The Sketchbook of Wisdom: A Hand-Crafted Manual on the Pursuit of Wealth and Good Life
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.
In most fields, studying the patterns of success is a standard way to learn. So when people come to financial markets they try the same approach. All new investors get busy investigating how successful investors made their money in the stock market. They want to know the secret behind the winning strategies. But investing is a world of counterintuitive ways.
All successful investors and traders have made their money in widely varying ways and more often than not, their strategies often contradict each other. If one market pro vouches for his or her winning method, another market savant would seem to oppose it ardently.
Jim Paul, in his book What I Learned Losing A Million Dollars, wrote —
Why was I trying to learn the secret to making money when it could be done in so many different ways? I knew something about how to make money; I had made a million dollars in the market. But I didn’t know anything about how not to lose. The pros could all make money in contradictory ways because they all knew how to control their losses. While one person’s method was making money, another person with an opposite approach would be losing — if the second person was in the market. And that’s just it; the second person wouldn’t be in the market. He’d be on the sidelines with a nominal loss. The pros consider it their primary responsibility not to lose money.
The truth is that like there is more than one way to skin a cat, there is more than one way to make money in the markets.
Obviously, there is no ‘one’ secret way to make money because the people who have achieved success in this game over the long run have done it using very different, and often contradictory, approaches. But one big lesson that almost all these people have agreed to settle for is this – Learning how not to lose money is more important than learning how to make money.
Which means if you are looking for success in investing, your chances are better if you take the indirect approach, i.e., finding the ‘anti-patterns.’ In other words, finding ways which most often lead to losses and then actively try to avoid those patterns.
Some such anti-patterns include –
- Chasing performance
- Looking to get rich quick
- Ignoring market cycles
- Letting emotions guide decisions
- Failure to accept mistakes and cut losses
- Venturing beyond circle of competence
- Ignoring margin of safety
- Driven by FOMO – fear of missing out
The list is long, but the idea is simple. To win in investing, find the anti-patterns, and then try to avoid them.[Read more…] about Identifying Investing’s Anti-Patterns