An Investment Primer

Investing has several dimensions and people often look only at stocks, the businesses, the market index, and many statistical measures.  They are sufficiently deep to seem important. But they are not the important part of investing. They are the raw material for investing. The process of investing and the people making decisions matter more.

There is a question that you should consider. It is offered by Indian Fund executive, Yamini Sood.

“You will measure your mutual fund’s under /over performance. How will you measure your own behaviour gap?”

Despite her perfectly reasonable question, most of us have never asked it. Worse yet, we not only don’t know how to measure, we usually don’t know we should. Much of the literature on investing suggests that investors make mistakes that are easy to remedy if they are knowledgeable and at least a little disciplined.

Impatience

Every skilled investor is patient. It is not like it’s optional. Buffett preaches it like a commandment. Ms. Sood does too. Again a question.

“Do not question 7 years as a timeframe for equity investing, question your need to churn in a year or two.” 

You might wonder why seven years. It actually makes some sense and is easier to cope with than Buffett’s idea of forever. Seven years is roughly two cycles in the market. You will probably see most of the things that can happen in two cycles. It all evens out eventually.

Fear and Greed

Fear, even emotion in general, is your enemy. Clear thinking and emotion seldom come in the same package. Fear arises from a condition in the market – volatility, coupled with unreasonable expectations. Volatility is easy enough to explain. The stock market is an auction market, and the participants are not equally informed, not equally wealthy,  and not equally motivated. It is a good thing they are not, otherwise if everybody knew exactly the value of a stock, who would you buy from or sell to?  Volatility is what makes the market possible.

What happens when more people believe the opposite of what you do? If they are optimistic, the price will seem recklessly high. If they are pessimistic prices will fall. Falling is fear-inducing. Rising is greed-inducing. Emotionally stable follows a Buffet idea. “Mr. Market is bipolar. When he is manic sell to him, when depressed buy from him.”

That only works when you are not influenced by emotion and know what a reasonable price for the stock should be.

Understanding risk

If you take a course in portfolio design or investing, you will hear volatility referred to as “Risk.” Is it really? How difficult would your investing task become if ivolatility really was not risk? When you misunderstand fundamentals, success is just luck.

Risk is an intuitive idea for many. The first thing to notice is that there is no loss if you don’t sell. You might be motivated to sell by fear or the need for the money when the market is down. Absent fear or need, what would the risk be? Volatility is just noise surrounding the signal. The signal is important, the noise is not.

Consider Ms. Sood again:

“If you can manage liquidity, Volatility is not Risk. If you cannot manage liquidity, Volatility is Risk “

“Knowledge is to know stocks are volatile. Wisdom is to know volatility is not risk”

If you don’t need the money today, you can wait for the cycle to pass. Fully invested is a risky practice. It is fear inducing.

A Defence

Being an investor is lonely. Lonely people tend to amplify emotions. Consider having others around you who can help you work through conflicts and emotions. Help you acquire knowledge and wisdom. Help you to manage patience.

Yamini Sood again.

“For medical ailments, we quickly take a second or a third opinion. In investing, self medication is perfectly fine!”

How sure are you it’s fine? Do-it-yourself is not always the best approach. There is a wise idea surrounding the cost reduction of doing things yourself. “Cheap is expensive.” Keep that in mind. We need to understand our circle of competence.

Dirty Harry Callahan in Magnum Force. “A man’s got to know his limitations.”

I suppose women do too, but the evidence suggests they are not so susceptible to the effects of volatility.

The takeaway

Managing yourself is harder than managing the money

“Technology Management is easy….People management is not” Yamini Sood

Work at that aspect a bit. It pays rewards.


I help people have more retirement income and larger, more liquid estates.

Call in Canada 705-927-4770, or email don@moneyfyi.com 

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