Taking advise from Strangers

There is a wonderful quote from the Oracle of Omaha wherein he says 

Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway.

Its amazing how true that statement is in the financial field while not being true in any other profession. For example, the other day, a friend complained about pain in the ear. My initial thought on that subject was that the probable cause was it being a infection and the remedy would be a cheap anti-septic ear drop. But my friend decided that he was better off consulting a specialist (and I do agree with that 100%) since I am no doctor to advise and we all have heard about how dangerous self medication can be.

If a light bulb burns out, generally some one in the house easily replaces it but if a switch got burnt or broke, more time than usual, a electrician is called in to change the switch despite the job being no risky than changing the electric bulb. The reason is simple – the probability of getting a electric shock if you are dealing with a open wire is much higher than one that can be caused when changing a bulb. 

But when it comes to advise in the markets, its amazing how all and sundry can make an impact and how easily we fall prey to such advise. One reason for that I believe is that the pain that is caused by financial loss has a much lower impact than one caused by say a electric shock. If you try to do some thing and get a electric shock, the probability of you trying to do the same thing once again is much lower compared to doing the same thing in markets where we just tell ourselves a new story as to why the previous tip based trade failed and why the current should / shall work.

Statistics tell us that the probability of a failure for a trader is pretty high, yet that seems to make one more deterministic about how we are better than those other failures and why shall win this time around. Having been a full time active participant in the markets for more than a decade and a half, the one reason I can see for that is the fact that many are successful in their own fields and wonder why cannot they be here where the odds seems reasonably low in comparison.

For instance, to be a professional in any field, one needs to study and excel for at least 5 years while to be even worthwhile to enter the said field while to be a trader / investor, all one needs is a PC. Most have little knowledge about the company or even the methods they claim to follow. Have talked to many traders who claim to use technical analysis but cannot distinguish between RS and RSI let alone explain how they are constructed.

Of the guys who I have seen as having succeeded in markets, the one thing that has been common among all of them have been their devotion in terms of time and energy. All of them are full time traders / investors whose bread and butter is from their trading / investing activity and not Salary / Brokerage / Business or the trading being a part activity after retiring from full time service elsewhere. This in a way compels them to be either successful or find another profession (and as elsewhere, Survivorship bias does have its way even here with many who did devote full time too failing).

The reason for advisory services to have a field day in the stock markets as compared to elsewhere is that a lot of times, you just have to be lucky to be right and if markets are on a one way trip, it makes it even better if the markets are trending since then the odds of the stocks moving in favor of the trend remains high.

Of course, picking a few odd stocks cannot be a way to build wealth, but then again, who cares since the brain has this innate ability to think positive and multiply one good trade due to luck into a series of good trades. As Benjamin Graham said and I quote

In the short term, the stock market behaves like a voting machine, but in the long term it acts like a weighing machine 

Luck can be of help in the short term, but over the long term, skill outclasses luck (think about the 10,000 hour rule made famous by Malcolm Gladwell. You can make some money i the short term by paying for tips / newsletters and seeing some of them succeed as well, but if you really want to succeed in the long run, the key requirement is that you are hungry for it and make it  your business to know anything and everything there is to know about a business.