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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.
A Thought
The luckiest part of my investing career is that I’ve been old enough to have invested through multiple bad markets and still young enough to take advantage of the lessons learned.
What I have realized by investing through the crisis periods is that one of the best ways to learn how crises unfold is to learn from the past and not be complacent to the possibility of them occurring in some form or other.
I remember attending a company’s analyst meet in around 2006. It was held in a three-star hotel in a crowded part of Mumbai. Before the meeting began, the company’s safety officer briefed us about the emergency exits and nearest hospitals.
Now, what were the chances of an emergency happening? Probably miniscule. But the loss, if it happened, would be significant.
That lesson applies to investing too. When you multiply the probability of loss into the magnitude of loss, it becomes meaningful. That is the reason why airlines do a safety demonstration before every flight, and surgeons go through their checklists before every surgery.
As an investor, that should be your standard operating procedure too. You should be mentally ready to see your investments go down by 50% rapidly and be prepared to act rationally when that happens.
Investing is largely a game of luck, and relying on luck tends to make us fragile. So it pays to listen to Nassim Taleb who argues that “it does not matter how frequently something succeeds if failure is too costly to bear.”
That is a wonderful, even if a bitter, lesson to take especially when you are basking in the glory of your short term success in the stock market. But that’s a lesson worth taking.
[Read more…] about Spoiler Alert: It’s Luck, Stupid!