I have never been a good investor. Since the day I started working, I had been through at least two or three recessions. In every of those recessions, I'd always stayed out, not wanting to log into my account to see the red indicators of the counters.
You'd think that people working in financial services will be more astute in terms of their judgement of public equities - what's undervalued or overvalued. But truth is: we know nothing about how public markets really work.
"The role of financial markets is to take money away from mediocre and underperforming companies and put it in stable, growing, high return on capital companies. "
Low risk investments such as fixed income instruments have an important role to play in the world of money management, especially when it comes to managing billions of dollars over long periods of time.
"Almost all of the real money made in those areas is made only by extremely patient investors who invest once every ten or twenty years, liquidate their holdings once a decade and spend long, long periods of time in cash.”
And when it comes to stock valuation, there are numerous scientific methodologies to calculate what the true value of a company is. But none of those scientific approaches guarantee any success in getting positive returns.
"Trying to invest in those companies based on an analysis of value is more likely to result in opportunities missed than it is make money. An approach that is much more likely to be successful is:– Investing in high quality companies after a market decline of thirty percent, and retaining the liquidity to build positions in those companies after a fifty percent decline in the broad market averages. That takes extraordinary patience, which is a matter of personality."
The goal is to be "liquid at the bottom" because "business cycles are primarily caused by the creation and destruction of debt. Those are functions of greed and fear, in other words of emotions."
It is said that "a long-term investor must be a patient person. A short term trader who thrives on, perhaps needs, constant activity is likely to be an impatient person."
I believe that Investing is an extremely and deeply personal thing. It's all about managing risk. Risk appetite is subjective. Each person can only figure what that is for himself/herself. No one else can do that. Once again, this is a personality issue.
This is also the same reason why I do not believe in seminars and workshops that preach about obtaining wealth by punting in stocks. I have nothing against the technical aspects (charting, valuation and analyzing financial reports). But in most cases, it tends to always be about extrapolating the future, which no one really knows.
"Successful investors...incorporate into their investment strategy, clear concepts of acceptable risk, what constitutes an acceptable level of inactivity and length of holding period after funds are committed. And successful investors stick to their strategy. That strategy – for instance sitting on cash, sitting on losing positions, sitting on winning positions — must be based on self-knowledge. If the strategy is out of sync with the personality, it won’t work, no matter how well it has worked for others."
[Takeaways, excerpts and quotes adapted from here.]
"Conviction in analysis is critical. Position sizing will allow you to sit patiently through the pull backs. Every good stock pulls back on multiple occasions. But most people head for the doorway at the first sign of trouble. Learn to deal with it. Don't get shaken out. Having one good year is fun but having a great decade is a lot better. If you want to grow wealth, you must understand that money is made in the sitting, not in the trading." - Random tweet on Twitter
Tasseography is the divine art of reading patterns in tea leaves. People believe that energy is transmitted through the tea leaves during the process and the resulting arrangement gives us insights of our past, present and future.
Technical analysis is somewhat like tasseography, at least in my opinion. A lot of sentiments and 'energy' are embedded in the financial markets. There are possibly at least ten major events taking place in the world at any point of time, which are likely to move the markets. Some are speculative, some are anticipated, some are premeditated.
It is basically chaos theory at work. A complex system at heart.
I do not believe in charts.
I also have zero appreciation and understanding for the creative lines constructed by chartists and punters.
I once sat in a course on technical analysis many years ago. It was intriguing and captivating. Something about the way the overlays on the candlesticks is being explained and how it nicely fits into share price trends really convinces you that with the right observations and tools, you can try to predict those stock drops and spikes.
But since I have never had much luck with stocks and charts, it probably means I suck at it or am just a very lousy investor.
But in times like these, I can't help but take a step back and re-look at the bigger trends that have taken place over the last two decades, which is best observed through charts.
This is the DJIA from 2002 to 2005.
The end of 2002 was when the full impact of SARS was felt in the market. The market probably pre-empted some of that effect a couple of months before, Within approximately 12 months, stock prices had reverted back to its pre-crisis levels. One can argue that the spread of the virus at that point of time was somewhat limited by a relatively moderate travel activity globally.
And it didn't stop there. The next 5 years that followed saw one of the longest bull runs ever.
Was it that the impact from SARS was less pronounced as compared to COVID-19? Was it the release of pent-up demand from consumers 2002-2003? Was it the onset of globalization and the opening up of China, one of the world's largest economies, to the rest of the world?
Then the worst thing happened in 2008. In September, Bear Stearns, who had heavily dealt in the securitization of assets and liabilities, was stripped and offered as a sacrifice to one of the largest banks in the US, while Lehman Brothers was taken out in the streets and shot in the head. Yet again within about two years, the DJIA had once again recovered to pre GFC levels, with the intervention of the central banks through QE and the moderation of aggressive risk-taking by the consolidation of pure investment banks into commercial banks.
In the seven years that followed, saw once again, the best bull market the world had ever seen.
And this is us today. Not quite pre-COVID levels based on end 2019, not that far behind.
We have come a long way. The world today as compared to 2003 is very different - globalization, connected-ness, lifestyles, China, the iPhone and Zoom calls. Were we able to foresee back then in 2003 and 2008 how the markets would have turned out? How is that different today?
To analyze a "complex" system of an infinitely large number of moving parts (that we have almost no control of), we sometimes need to step back from the action and make the decisions based on the big picture. Stocks go up and down all the time. Volatility is the norm. But if you believe in the mean reversion to normalization, the long-term trend is still bullish.