Life was good when I was working at my job as a stock market analyst around 2005-06. Markets were doing well, and my stock picks were flying high. My company’s clients were happy with our recommendations, and consequently, my salary was coming in.
Talking about salaries of stock market analysts, the less that’s said the better. You get paid undeservingly (salary-to-effort ratio, as compared to most other knowledge workers) for constantly questioning the hard work of entrepreneurs and then not questioning your own analyses while churning out words that lose relevance in a few weeks or months.
Anyways, since I was an analyst then, I did not question what I am questioning now. Life was good. I felt safe and comfortable in my job, loved what I was doing, and thought that I would be happy doing the same thing for the rest of my life.
Then, 2008 happened. The stock market bubble burst, and so did my bloated ego. My job wasn’t in trouble, but I saw a few of my friends working for global investment banks and brokerages lose theirs’. In some way, their story was same as mine. They also felt safe and comfortable in their jobs and failed to see what was coming next. In Nassim Taleb’s terms, we were a fragile lot.
While I was starting my career as a stock market analyst in 2003, I had a close friend from MBA who went on to start a takeaway food business. He came from a business family, so I always thought he had it in him to do well in any business he would start. Even I came from a business family but never had the guts then to take the plunge on my own.
Anyways, I was doing fine in my analyst job and my salary was high and predictable. My monthly home loan instalment and other household costs were well covered, and I had some money saved by the end of every month. However, when the financial crisis of 2008 struck, I realized like most of my analyst and investment banking friends that our jobs weren’t as certain as we had always imagined. We were not masters of the Universe as we had come to think of ourselves, thanks to the bull market.
The fear that my job could be made redundant if the slowdown were to continue had grabbed my mind. Losing my job at that time would have been a terrible outcome. I had, in fact, almost planned my life without a job. Selling my house and going back to my hometown to start a business with my little savings was that plan.
Anyways, while I was ensconced in my job before the crisis hit, my MBA friend was doing reasonably well in his business, just that his income was not regular and predictable. Some months were good, and some weren’t so – when he barely managed to meet his operational costs. However, as I could gauge from our discussions then, on an average he was earning almost as much as I was at that time.
I often found myself motivating him when he was going through the bad months when his business income was barely enough to meet his costs. One time, I even advised him to get to a corporate career to bring some predictability to his income.
Fortunately, for him, he did not take my advice. Even when he thought my predictable salaried job was more secure than his unpredictable income business, I now realized how wrong he was, and I too.
When the 2008 crisis hit home and sent me into that fear spiral of losing my job and thus my salary, my friend’s food business picked up pace. People eat more during stressful times, so that seems to have helped him then. His income was still not predictable, but he started doing better than earlier.
Now, my Plan B – Plan A was to shift to my hometown – was to join my friend in his business. It did not happen, as I did not lose my job.
Life is uncertain, and often random. Things that we think should happen, often don’t. And things we think should not happen, often do. Most of it makes sense after the fact. But when we are facing life’s randomness, we curse it. We think we’ve been dealt an unfair hand, except when things are going our way.
However, the good thing about the randomness of life is that it provides us with the ability to become better at dealing with, well, randomness. Again, in Taleb lingo, randomness provides us with the opportunity to become antifragile – things that get better when exposed to shocks, volatility, randomness, disorders, stressors, risk, and uncertainty.
Taleb writes in his book Antifragile –
This is the central illusion in life: that randomness is risky, that it is a bad thing—and that eliminating randomness is done by eliminating randomness.
Artisans, say, taxi drivers, prostitutes (a very, very old profession), carpenters, plumbers, tailors, and dentists, have some volatility in their income but they are rather robust to a minor professional Black Swan, one that would bring their income to a complete halt. Their risks are visible. Not so with employees, who have no volatility, but can be surprised to see their income going to zero after a phone call from the personnel department. Employees’ risks are hidden.
I did not know about the concept of antifragile back in 2008, but now I realize that the randomness in my friend’s business income made him antifragile, given that he had learned from such randomness that helped him build a business that was more robust than earlier.
He used randomness and constant stressors in his business as new information that made him adjust himself to deal with challenges and tap opportunities better.
Burton Malkiel wrote a nice book titled A Random Walk Down Wall Street, which was first published in 1973 and is regarded as an investment classic. The basic premise of the book is that the stock market is at best random, and that past movement or direction of the price of either the overall market or of an individual stock is not a suitable predictor of future movement (there goes technical analysis for a toss).
Essentially, this theory holds that stock prices take a random path, and one that is unpredictable. Regardless of what has happened in the past, the chance of a stock’s future price going up is the same as the chance of it going down (there goes fundamental analysis and the idea of investing in quality businesses for a toss too).
While the book promotes the efficient market theory – which has been taken to the cleaners by the likes of Warren Buffett over decades* and thousands of other value investors over the years – there is a grain of truth in the point on randomness in stock prices made by the author.
This is especially true in how the markets and stocks behave in the short term, with prices getting dictated by random events like 9/11 attacks and demonetization, dubious financial data from well-known companies like Enron and Satyam, and human misbehaviour.
Anyways, here is how Malkiel defines the term “investing” in his book (emphasis mine) –
I view investing as a method of purchasing assets to gain profit in the form of reasonably predictable income (dividends, interest, or rentals) and/or appreciation over the long term.
It is the definition of the time period for the investment return and the predictability of the returns that often distinguish an investment from a speculation.
A speculator buys stocks hoping for a short-term gain over the next days or weeks. An investor buys stocks likely to produce a dependable future stream of cash returns and capital gains when measured over years or decades.
So, here’s the proponent of efficient market theory and a believer in stock market’s randomness advising investors to invest for the long term.
The reason is not far to fetch. True (not forced, who won’t sell till they get their money back) long-term investors are like my MBA friend who use randomness and unpredictability of stock prices and the stressors of volatility as information, adjust their portfolios accordingly (being greedy when others are fearful and vice versa), and emerge wealthier over the long run.
Their portfolios are antifragile to a large extent, and thus they are better at dealing with the market’s and individual business’s randomness.
Such investors don’t usually get perturbed and sell, say, Asian Paints or Pidilite (purely examples) when these stocks are down 30-40% in the interim because they are looking for these businesses to turn up 10-20x over the next few years.
Asian Paints, for example, has multiplied 54-times since the day I joined my job as an analyst in April 2003. That’s a CAGR of 30%. Pidilite has done a 97-bagger, a CAGR of 36% during this period.
Incredible gains, but these are just numbers, masking the immense pain one would have endured holding these high-quality businesses for 15 years. After all, these 30-36% CAGR journeys have had a few 30% quick drawdowns in these stocks’ prices.
As these examples, and many more like these, show, extreme randomness and large declines are an inevitable part of achieving high returns from great businesses. If you haven’t yet experienced such a gut-wrenching decline, then you probably haven’t owned something that has appreciated 10x, 20x or more. Or you simply haven’t been investing for that long.
While I succeeded in not losing my job in 2008 or around that time (thanks to my employer and not due to any special skills I had), I quit in 2011 to start Safal Niveshak. That meant moving away from a job that provided predictability in income and thus security, to a work that had immense randomness, no predictability and still doesn’t.
But, as I look back, like what happened with my MBA friend, working through this predictability has made me sort of antifragile (or so I think till I break down next, thus feeling fragile again).
I don’t have a boss (except three at home – my wife and two kids) who can call me anytime to tell me I’m fired. I am not addicted anymore to a monthly paycheque. In fact, I don’t worry about money anymore.
I am not yet financially free mathematically (so that keeps me motivated to spend some time working for money). But I’m certainly free mentally, as money or the lack of it isn’t a baggage that I carry anymore. That I don’t owe anyone any money, or my time, adds to this feeling.
I love what I do, and thus I tap dance to my work desk every morning, which often happens to be in a coffee shop (not having an office saves me a lot of money, you see).
As far as my investments are concerned, I have a few 10-12 baggers in my portfolio that have happened over the past 5-10 years (sorry, not months, but years). As I look back at how these stocks have moved over the years, I see less of my skill and a tremendous amount of randomness at play. Just that I stuck around, and still do, with these businesses that have remained top notch. This is because I believe in the role of time in wealth creation, and also because I have my skin in this game (thank you, Mr. Taleb, again!) of teaching you exactly what I practice in my life and investing.
Randomness is good, my dear friend. Just don’t let it overpower you and, instead, use it as a stepping stone to create an antifragile life, and also a stock portfolio.
* In a Fortune article in 2014, Buffett revealed his instructions in his will (in addition to his investment strategy, as a professional, while alive) to the trustee for his wife’s benefit (some hints of Buffett’s belief in market efficiency here):
It’s vital, however, that we recognize the perimeter of our “circle of competence” and stay well inside of it [..] Most investors, of course, have not made the study of business prospects a priority in their lives. If wise, they will conclude that they do not know enough about specific businesses to predict their future earning power. I have good news for these non-professionals: The typical investor doesn’t need this skill.
The goal of the non-professional should not be to pick winners – neither he nor his “helpers” can do that…
Put 10% [..] in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.