Saturday, December 24, 2016

The Secret to being a Successful Investor

“If one negligently leaves the bath running with the baby in it, one will realize as one bounds up the stairs towards the bathroom, that if the baby has drowned one has done something awful, whereas if it has not one has merely been careless". I didn't say it. Thomas Nagel did. I just copied pasted it. Because it made me realize something. That this could be it!! After all these years of reading and learning and making mistakes (and repeating these steps again and again, though not necessarily in the same order!), I have quite accidently stumbled upon the secret to successful investing. The difference between success and failure. The answer is actually quite simple. Luck! Just plain ol’ simple dumb luck!

I know you are disappointed with the answer dear readers. But please bear with me. Just indulge me and read the above quote once again. What defines the magnitude of our mistake is not the nature of the mistake itself, but its consequences! Looking back at all the mistakes I have made in my investing lifetime (so far), I realize that I have been extremely lucky! Actually, I can hardly believe how lucky I have been. If all the mistakes that I have made had ended with the worst-case scenario, I doubt if I would have ever had the opportunity to learn from them. Or I would have learnt from them, but would certainly not have had the resources to implement my “learnings”. After all, there are just so many times you can lose your entire bankroll and start all over again.

So many times, we make the mistake of attributing our good luck to skill. And we attribute our bad luck to, well, bad luck. In fact, this phenomenon is so common, that there is a whole mental model about it. Self-serving bias.

“A self-serving bias is any cognitive or perceptual process that is distorted by the need to maintain and enhance self-esteem, or the tendency to perceive oneself in an overly favorable manner. It is the belief that individuals tend to ascribe success to their own abilities and efforts, but ascribe failure to external factors.” - Wikipedia

No matter what investing school you belong to, fundamental or technical, value or growth, there is a great amount of forecasting attached to it. Forecasting, by its very nature, involves uncertainty. And uncertainty involves probability. The easiest way to increase your odds of success is to reduce your odds of failure. And the simplest way to reduce your odds of failure is to learn from your mistakes and avoid repeating them in the future. Every little mistake ticked off results in increasing the odds of success. But like we said in the beginning, the magnitude of our mistakes is not defined by the nature of the mistakes themselves, but by their consequences. And this is exactly where luck comes in! What if the initial few mistakes all had dire consequences!

I believe I am becoming a smarter investor every year. Not because I am closer to finding any secret stock picking formula, but because with passage of time, I can now recognize mistakes that I have made in the past that I had never noticed before. And that, I believe, holds the key to being a successful investor.

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Tuesday, July 12, 2016

The Poverty of the Rich

I am a firm believer of the fact that our entire moral compass is a function of the times, and thus be extension, the society that we live in. Continuing on the same lines, so many of our thoughts, ideas, dogmas, beliefs are just so ingrained in us, ever since our childhood, that we spend our lifetimes without even, forget questioning them but even thinking about them. I read something today morning that made me not only question a very simple concept, but also see it in a whole new light. The concept of poverty.

What is your definition of poverty dear readers? I will first share mine. Not having enough. Having very little. Struggling to make ends meet. Just few of the phrases that would come to my mind if you were to ask me to try and define poverty. And I am willing to bet that most, if not all, of you readers would have also come up with similar answers.

As the regular readers of this blog know, we have been visiting the works of Seneca in the recent months and trying to gain some financial wisdom. And it was while revisiting his works that I found myself changing my mindset about poverty. Seneca quotes Epicurus and states 

"Contended poverty is an honorable estate. Indeed, if it be contented, it is not poverty at all. It is not the man who has too little, but the man who craves more, that is poor."

I was so impressed by these lines, I found myself reading them again a couple of times. I would suggest you readers to also do the same. Being from a developing country, you come across poverty everyday and by no means, do I want to undermine their condition. But what these lines did was made me expand my definition of poverty. Hence, the title of the post. The Poverty of the Rich.

More on Seneca as applied to finance:

Tuesday, July 5, 2016

Indian stock market - Just some observations

This is what I have been observing about the markets in the past few days......

(1) Articles forecasting stuff like NIFTY i.e. the primary Indian stock market index will go to 13,000 in 2 years. For the uninformed it is at less than 8500 currently.

(2) Every IPO is getting way oversubscribed by retail investors. It is already being said that this could be the best year for IPOs since 2011.

(3) On various forums, people are starting posts talking about quitting their jobs and shifting to equity investing/trading as a full time career.

(4) Colleagues at work, who have always thought that equity markets are risky, are discussing stocks with each other. No, they are not asking about investing, just about how to trade stocks and how to invest in IPOs.

Not making any conclusions, just stating some facts. All the above observations and links are from this week only. Are you readers seeing anything similar in your equity markets?

Take care and good luck!

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