Book of Value - Anurag Sharma

1. People tend, on the one hand, to overreact to chance events and, on the other, to think that they could have predicted that which has already occurred.

2. Cards example:

   1. Imagine you have 4 cards, each with a side displaying a letter and another side displaying a number

   2. You can only see what is on the side facing up

   3. You see the following: A, 4, D, 7

   4. Suppose the rule here is that if a card has a vowel on one side, it has an even number on the other. Which two cards would you turn over to find out whether the rule is true?

   5. Most would turn A and 4. However, the correct answer is to turn A and 7, as both can prove the rule to be false. The first only validates it.

3. Once people adopt an opinion, they are drawn to all evidence that supports and agrees with that opinion, and they despise that which is contrary to their opinion.

4. Instead of collecting evidence to prove your hypothesis, it is argued that the correct scientific approach is to try to falsify your expectations

5. Issues with the CAPM model 

   1. We want to evaluate prevailing prices using markets outside the market mechanism that prices the shares. Since CAPM relies on prices, it is unable to provide the independent view that is required for valuation 

   2. Discount rate reflects risks + uncertainties in future expected earnings/CF. Market risk as incorporated in Beta focuses on changes in returns in relation to overall markets instead. If markets were fully efficient, then market risk could perhaps fully reflect the uncertainties in the expected earnings/CF. 

6. The strength of a business model is evident from the average historical returns on invested capital.

7. Markowitz on portfolio management

   1. The risk of a single stock does not matter that much

   2. Each buy or sell decision must be made in light of whatever stocks you already have in the portfolio