Three "epic fails" nearly wiped me clean this year. Here are five things I’d learned from these painful lessons:
1) Despair and greed (both) drive people to do irrational things.
Financial distress usually forces your hands. But “sudden-wealth syndrome” is also a real thing. It results in misplaced optimism, arrogance, and impairs one’s ability to make sound decisions, leading back to distress. It is true that ‘success is the greatest imposter’.
2) Learn to block out noise and opinions.
Investing is a very personal thing. Most people I meet so far tend to be prescriptive about what they invest in. They believe what they expound is the ‘holy grail’ and want to tell you what they know best. Sometimes, this is a manifestation of their experience and background. Other times this is just pure ego talking. I have learned that disagreeing doesn’t work well. 99% of the time, it just pays more to nod and agree.
I think sometimes people forget that:
What applies to you does not apply to me. Ipso facto, what works for you does not necessarily work for me.
At the end of the day, it’s your money. Use your own judgement to act and execute.
3) Diversification is not about putting money across 50 different stocks.
Diversification is not about beating the probability curve and putting capital to work across 50 different businesses. It is about setting aside an appropriate amount of cash, and with the deployed capital, to selectively invest only in the businesses which you understand.
The quality of an investment portfolio - whether it comprises tradable stocks or shareholdings in private businesses - should never be judged purely on their ‘rockstars’. Media has a tendency to over-hype on successes than failure (cos' who wants to be associated with a cynic?). Be realistic and accepting that a portfolio will inevitably have winners and losers. In my opinion, people like to judge their “stock-picking” capabilities on the winners, and undermine too much the missteps they make on their losers.
Collective performance of the portfolio is ultimately most important. Diversification is about risk management. And risk management is not about eliminating the bad eggs, it is about reducing the number of bad decisions, over time.
4) Make data-driven decisions.
Information is a privilege especially in a digital age today. Anyone providing you with privileged information is either trying to show off, or has something to gain from doing so. Constantly keeping this in mind will enable you to make more data-driven evaluations and eventually the right decisions.
The worst thing is ever do when it comes to investing is to blindly follow the lead of someone else.
5) Money is made in the sitting.
Humans are gamblers at heart. There is money to be made from gambling but we are also excited by its thrill - the thrill of knowing that loads of money can be made overnight in a few minutes. Somehow, we seek that thrill and the world today has also grown so used to instant gratification. The reality is that no one grows rich overnight. You are a winner if you had been able to leave the gambling table sober with a pocket of slightly more cash than when you came in.
Reality is: Stock markets exist to create avenues and platforms for companies to raise capital, not for investors to grow rich overnight.
And lastly, "you are only as free as your last trade":
I recall once a threatening trader abusing a terrified accountant with impunity, telling him things such as 'I am busying earning money to pay your salary' (insinuating that accounting didn't add to the bottom line of the firm). But no problem, the people you meet when riding high are also the those you meet when riding low, and I saw the fellow getting some (more subtle) abuse from the same accountant before he got fired, as he eventually ran out of luck. You are free - but only as free as your last trade.
- excerpt from the book "Skin in the Game", by Nassim Taleb
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.]
A thoughtful weekend read and a timely reminder for reflecting on all bad decisions made this year and in the last four years...
"Life is tricky. It is never clear when you are at your peak (and about to head downwards into a death spiral) or at your bottom (and about to skyrocket upwards to your greatest heights). Right now, you could be sitting at the very peak of your life (or you could be sitting at the very bottom of your life), and there is no way to tell which is which. It is the scary truth for all of us. This truth applies to people, companies, and countries. Change can happen gradually over time or it can happen instantly. For me, success is the greatest imposter. In life, business, or martial arts, winning is a falsehood. It seduces smart people into thinking that they are invincible. It tricks good people into believing that they are infallible. And it robs all people of reality and truth. Don’t believe the hype. And don’t eat your own bullshit. Or you will lose everything. The only antidote to the poison of success is humility, hunger, and gratitude. Stay humble. Stay hungry. Stay grateful. And outwork everyone. Always." - Chatri Sityodtong