Archives for November 2021

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.

A Thought

The world often looks, and is, like a disorderly place, full of random events. And the irresistible urge to seek patterns can get us into serious trouble when we take this tendency to the field of finance and investing.

As investors, it is important to know that we are dealing with something where randomness and chance can distort the expected outcome in the short term.

Nassim Taleb wrote in Fooled by Randomness –

…risk-conscious hard work and discipline can lead someone to achieve a comfortable life with a very high probability. Beyond that, it is all randomness: either by taking enormous (and unconscious) risks, or by being extraordinarily lucky. Mild success can be explainable by skills and labor. Wild success is attributable to variance.

Time and again it has been proved that majority of stock price changes are nothing more than random jitters in the system for which no explanation is ever required. Yet you can find people obsessing over every movement and explaining it like kids spotting animal shapes in the clouds.

You don’t have to be one of those.

In fact, you just have to do your work, and then let randomness do its own.

Like Taleb advises, risk-conscious hard work and discipline can lead you to achieve a comfortable life with a very high probability.

If you are trying to seek anything else through your investments in the market, you may be playing with fire.

[Read more…] about Never Take a Risk You Do Not Have to Take

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.

A Thought

You or me are not the market. Earning the long-term returns of the market, of the past or the future, is not in our control. Managing our risks and avoiding ruin, mostly is.

“Rationality is avoidance of systemic ruin,” Nassim Taleb writes.

Peter Bernstein writes in his brilliant book Against the Gods –

Survival is the only road to riches. Let me say that again: Survival is the only road to riches. You should try to maximize return only if losses would not threaten your survival and if you have a compelling future need for the extra gains you might earn.

Trying to avoid the ruin the stock market system enforces upon people who disregard its workings is rational.

Believing that you can beat the system at it, by playing the game mindlessly, isn’t.

[Read more…] about The Only Road to Riches

When you invest in a business you don’t understand but just because its stock price is rising…

When you invest in stocks with money that, if you lose, can hurt you badly…

When you invest purely based on tweets and “influencer” videos who promise you quick, easy riches…

When you invest in “assets” that you – and most other people – do not understand but just out of the fear of missing out…

Remember it’s your – or your mom’s or dad’s – hard-earned money.

Don’t lose it chasing easy money.

Sir John Templeton said the four most dangerous words in investing are “this time it’s different.”

What he meant was that there are fundamental laws with respect to investment risk and return that can bend for a while but do not ultimately break.

I may be old school, but I see many-many more people trying to bend these fundamental laws – most in their 20s – than I have ever seen in the past 18+ years of being in the market.

We are certainly in a new age economy, and this may just be the dawn of a new era for the Indian economy (though a lot of variables need to work perfectly for that to happen). But the level of outrageousness that I see in the behaviour of masses is too difficult to ignore or not be concerned about.

This is especially true of those betting on cryptocurrencies without understanding the underlying fundamentals.

As per stats, India has more than 10 crore cryptocurrency owners, the largest in the world by far (US lags far behind at 2.7 crore). Just imagine this number for a country where it has taken more than 40 years for 5 crore people to invest in equities.

The way things are going, I fear it’s going to end badly for a lot of people.

As little as I understand it, there certainly is a future for new age tech, blockchain, cryptocurrency, etc. It will take its own time to unravel. Most of us away from the front-end of tech can’t even make proper sense of that future. But that should not lead us to use our hard-earned money to bet on it to get rich fast.

It’s like playing Russian roulette with one bullet and five empty chambers and believing that the bullet would come only after you pull the fifth trigger, by when you would have already become a billionaire and will obviously not pull the sixth trigger.

But who knows when the bullet will strike, and you will become a statistic? Like, who knows when the cryptocurrency madness would hit a peak and instead of making you rich fast, it may lead you to lose everything you earned the hard way?

It’s easier for celebrities to appear on advertisements and tell you that “Crypto is not hard, it’s very easy.” But remember that they get paid for their acting, not for their advice. Plus, they have nothing to lose when you lose.

This is also true for financial influencers who are all over YouTube and other social media showing you (often live) where and how much there are investing in such currencies (and stocks, and IPOs). Remember that they get paid for how much time you spend on their channels, not for their advice. Plus, they also have nothing to lose when you lose.

I believed the world couldn’t get noisier 10 years back. Then I believed it couldn’t get noisier 5 years back. How wrong I was!

The level of noise all around is unprecedented, and amidst this, your behavior with your money is your only edge and guard to help you survive this noise and the madness it is causing.

This time is not any different, and I wish you realize this now and not when the tide goes out.

There will be a lot of naked swimmers then. I wish you are not one of them.

I wish you a very happy Diwali, and a peaceful, sane, year ahead.