Saturday, 27 May 2017

How to Be Greedy in the Stock Market and Still Win

Recently while I was talking to a colleague about a promising stock, he told me the story of the greedy dog. Once upon a time a dog was passing through a narrow bridge over a stream. He had a bone in his mouth. As he looked down, he saw his own image in the water. But he felt that it was another dog with a bone in his mouth. In order to get the bone from the “other” dog, he started to bark. As soon as he opened his mouth, the bone fell out of his mouth and into the water. The dog regretted his foolishness.

With this story, my colleague wanted to give the message that one should be contented with what one has and should not be greedy. So he turned down the idea of buying the stock I was talking about.
There is a general and a specific lesson in this anecdote. The general lesson is to avoid analogies. Those who take help of analogies to explain their point are just twisting the facts to suit their own case. Just because the dog lost its bone doesn’t mean that you have to be satisfied with what you have. What the dog did is the dog’s problem, not yours. 

The specific lesson is regarding “greed” in the stock market. Many investors attribute their stock returns to luck. Others are content with small returns and consider waiting for higher returns as being greedy. The person whom I talked about earlier considered investing in the stock as being greedy. All in all, the idea of greed is highly misunderstood in the context of the stock market.

In the stock market, it’s perfectly okay to hold onto a good stock for long times in anticipation of higher returns. That’s not greed. Indeed, you find multibaggers only when you are invested in a company for long durations of time and refuse to sell your stock prematurely. Similarly, while luck does play a part in almost anything in life, it’s not just luck that makes you successful with stocks. You need to do much more than simply rely on luck to get successful in the stock market. Finally, exploring new ideas and opportunities is the basic requisite for progress. It has nothing to do with greed. All that the stock investor needs to be careful of is being optimistic without any basis. That’s greed.

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