Saturday, 23 January 2016
Contrary to what you may find obvious, your chances of being successful at stock investing will actually diminish if you choose to work in the financial industry, especially if you begin your career there. This is because you will be so overwhelmed with the barrage of stock-investing “wisdom” that you may decide never to buy stocks, at least directly. Little of this wisdom is actually useful.
With stock investing, there is just one rule you need: Ignore almost everything. The financial community tries really hard to make itself useful, but in this pursuit all it does is add to the unfathomable pandemonium. And while it adds to the preexisting intricacy, it also overlooks the simplest things. An analyst may care more about the internal rate of return (they call it IRR, yawn!) than what is obvious. He will take great pride in digging out some obscure aspect of some company rather than pick what is there in front of him. An analyst is someone who, when he sees a dog growling and ready to pounce at him, takes out his digital device and studies the data to find the probability of being bitten by an angry dog.
Those who start their careers in the financial sector will have their blank mental templates all written with traditional (and ineffective) rules of finance. Unless they challenge what they are learning free of cost with some “non-mainstream” stuff, they will eventually find themselves speaking the traditional language of finance. With traditional wisdom, you can’t expect great outcomes.
So, what’s the message? I am not saying that you leave your jobs at the financial industry. What I am saying is that your chances of success at stock investing will be better if you keep it simple and sensible. You don’t need the analyst. You don’t need the advisor. The fewer chefs you have the better your broth will be. For those who are already working in the financial industry, expose yourself to disconfirming and conflicting knowledge and wisdom. You will do well by challenging what you already know and adopting newer ways of thinking.
Saturday, 9 January 2016
In the stock market, it is frequently seen that investors invest not only their money but also a good amount of self-esteem in their stocks. This is particularly true for fundamental analysts. The business of stock picking is one of the worst avenues to tie your self-worth with because you can easily go wrong with stocks. While going wrong with your stock selection isn’t much of a problem, sticking to a bad stock just because you have picked it certainly is. In the stock market, smartness lies in realizing when you are wrong and taking action.
Why do fundamental analysts fall prey to their own analysis? Because they have invested a lot of time in analyzing the stock and coming up with a story. In the process, they fall in love with their own brilliance and logic. So, when they find contradictory developments pulling down the stock, they take them as a blow on their egos. As a result, they stick to the stock, only to see it tumble further. Rather than appreciating the contrary developments as a negative, they interpret them according to their biases. On the other hand, a technical analyst is more nimble and quick to appreciate an error. This is because his judgment comes not from “inside” but from “outside,” i.e., from the charts and patterns he sees.
Though I don’t practice technical analysis, given its own problems, I support a model-based approach to stock investing. Models are complete systems that tell you what stock to buy, when to buy them, how to track them, and when to sell them. They shift the task of analysis from “inside” to “outside.” So, when you are wrong with a stock, the model will tell you and you need to act. When you are right, the model will tell you, so you need not worry about the market’s ups and downs.
The success in stock requires not only picking winning stocks but also containing your losses. Those who are dispassionate about their stocks actually have better chances of succeeding. Call it a paradox if you will.