A few months back, during my lecture to a class of MBA students, I asked them to finish a sentence. The sentence was – “If you play a slot machine in a casino long enough, eventually you will ………” *
The class yelled out in unison “WIN!”
As most people reading this know, that is exactly the wrong answer. Slot machines are engineered to make everyone but the casino a loser in the long run. But MBA kids don’t know that, and they are never taught that. I assumed they confused the benefits of persistence with the actual odds of succeeding.
Anyways, I met a couple of my neighbours in the gym today, who smiled – as if mocking me – when I told them about my work that is to teach people to make lesser mistakes with their money and also learn to make sensible investment decisions for the long term.
“Who makes money in the stock market?” asked one of them who is a property agent. “I have been owning some penny stocks for the last 20 years, and most of them are down almost 99%. So I have been persistent enough but have not made money even in the long run.”
Before I could ask him the secret of achieving such an “amazing” feat – of not earning positive returns from stocks in two decades – he added, “And then there are some real estate stocks that I bought in late 2007, and even those are down almost 95%. So nobody makes money in the stock market…and this long term thing is all bull c**p!”
The second gentleman, another property agent, said, “You are right! I think the best way to make money in stock market is to buy stocks on margin, and sell them as soon as they rise five or ten rupees. This long term theory does not work in this market. It’s like a casino where you have to play fast and move out quickly if you really want to make some money.”
Before I could utter a word in favour of long term, sensible investing in stocks, the first gentleman asked, “By the way, do you have any stock ideas to buy now?”
“You know what?” I said, “You must not own stocks but invest through mutual funds if you really want to participate in equities. Stock picking is not for everyone.”
“Why?” he asked, “There’s no excitement in mutual funds like there is in trading stocks!”
“That’s the reason you must not invest in stocks…because you want to do that to seek excitement. You will be better of betting on horses,” I said with a smile.
He did not speak the next word, and went back to exercising. I felt relieved.
It’s Difficult to Change People
Over the years, I have learned that it’s very difficult (or nearly impossible) to change people’s worldviews and habits once they move into adulthood. When you are young (pre-adulthood), and your mind is still malleable and your worldviews are still getting created, there is a great chance that you may change your beliefs and habits as you soak in new knowledge and wisdom. But when you grow into an adult, your worldviews (like stock market is a casino, real estate is great, people are untrustworthy, etc.) and habits stick with you.
“We are what we repeatedly do,” Aristotle proclaimed. “Could the young but realize how soon they will become mere walking bundles of habits, they would give more heed to their conduct while in the plastic state.”
You may practice a new habit for 21 days or 66 days (different studies prove that a new habit can be formed if you practice something consistently for these many days), but for most of us, going through that 21 or 66 days is in itself a huge challenge. And thus most of us drop off after a week or ten days of remaining persistent of trying to form a new habit.
And thus I felt relieved when that discussion with my neighbours, on the right and wrong way of playing the stock market, ended in the gym earlier today. And this gave me a new reason to talk more to the youngsters around me, and explain to them the power of long term compounding of learning, about the math of success and failure (base rates, probabilities etc.), and what they should do and avoid doing with their money and careers and the likely consequences they may end up with.
To start with, I would teach my daughter today that all persistence is not good. And sometimes accelerated failure – and taking lessons from it – is what would lead her to success in life. I would tell her that sometimes it’s better to quit than to prove your grit. Not everything is worth doing, let alone doing for extended periods, and not everyone who works hard is pursuing something worthwhile.
Finally, I would tell her that it can take guts to cut your losses and move on. And that could play an equally important role in her life as the usefulness of persistence.
* I’ve borrowed the question on casino mentioned at the start of this post, and which I now ask in my lectures, from Scott Adams’ wonderful book – How to Fail at Almost Everything and Still Win Big.