This is a Guest Post from a renowned investor known in our world as VIJI. I have been lucky to learn quite a bit from him, and going forward would try to post nuggets from him.
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Experience teaches many lessons provided one has open mind to learn. As an investor, I have learned many lessons over the years. One of the more
important lessons is to be leery of repetition.
If I hear a word, phrase, or a concept repeated often to explain a myriad of
phenomena, I immediately question the worth of the commentary, as well as the
validity of the commentator's underlying thesis.Repetition of the familiar is often a mental short cut. It allows the
commentator to explain a cause and effect relationship, even though he/she might be unsure of the relationship (or he/she might
simply be attempting to fill space).
Below are a few commonly invoked buzz words or phrases investors would be
better off ignoring.They simply fail to impart any insight yet their use is ubiquitous.
Fear: This word is most often used upon the bursting of
an asset-price bubble. Investors are fearful, so that's why we are in a
recession. Unfortunately, fear is wrongly used as a synonym for uncertainty.An investor is more often uncertain, not fearful. And he is usually
uncertain, and rightfully so, after the bursting of an asset-price bubble
because he is unsure of governments response to the bursting. And he is uncertain how other market participants
will react to the government's response. Therefore, it is uncertainty keeping
him out of the market, not fear.
Greed. The word “greed” is often associated with fear. It
was greed that led to an asset-price bubble.But asset-price bubbles form not because of greed, but because of investors
acting on outside incentives.Investors acting on incentives, even if the
incentives are misguided, doesn't mean the investors are greedy.Greed is also incorrectly used to denote ambition. The two are not the same.
Ambition means working to get what you want.Greed is an attempt to get
something for nothing. Most investors and analysts are ambitious, not
greedy.
Probabilities and Statistics. An analyst who says
“there
is a 40% chance of the economy falling into recession” is proffering
nonsense.
Economies and investments are not a gamble like the roll of a fair die,
where
you know there is a 20% chance of hitting any number.Economies and
investments deal mostly in uncertainty, not risk. Uncertainty
cannot be quantified, because it deals with un-quantifiable human
action.Risk - like the chance of a house burning down within a
five-kilometer square radius
- is quantifiable because it is not influenced by deliberate human
action.Ignore prognostications like “ABC company has a 70% chance of
hitting Rs XYZ within
the next three months.” There is simply no way of knowing, unless the
source of
the prediction is revealed, such as “according to current options
prices.”
Market Efficiency. This should only refer to
ease and cost of exchange between individuals. Instead, market
efficiency is
used to reflect fully and realistically all that is known about a
company.If markets are truly efficient, as some academics believe, then
there would
be no RJ or for that matter even Warren Buffet.It is impossible to know
the amount of information embedded in a
stock price.
Markets Acting. Any reference to a market doing anything
is wrong from the start. Markets cannot act; they can't do anything. A market
isn't a place; it's a process of exchange.When a reporter says something like “the market sold off today,” he is
talking about the activity of many individual investors
and then ascribing that
to “a market.” To refer to the market doing anything on its own is to
talk of
the market as if it were an acting entity, which it isn't. Markets
reflect the actions of individuals; the markets themselves do
nothing. The distinction is worth remembering, because there is rarely
only one
reason for why the market ended the day up or down. All individual investors
don't act on the same information.
I am not mentioning these mental short cuts to point fingers.
I have been guilty of
invoking them myself on occasion.The key is to become aware of the habit, and
not be fooled.
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cheers,
saurabh
PS- I took the shortcut to writing a post, please don't do that while taking investing decisions.
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