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.
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.
A Super Text
A good business may face two challenges: It may face a fundamental challenge or adversity in the business at some point in time, or there can be a general challenge when markets are passing through tough times. Both may lead to drop in market value.
More often than not, it is the good businesses which are still in profits when markets are falling, and there is an overbearing temptation to surrender them away when things look bleak, outlook negative and pain-points in the markets appear high (“Plucking the flowers to water the weed”). But it is important not to surrender away good businesses due to the trying times of the market. And even if it faces a fundamental challenge, but a temporary one, then it may be all the more important to embrace the stock than to shun it.
Equally, when the general markets are passing through a tough phase and the sentiments are down, the tendency to give away a good one for a temporary mental satisfaction may prove to be an expensive gambit. It is important not to use a broom to sweep away the good ones while keeping the dirt inside.
~ Bharat Shah, Of Long Term Value & Wealth Creation from Equity Investing
This interview of Peter Bernstein by Jason Zweig is from 2004, but one of the best I have ever read. Here’s just a short passage that contains a great lesson –
Q: What investing and personal advice do you offer your great-grandchildren?
A: …I would teach them Pascal’s Law: the consequences of decisions and choices should dominate the probabilities of outcomes. I would remind them of what the man who trained me in investing taught me: Risk-taking is an inevitable ingredient in investing, and in life, but never take a risk you do not have to take.
At its heart, investing is simple, and to make it seem anything but, with the frequent repartition of short-lived facts and data points, may be a conceit. Indeed, it could be argued that a running commentary obfuscates a discussion of the things that really matter.
~ Nick Sleep
Markets will be volatile and the road will be rocky. You’ll bump and bang against various forces of markets and your emotions. But if you can survive, and keep at it, you’ll go far. 😀 pic.twitter.com/pnAki84nuX
— safalniveshak.com (@safalniveshak) November 29, 2021
Was the last big gain you made in the stock market a result of your investing skill or largely luck?
That’s about it from me for today.
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