Leverage and illiquidity

Leverage used to invest in illiquid assets poses a serious risk. Similarly, if you do not have an alternate cash flow and the asset is illiquid, repayment of borrowed money becomes difficult

You may also want to read this article.

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Emotional or rational

When the stronger emotions of greed and fear take over, rationality is thrown out of the window.

“Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget” is a story of two roller coasters – one in the market (visible) and the other in our minds (invisible). The emotional roller coaster could turn out to be more harmful than the one outside in the markets.

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Ego

There are events and there are chance events. We get lucky sometimes. However, ego denies the hand of luck and instead thanks skill, knowledge and prescience.

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Underperformance

During periods of euphoria, the good and diligent investors underperform a vast majority of those who simply got lucky.

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You can’t direct the winds

Remember the old saying, “You can’t direct the winds, but you can adjust the sails.”

Translated in the context of the book, it should read as, “You can’t prevent market crashes, but you can safeguard your portfolio.”

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Book in Subra’s blog posts

P V Subramanyam, a well-known trainer in the financial markets and a very active blogger (www.subramoney.com) has mentioned the book “Riding the Roller Coaster – Lessons from financial market cycles we repeatedly forget” in two of his recent blogs.

Below are the links to both the articles:

 

Thanks Subra.

Who needs diversification?

“Wide diversification is only required when investors do not understand what they are doing.” – this quote is attributed to legendary investor Warren Buffett.

However, it is important to understand that Warren Buffett knows what he knows as well as what he does not know. Most of us are not Warren. Often, we are not even aware of what we do not know. In such a case, one needs to be careful.

The study of various episodes of boom and bust suggests that in the greed to make quick bucks, investors tend to concentrate their portfolios around recent period winners (stocks, sectors or markets that have seen major outperformance in the recent past). The subsequent direction of the markets in most episodes ended up with huge negative surprises and regrets.

Diversification may be boring in good times, but would be a prudent life-time strategy for most investors.

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