dollar cost averaging of Bitcoin and should not be construed as any investment advise. The author might have vested interest or holding in any of the discussed assets or securities.

Why Hitting Rock Bottom Is The Best Thing That Can Ever Happen!!

THE IMPEDIMENT TO ACTION ADVANCES ACTION. WHAT STANDS IN THE WAY BECOMES THE WAY — MARCUS AURELIUS

Hitting the rock bottom would mean facing any type of adversities in life and it is not easy for anybody to face adversities. But stoic philosophy teaches otherwise as I began this post with a quote by the famous Roman emperor Marcus Aurelius. The stoics guides us that adversities are the greatest opportunities in life. Again that could really be true when we remember all the adversities that has happened in our own lifes but in hindsight.

Am not delving further into philosophy. Now time for a physics concept that we have all learnt. That`s Newton`s second law of motion which states that the rate of change of a body’s momentum is equal to the net force acting on it. Hold this thought for a while.

Am an investor and am going to explain how to benefit from this concept of handling rock bottoms. I love this work of investing because it is multi-disciplinary by nature. Now if we apply these concepts in Investing, there can be huge wealth created. But how?

George Soros is definitely the best investor the world has ever seen whose fund generated an average annual return of 30% over a 30-year period from 1970 to 2000.Though am not a fan of the billionaire investor Soros who pocketed $1 billion by betting against the British pound in 1992, I have always followed one of his quote in my investing process which goes by “The worse a situation becomes the less it takes to turn it around, the bigger the upside”.

But what happens when investors face the worst situations? Most common human reactions are panic and extreme fear during adversities in the markets. When markets hits the rock bottom, that is exactly the point of extreme pessimism and lowest expectations. When the expectations are the lowest, it takes a small trigger of positive impulse (net force) to turn around and the upside could be biggest, if the law of momentum sustains.

Consider Meta (Facebook) stock that saw the most dramatic devaluation in November 2022 as the stock hit the rock bottom of $88. The whole Wall street community called it the end of social media giant. Now that was really the rock bottom and it took few harsh measures from the management to turn it around and the stock saw the highest upside. Meta stock went up 3X in 6 months !!

The Only Way is Up

The good news is, once you’ve hit rock bottom, you know you can’t possibly go any lower. You realize the bottom is actually a great springboard from which to push yourself up. This is true whether its in investing or any other aspect in life. So next time we face any adversity, the point where we feel our weakest, just understand this -> things can only change for the better. The only way is UP !!

Biggest wealth in life is ‘ ‘..A complex puzzle I solved

Why do we work? What is the purpose? The most common answer would be – to make money for a living or to pay bills. To offer a better life for our family. We always have that next car or house we want to buy. We always have the next role we are vying for in our work. Materialistic upgradation in life and higher positions in the work/ society are often confused as our growth.

Recently in an interview, Elon Musk was asked what advise would he give to youngsters and he said “‘Try to be as useful as possible to the rest of society‘. Follow your passions in a way that can benefit other people.”. But this doesn’t answer it all. There is a big missing piece that Elon didn’t address.

I was constantly seeking this missing piece in the puzzle since I started working in a corporate. It took me a decade or two to complete that puzzle and here is what I learnt. And that is the Big idea am talking about. What is the best advice I would give to a younger myself?

The Big Idea is – ‘Choose Freedom’

Sam Zell the real estate billionaire investor is somebody I had learnt a lot, listening to his interviews and book. But recently I was listening to founder podcast by David Senra who had a chance to meet Sam Zell. He speaks about different lessons learnt from Sam Zell in this podcast : https://lnkd.in/e6UvvwYi . Its a must listen one and the podcast itself is worth subscribing to.

But what really resonated with me was this same idea that he speaks about – “Go For Freedom”. This is what David posted on Twitter about this idea directly coming from Sam Zell.

“Go for freedom.

Freedom allows you to control what you work on

If you control what you work on then you can work on what you love.

If you love it you will do it for a long time.

If you do it for a long time you will get really good at it.

Money will come as a result.”

Nobody could have said this better! So finally, what is the solution to the whole puzzle?

Choose Freedom. When you have freedom, you have the power to choose the work you are passionate about, that you think has an impact and be purposeful to the rest of the society. Choosing freedom also helps us to be happy most of the times.

Think over it. ‘Freedom’ is the ultimate happiness in all aspects!!

Now choosing freedom over money or status is not an easy game for human beings though!

Only Lesson I took away from 2023 Berkshire Annual Conference

This was my second visit to the Berkshire annual convention or as the popular parlance state ‘woodstock for capitalists’. Not to worry. I didn’t take away anything specific to business or investing this time around since all of that has been spoken or written enough about Mr. Buffett and Mr. Munger through several mediums. What instead I took away was something that I observed keenly during the meeting – ‘Their long attention Span’!! Yes the two nonagenarians sat there for 5-6 hours and attended with utmost concentration fielding all the questions and answering them in detail. They have been doing these meetings since last 3 or 4 decades consistently.

There were no phones ringing, no checking mobiles or any other distractions during the meeting and what is commendable is their ability to sit there, focus and concentrate with such long attention span.

Charlie Munger had famously attributed this to his success. To quote him

I think people that multitask pay a huge price. They think they’re being extra productive, and I think they’re out of their mind. I use the metaphor of the one-legged man in the ass-kicking contest.

I think when you multi-task so much, you don’t have time to think about anything deeply. You’re giving the world an advantage you shouldn’t do. Practically everybody is drifting into that mistake.

Concentrating hard on something that is important is .. I can’t succeed at all without doing it. I did not succeed in life by intelligence. I succeeded because I have a long attention span.

Both of them are known to read hundreds of pages of books, analysts reports, company reports and so on for hours together every day. This practice is extremely difficult in today`s world of digital distraction. Humans are now officially worse at focusing than a goldfish.

A recent study by Microsoft concluded that the human attention span has dropped to eight seconds – shrinking nearly 25% in just a few years. On average, people spend 3 hours and 15 minutes on their phones per day. Individuals check their phones an average of 58 times each day and is increasing by day.

We feel we are effective multitasking but humans cannot multitask because of the ways that our building blocks of attention and executive control inherently work. To this end, when we attempt to multitask, we are usually switching between one task and another. The human brain has evolved to single task. And on top, all these are taking a toll on our mental health.

We cannot undo any of the digital distractions that are taking over our lives but we atleast can try to zone out for few hours everyday from gadgets, that might help reduce the stress and the urge to attend to notifications. And more importantly, it helps improve our focus on one task in hand thereby elongating the attention span.