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Here is the latest issue of The Journal of Investing Wisdom, where I share insightful stuff on investing I am reading and thinking about. Let’s get started.
The world often looks, and is, like a disorderly place, full of random events. And the irresistible urge to seek patterns can get us into serious trouble when we take this tendency to the field of finance and investing.
As investors, it is important to know that we are dealing with something where randomness and chance can distort the expected outcome in the short term.
Nassim Taleb wrote in Fooled by Randomness –
…risk-conscious hard work and discipline can lead someone to achieve a comfortable life with a very high probability. Beyond that, it is all randomness: either by taking enormous (and unconscious) risks, or by being extraordinarily lucky. Mild success can be explainable by skills and labor. Wild success is attributable to variance.
Time and again it has been proved that majority of stock price changes are nothing more than random jitters in the system for which no explanation is ever required. Yet you can find people obsessing over every movement and explaining it like kids spotting animal shapes in the clouds.
You don’t have to be one of those.
In fact, you just have to do your work, and then let randomness do its own.
Like Taleb advises, risk-conscious hard work and discipline can lead you to achieve a comfortable life with a very high probability.
If you are trying to seek anything else through your investments in the market, you may be playing with fire.[Read more…] about Never Take a Risk You Do Not Have to Take