Have you ever felt that stock market is rigged to ensure that you never make money? I am sure that many of your friends/relatives who have lost money in markets will tell you this. And this is a very natural feeling to have when one has lost money. After all, the blame has to be put on something…
But have you ever ‘really’ thought why you (or your friends) ‘actually’ lost money in markets?
We will come back to this question in a bit…
I was reading a post by Shane Parrish of FarnamStreet Blog, where he shared a quote from the book How Adam Smith Can Change Your Life. It’s about how and why, recognizing our own shortcomings is the first step in the journey of gaining wisdom.
Now when I say wisdom, I don’t mean that the idea is to become some guru or an investment expert. Rather, its about knowing what mistakes we can make in future, both knowingly and unknowingly. Having the wisdom helps us reduce the chances of making those mistakes. And when it comes to investing, mistakes can have big financial impacts…
So here is the quote (emphasis mine):
As I have gotten older, I have become less confident and maybe more honest. The economy is too complex; we can’t measure the interactions of all its various pieces with any precision.
We don’t have enough data, and we don’t understand how things fit together.
We should be humbler and more honest.
Our empirical studies are very imperfect. We often hold the views we do because of ideology and principle. Then we find some evidence that supports those views. We ignore the rest…
An awareness of reason’s limits is a caution sign to remind us that we’re not as smart as we think; we’re not perfect truth seekers. We’re flawed.
Recognizing our flaws is the beginning of wisdom.
Many things look like nails that do not benefit from being pounded. That should induce caution and humility for those with hammers … Humility is an acquired taste. Once you come to like it, it’s a dish best served hot.
It’s amazing how liberating it can be to say, “I don’t know.”
Aren’t those some really potent and bring-me-back-to-ground words?
Now lets come back to our previous question:
Have you ever thought why you (or your friends) actually lost money in markets?
Lets try answering this question with a few more questions!
Did you invest in companies with bad businesses? Did you even know what businesses the company was in? Did you know what were the demand-supply dynamics of the business? Did you understand the industry/sector in which the company was operating? Did you understand how various economic events affected company’s business?
Or did you invest on basis of a prediction that the government will do something (in future) that will be beneficial for the company. To put it simply, you were betting on a positive consequence of a positive consequence that will become a reality if a prediction came true. 😉 (Best of luck with that)
Or did you simply invest on basis stock tips that you got from your friends or stock broker?
I am sure you are getting what I am trying to say here…
Chances are high that you lost money in markets not because market is volatile or rigged, but because you did not do your homework. You lost money not because of market’s behaviour but because of your own behaviour.
Now I know some very smart people, who are absolutely dumb when it comes to managing their money. These people don’t know the limits of their intelligence (or lack of it in certain areas). Some of them are mathematical stalwarts who are so used to using statistical models to predict the future, that they try to use their models anywhere and everywhere. What they forget is that in investing, there are a lot of things that cannot be answered by maths or formulae. As Morgan Housel puts it, “There are things we can’t measure, and things we can’t understand, ever. Herd behavior, future trivia, and psychology aren’t things we can predict today.”
For people who are not willing to accept the limits of their knowledge, there is no world outside the facts they have memorized. Markets are driven more by human behavior than anything else. So if one tries to predict human behavior with standard deviation, etc., then such an approach is bound to be met with failure most of the times.
Realizing the limits of your intelligence is one of the most important skills in finance. When you pretend you know something you don’t, your perception of risk becomes warped. You take risks you didn’t think existed. You face events you didn’t think could occur. Understanding what you don’t know, and what you can’t know, is way more important than the stuff you actually know. [Morgan Housel]
So what should you do?
They say that the best apology is a changed behaviour.
So when markets are being so volatile these days, take some time off and think about your past investing decisions. Instead of just fretting over not being able to make money in markets till now, objectively assess why it really happened?
Did you do that?
If not…then why not?
This then demands the question that do you even know what really works in investing?
If not, then why are you even investing in direct stocks?
Lets for a moment assume that you know what works in investing. Now the question is that are you putting that information to use?
If not…then why not?
What are you waiting for?
If you don’t have the time or skill to analyse individual business, why are you playing the game of direct equity investing? I am not saying that don’t invest in stock markets. After all, it’s a kind of necessity when we think about the returns we need to have to achieve our financial goals.
I am saying that for most people, its best to instead take the MF route as it works beautifully. Allow compounding to help you. It has helped our grandparents, parents and a few of us. It will work for others too. Don’t wait for years thinking whether it works or not.
So take your time.
Sit back and reflect on your own behaviour in past.
Learn from your mistakes and change your behaviour accordingly. Because as they say, best apology is a changed behaviour. And if apologizing results in future wealth creation, why not do it?