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.
A Super Text
If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices?
These questions, of course, answer themselves.
But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period?
Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall.
In effect, they rejoice because prices have risen for the ‘hamburgers’ they will soon be buying! This reaction makes no sense.
Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.
Myth #6: The stock market is like a casino – Whenever the stock market falls it feels like the powers that be are out to get you. People always compare the stock market to a casino when they lose money.
This analogy has never made sense to me.
At the casino, the longer you gamble, the greater your odds of walking away a loser. The casino has better odds than you. It’s math.
But in the stock market, the longer you invest the greater your odds of success.
As I look back on it now, it’s obvious that studying history and philosophy was much better preparation for the stock market than, say, studying statistics.
~ Peter Lynch
That’s about it from me for today.
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