Would you play a game for an amount of money you cared about without knowing anything about the other players or even the rules?
Most likely not, but what if you could discover:
- The outcomes of previous games,
- Expert commentary on those games
- Pundit projections of the future.
- Guarantees by the government that the game was fair
Starting to look possible, but as you dig further you find:
- The experts don’t agree on the meaning of what happened
- The pundits are wrong far more often than they are right
- The government guarantees, but does not enforce, and in any case they only guarantee the process.
- Some people have information first
- Some methods are far different than the ones you can use
Not so attractive, but that’s the way the stock market works.
The reasons for it being chaotic are many. They include the fact that all the trades other than flash trades involve people’s emotions. Greed and fear being the dominant ones. The reasons include incomplete information and little awareness of the meaning of what can be seen. The reasons include a vast and complex playing field that can changes size and shape quickly and sometimes without an obvious reason. Sometimes the game ends before the allotted time has expired.
Not exactly a benign environment and important money is involved.
There are defenses.
The first one is to buy tiny shares of a business rather than buy stock. They look the same but they are quite different. It is like a golfer who thinks that he must “hit the ball.” He will never have a low handicap. Low handicap golfers swing the club and the ball is in the path. So with investments think buy business before think buy stock.
It is possible to understand some businesses and it is possible to keep track of how they are changing. When you invest this way, you dial out almost all of the anomalies. You won’t care about sharp ratios, beta, alpha, or any of the other statistical things. Most of those are not fully rational anyway so losing track of them won’t matter much.
Buying small parts (shares) of successful businesses is fairly straight forward once you get past the hype. Look for dividends or regular share buybacks. Look for humble management. Look for a strong commitment to employees and other stakeholders. Look for innovation. Look for products and services you use or at least can understand.
Building a successful business is demanding, but once built they are easy to identify. Your advantage is you do not need to make exceptional yields if you can avoid catastrophic losses.
If you do not want to do the work, find a manager that shares your views.
Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.
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