Learnings of the Week-3. (2/2)

Understanding the Circle of Competence: How Warren Buffett Avoids Problems

  • It is expected from you to give your best work on what you know and what you understand
  • Work in your own circle of competence, i.e. do the things in which you have an edge
  • Understanding your circle of competence helps you avoid problems, identify opportunities for improvement, and learn from others

  • For example, a Saree businessman don’t know how to play in stocks, he only knows his business which is his circle of competence (he is not expected to learn share-market to be successful)
  • There is nothing like one should understand all areas, it is only expected to understand your own area or business, get introduced with all of its boundaries and become expert there is essential
  • Never be afraid to say “I don’t know”, improve yourself in your circle of competence to outperform

Article link:
https://fs.blog/2013/12/circle-of-competence/

Running on OPM: Other People’s Money

  • What is better than Debt and equity? Debt is costly because we have to pay interest and equity is also as we have to earn better returns for shareholders; but what about other people’s money (OPM) – it’s totally free
  • OPM comes usually from two ways – advance from customers and credit by suppliers
  • How a business can get OPM? Let’s take an example
    • Company InfoEdge, operating Naukri.com and types of websites, get payments from its customer 120 days in advance, which is no cost – free money for the company
    • As it has no PPE cost or inventory management to do, company can earn interest on that money for 120 days
  • How OPM matters to shareholders?
    • OPM is not only free money, but it also saves interest expense for the company, which leads to increase in profits
    • Presence of OPM proves that company is special or its products are in demand, only then company can get OPM by customers or suppliers

(only make sure that speciality isn’t likely to go away anytime soon)

Article link:
https://www.capitalmind.in/2020/02/opm-other-peoples-money/

Physiology of Finance

  • Behavioural finance talks about human aspects of finance
  • It is like if you put money into venture, and though it is not working well, you find it difficult to recognize loss and keep funding it
  • When we know behavioural finance, we will be better of dealing with finances

Philology of finance

  • If one person earn 1000 Rs by trading in the market for the 1st time, it would be great pleasure for him, but when he keep doing it and after some days, that earning of 1000 Rs will not give him equivalent pleasure, to have that equivalent pleasure, the earning must be higher (which make them take higher risk every time)
  • Behavioural finance includes 2 things, greed and fear
  • While in physiology, finance include 2 things i.e. mania (non-clinical stage of depression) and stress or depression (clinical part)

When you feel stress?

  • When the situation is not familiar or it is rare
  • When you don’t know what will be the outcome
  • When things are not in your control

Short time stress is good for us as it encourages us to do something

Video link:
https://youtu.be/1YaWjEwHXtM

Published by Aakash and Meet

I am Aakash Raotole I am currently doing Bcom from Dr. Patel and Rb Patel commerce college I am currently studying at finnacle investment academy Recently done distance internship with windrose capital, Pune - for a period of 14 weeks I am Meet Bhatt Completed HSC in commerce Now studying finbridge program at finnacle investment academy and Bcom externals I had completed CFA institute's investment foundation course and distance internship with Windrose capital, Pune - for a period of 14 weeks

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