Knowledge is power and can be used to make money. Correct? To a great extent yes, but have you wondered about the flip side?

I have seen balance sheets (shit) where I knew the promoters and have wondered how the exist. There are companies which have existed upwards of a couple of decades and have no clue where the next client will come from. I have seen listed companies run by shady promoters whom I would not like to meet socially – let alone be on the same Board of Directors.

The problem when you have this kind of proximity you keep wondering – is this a share that I want to buy. For example one engineering company claimed it had ‘X’ amount of exports. When you hear that you ASSUME that the X figure is ENGINEERING exports, right? well it turned out that they were ‘buying’ exports of rice and bananas. For a while the share did well, but I had exited and maybe lost some ‘opportunity’ to participate BECAUSE OF THE KNOWLEDGE about the management. Of course company went into BIFR and now I have no clue where the promoters are.

Silverline – one balance sheet I could never get myself to believe. This is perhaps because of knowing the management, not because of not knowing them. I did not trust the share at Rs. 10, Rs. 30 (it did a buy back!!), Rs. 1200 or now when it has ceased to exist.

The curse of knowledge is related to hindsight bias, the problem being that if we have expert knowledge about something (you have done research, or the promoter is dressed so badly that you do not like the balance sheet, or his staff is really pathetic) – the real value of a security for instance – we cannot put ourselves in the position of uninformed punters/ investors. I experienced this during the IPO boom era when I refused to invest in a whole bunch of companies that I knew for a fact were a complete crooks. One of those companies have now turned ‘moral’ and ‘ethical’ – and not very long ago had told me ‘Subra not paying TDS and PF on time is the source of working capital for me’. I still cannot get to do business with him. I will never be able to do so.

Similarly companies where the balance sheet was not worth trusting – Shaan Interval, Patheja Forgings, Indiana Dairy, Krishna Filaments, Sun Earth Ceramics, Crest Animation, – whatever you did, the numbers never added up.

Classically insiders with expert knowledge are supposed to have an edge on outsiders. However, the curse of knowledge mitigates against this. We simply cannot un-know (or worse ignore) information, we’re unable to put ourselves back in the state of ‘not knowing’ and therefore are unable to put ourselves in the position of uniformed parties. For example if the whole organisation tells you that the wife of the MD makes a pain of herself in all business matters and the top management changes were at her behest, how do you buy the share at a p/e of 22? You know one day it will give way.

Is there a solution to this?  Can you try to put yourself in the position of (uninformed) outsiders and to set prices based on that lack of knowledge. To me at least this has been nearly impossible, which why knowledge is a curse: we can’t unlearn stuff we’re learned. How can you ignore your gut? How can you know when the entrepreneur will turn from a scheming, penny pinching, cheating SOB to a person who talks on public forums about corporate governance? Until you’ve learned a language it’s just unintelligible noises – and now is the challenge, try getting your brain to stop processing that negative, juicy interpreting.

Even worse. If I had bought put options for 1000 days in Shaan Interwell, Indiana Dairy, Silverline, Patheja forging, Crest animation, Sun Earth Ceramics, ….I would have made a few million.

However do remember both Crest and Silverline went to 4 digits. How would I have reacted at that point?

Maybe I would have closed the deal saying “the market can be irrational far beyond you can be solvent’.

Well History would have written an epitaph for me, but I would have been in the poor house, broke, alone, and wondering what the market is all about.