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Investing and the Five Laws of Holes

Centuries ago, a Chinese King was sitting in his cabinet meeting discussing the poor economy of his country. One economist said, “Sir, we can’t do anything about it. It’s the Law of Supply and Demand.”

The King said, “I’m the King. I will repeal that Law!” The Cabinet kept quiet, but one brave soul said, “Sir, you cannot repeal the Law of Supply and Demand. It’s like the Law of Gravity.”

And the King said, “I’m the King. I will also repeal the Law of Gravity!”

Obviously, this story is purely fictional. But the message that comes out is clear – You cannot repeal some laws that govern this universe.

Like the Law of Gravity, and maybe…

The Laws of Holes

The First Law of Holes (this is the only stated law of holes) – If you find yourself in a hole, stop digging.
If you realize you have made a mistake, accept it and cut it short as soon as possible. Like in investing, if you realize you made a mistake in selecting your investment, sell it off even if at a loss. Don’t wait to get your money back, if you find out it’s a bad business. People who lose 90% of the money in bad businesses and think how much more can they lose, often lose another 90%.

Law of Holes

The Second Law of Holes – If you find yourself in a hole, stop digging, come out of it, and then fill it in to keep it from becoming a hazard.
If you realize you made a mistake, getting over it fast is important before the mistake can cost you heavier than it is now. Then, it is important to learn the lesson that led you into that hole. Like in investing, making some mistakes is fine. But repeating the same mistakes can cost you your retirement. Albert Einstein (supposedly) defined ‘insanity’ as “doing the same thing over and over again and expecting different results.” Yet that’s exactly what most people (investors) do. They dig a hole for themselves, sometimes come out of it, and then fall back again because they failed to fill it in the last time.

The Third Law of Holes – If you don’t know that you are in a hole, ask someone who isn’t covered with mud and standing in the shade.
This is tough because when we are in a hole, we often don’t know that we are in a hole. But in case you find out that you are really in a hole i.e., you have made a mistake, seek help from others who you think aren’t making the same mistake. Like in investing, seek a devil’s advocate when you realize you’ve made a bad investment. Better, seek a devil’s advocate before you commit your money to any investment. That will help you avoid a lot of deep holes.

The Fourth Law of Holes – If someone else, and especially when that someone appears smart and has been successful in the recent past, seems to be digging a hole, don’t try to jump in to give him company.
This may turn out to be the most dangerous of all laws of holes if you don’t remember it well enough. Like in investing, we often do stuff that looks exciting and also because everyone else – especially the smarter lot – is doing it. So we will act on tips without blinking an eyelid. We will clone other successful investors mindlessly and without knowing what we may be getting into. And we will chase hot sectors and stocks because, well, they are hot. Here remember what Charlie Munger so often says – “All I want to know is where I am going to die, so I will never go there.” Success in the game of investing requires you to avoid slipping into deep holes. And there are a lot of them out there dug up by others. So beware!

The Fifth Law Of Holes – Trust your logic – “I must get out of the hole before I fall deeper” – more than your ego – “How could I be so blind to have gotten into this hole?”
You see, holes (mistakes) can be good (ask the golfer!) because they dilute our overconfidence and lead us to be alert all the time. But if you still get into one, drop your ego right there. A lot of people find that hard to do and would continue to curse themselves and others for getting into deep trouble. This often leads them to nowhere, but deeper inside the hole. It’s only good sense and logic that can help you get out of the hole fast. Like in investing, instead of blaming your unintelligence and that of others for your investment mistake, it’s better to accept it, take complete responsibility, and come out of it.

Any More Laws of Holes?
Are there any more Laws of Holes that you can think of or create? It would be a fun, yet thought provoking, exercise. Get famous, and share your law in the Comments section of this post. 😉



Value Investing Workshop in Bangalore and Pune – To help you avoid getting into a few deep investing holes, we invite you to attend our Value Investing Workshop in Bangalore (23rd July, Sunday) and Pune (6th August, Sunday). Click here to register and claim an early bird discount.

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About the Author

Vishal Khandelwal is the founder of Safal Niveshak. He works with small investors to help them become smart and independent in their stock market investing decisions. He is a SEBI registered Research Analyst. Connect with Vishal on Twitter.

Comments

  1. Nice one Vishal ,few thoughts :-

    In Holes opportunity will come across to float when it pours,so wait for the moment. Mr market will give chance but one need to keep awake and lighten the burden to float and come out of the hole.And inversely when it is pouring it is difficult to distinguish between holes and ground so need to be careful and do your fundamental analysis and take convincing steps forward.

  2. 6th Law of Holes: There are holes all around us, sometimes even hidden from sight.
    When we are tired or excited or distracted we cant pay full attention to the ground around us.
    Solution: Tie yourself to a tree trunk when walking over such treacherous territory. This way you will have a rope to climb out of the hole you may fall in (the hole should never ruin you). Also try and be light-footed and agile (in mind as well) so incase you see yourself falling into a hole, you can quickly act to get out of it.

  3. Nice Article Vishal.

    One more law of hole that I thought could be added.

    If you are fallen into hole, remember two things. Often, you would not have anyone nearby nor any tools to come out of the hole. Even if you come out with using last bit of energy, you could be the victim of easy prey for the wild animals.

    Just to explain, if you are in deep debt with losses suffered in business or investing, you won’t get further loan when you need most. Even if anyone comes forward, they will charge you bomb which could force people to suicide.

  4. If you are digging a hole, stop early and get out before it gets too deep

  5. When in a hole, you just cannot adopt a ” HOLEY THAN THOU ATTITUDE”

  6. Sandhya says:

    Nice article Vishal sir.
    This law kind of corresponds to 4th law of holes. Just as you should not blindly imitate other successful investors, you should not give spade/shovel to someone else to dig hole for you. e.g. you should not depend on tip providers or you should not just had over your money to someone else to manage it for you. No one can manage your money more carefully than you yourself.
    Thank you.

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