Stick to what we know best

Many a time, On my way to Office and on my way to Home, I come across daredevils who ride their vehicles as if they are in a Moto-GP race. While most onlookers either shake their heads or just ignore them, there are a few young guns who get influenced and attempt to compete with them, either straightaway or when riding with their friends.

More often than not, most speeding drivers finally end up in a hospital or get fined by the police and in worse case end up in Mortuary. Even the rider knows the risks he is getting into, but as they say, Speed Trills (as long as it does not Kill).

So, what is the relationship with markets you may ask. Sitting in a Air Conditioned cabin, one feels that there is a very low risk of getting physically hurt let alone die because of acts of omission and commission. But financial destruction is also a form of death, a slow death by a thousand cuts perhaps, but death for sure if one continues to tread on the wrong line regardless of the hundreds of pointers showing one is on the wrong side of the road.

Yesterday I was talking with a friend of mine about the legendary trader, Jesse Livermore. No matter what his greatness lie, the true fact is that he died a broken man. Broken both in terms of his mind and financially. While its nice to see the positives on one’s life, I wonder how many have given a thought that even the best trader (perhaps) finally ended up broke. He blew his capital not once or twice but four times (and officially declared Bankruptcy twice).

A wonderful quote from Jesse goes as thus

The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the person of inferior emotional balance, or the get-rich-quick adventurer. They will die poor.

While we do not floor the accelerator just because we see some one race past us, why is that we do not think before acting on some one else’s thought. Yesterday I read a article which claimed that Anonymous Analysts were wreaking havoc in a few stocks by giving Sell calls without there being much of data to back them up.

When some one cries Fire in a crowded theater, the instant reaction is to rush to the exits without bothering to check whether the fire is real or not. The reason for the rush is that one is ill prepared to know whether there is a fire or not and would rather be found foolish to rush with the crowd than face the ignominy of being unable to escape just because of not acting fast (if there was really a fire).

In markets though, its a fact that Herds are both right and wrong. Right most of the time but wrong at the extremes. But if you are part of the herd, the end result will be one of failure since you cannot judge when they are right and when they are wrong.

Most Analysts (and you can include me as well 🙂 ) do not have a clue. While many of us work on probability, some just throw spaghetti on the wall and hope that some thing sticks. And then there are those who cry wolf every time the market dips a bit – the perma bears whose only hope is to claim that they in fact managed to catch the top.

Markets are a great vehicle for building long term wealth. If you were to Analyze the 140+ years of data (200+ from some sources) that is available for the US markets, you shall see that even those who were unfortunate to enter at the height of the market were able to generate more returns over time than what investing into safer assets (such as Bonds) at the same time would have returned.

But the key to building long term wealth is having a plan and having the balls to stick with it through thick and thin. If you are riding a Hero Splendor, do you worry about trying to compete with the Honda Hayabusa? If no, why worry about the noise generated by others who at best can misguide you on your journey and at worst derail your long term growth.

If you were patient enough to read through my long rant, I am sure that you can stick to your plan.

au revoir