The Sport of Investing

I have always wondered if investing is a sport or a profession. What I mean to say is that should investing be about competition or should investing be about generating good returns on investment. Although a lot that an investor does, especially a very public one, can be qualified as a sport when we use league tables to judge fund managers, private equity investors, etc. But is investing really a sport or just another professional activity?

Well professional sportsmen will surely differ here, saying, ‘hey, even we are professionals.’ Sure they are, but the context is different when emotions are involved. It is weird since both investing & sporting involve the same level of emotional demands from the player. (S)He has to make decisions in a cold and calculated way which can make the difference between glory & defeat. An investor faces the same emotional dilemma, but not with glory or defeat (entirely), but with money & worse – other people’s money. So the emotional motivation to get glory at all costs is the fundamental difference between sporting & investing, because an investor can’t bet the ranch when the odds are not in favour (at least that’s what should happen in a rational universe). Continue reading

Productivity Tools for Investors

Investors usually spend a lot of time sifting through huge amounts of information. Books, News Papers, Articles, Corporate Announcements, Annual Reports & Quarterly result transcripts just keep piling up (both online/offline). Then there is The Economist that looks at me menacingly when it comes on time every week. Also the incessant note making where I jot down important points & build enormous paper trails that would embarrass Roman road builders. Where does this end? When I want to find a note I made 3 years ago about some company, what are my chances of finding it in the rubble of paper, i.e. if certainly it wasn’t given away as Raddi. Well at least in its demise that note made me money, even if the stock didn’t.

Investors love chaos when they are cash rich, since they get more opportunities to put money in. But when they are data rich, chaos is hardly a friend.

We have help at hand, but it sure requires some changes in our habits. Ever since mobile hardware technology, internet & telecom services proliferated we have been blessed by a memory augmentation. We can not only carry all our contacts with us but we can also carry all our emails, music & documents with us too. With the new cloud computing technology, things have become even easier than before, we no longer need to have a mobile device with plenty of disk space on it. All we need to do is to put stuff up there in the cloud & we can access if from anywhere where there is at least one stick of network dangling on your internet enabled mobile screen. Continue reading

Pause for the Cause

The market fell by 500 points today & the reason was (pause for effect) (some drumroll) we have absolutely no idea.”

I wish it would be that easy. Whenever I scan the newspapers & there’s a commentary about the market performance of the day before, it always has a cause associated for the rise & fall in the market. Even if the movement is as insignificant as 0.5%. There has to be a cause.

The most recent reasons that I have been reading are, “The Greek crisis”, “Slow pick up from US”, “QE3, or not (depending on what you want to prove)”, “Corruption”, “Fiscal Deficit” & so on. Are these reasons incorrect? Well, we don’t need to jump to such conclusions, but we need to ask, are these the only reasons because of which the market fluctuates? The reasons also vary as per the seasons, the headlines emphasize whatever is in the news recently.

There are several theories about how & which information is incorporated in the market. There are research papers upon research papers trying to decifer the process of finding the true cause of any market reaction. There are algorithms fed into computers which constantly search for exactly the same information predicting the next market reaction (or sometimes even causing the reaction). So after numerous citations in these papers & gigabytes of commentary by writers & jouranalists, what do we know about “the real reasons” to what do markets respond to? Zilch. We know nothing. That is, we know nothing conclusively. We can ask immediately about the latest global headlines & attribute those as a cause for the market reaction. But that is classic Recency Bias.

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The Big Short

There is a reality outside of our ideas & our imagination which we may not always be acquainted with. That reality is often the source of opportunity for some & dread for others. I recently finished reading, quite late though, a book by Michael Lewis called The Big Short. I began reading it like just another book on the debt crisis. I had read Lewis’ earlier book called Liar’s Poker which exposed the life on wall street during the high days of 1980’s & the story of his former employer Salomon Brothers. I also watched the Oscar award winning documentary on the financial crisis called – The Inside Job. Both of these essentially hold the same views but have shown the same information from different points of view. I recommend you to experience both of them.

The Big Short, like other books I had read about the crisis, does the same thing that his previous book did. Exposes the culture on Wall Street & how various regulators behave in times of boom. The book is basically about how a few people identified the problems in the financial market & placed their bets against it. It quickly becomes apparant that it’s not wise to think in terms what’s good or what’s bad, but it’s very important to switch it with whom to trust & who not to trust.

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Getting it wrong

Investing requires a lot of conviction. Especially in equity investing where the future outcomes of any business are uncertain & many variables can affect business performance in the long run. In such a case conviction is a good currency to have.

But what is this conviction made of?

Conviction is to believe that something is right by judging the facts which we gather after going through available data. Why do we believe that something is right? Well its tricky to answer it this way. So we can try and invert the problem into thinking – why do we get things wrong? To put it into context, why do investors make mistakes?

Kathryn Schultz researches the phenomenon of ‘Being Wrong’. In her book & in her talk at TED she mentions what it feels when we are making a mistake. Does it feel horrible? Does it make us feel bad about our choice? No, while making a mistake we constantly feel we are right. All those miserable, horrible feelings come only after realizing that we have made a mistake. In most cases we can move on with our lives & forget about the mistake, but as an investor we have to pay our tuition fee. Continue reading