knowledge is very important when you are investing … writes Anup Bhaiya

Another book I read recently is ‘Riding the Roller Coaster: Lessons from Financial Market Cycles We Repeatedly Forget’ authored by Amit Trivedi. As the name suggest it gives us various lessons on business cycles. The book is spread across the 5 centuries involving 4 continents. It covers the market hysteria, the trading bubble and the subprime mortgage crisis. The author has decoded the complex subject into simple language. The book has taught me that one should not predict the market. Secondly, knowledge is very important when you are investing in a particular product. If you do not understand the product refrain from investing in it.

Read the full text here


The 3 Most Important Words in Investing

Recently, I came across this post by Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts.

Here is some part of the blog:

Because the future and markets are unpredictable, and having the humility to admit that is very hard for us to do. We’re simply not wired that way and instead suffer from the behavioral bias of overconfidence. Which is to say we overestimate our own abilities when it comes to sports, trading, driving or anything else.

While a little bit of confidence can be a good thing in many areas of life, overconfidence, particularly in the investment world, can be disastrous. With overconfidence comes the tendency to overtrade and make highly speculative, concentrated bets on the future.

Many studies have shown that these attributes tend to lead to lower overall returns (see, for example, Barber and Odean (1999)). The more confident you are, the more you trade, and the worse your returns are on average. And interestingly, as men tend to be more overconfident than women, they tend to have lower returns (see Barber and Odean (2000)).

What’s the best way for investors to manage their overconfidence?

Diversification. Not putting all of your eggs in one basket, resisting the urge to trade, and sticking with a broad asset allocation plan. Boring, I know; not nearly as exciting as letting it ride in some penny stock. I completely agree, but successful investing is not supposed to be exciting or entertaining. By diversifying, you’re removing your ego from the equation and accepting the fact that you’re not likely to pick the next Apple or make the next Big Short.

To the contrary, you are saying three important words when it comes to making precise predictions or forecasts about the future: I Don’t Know.

Let’s practice this concept in response to some standard questions you hear on TV every day:

Where will the S&P be at the end of the year? I don’t know.

Where will the 10-year yield be at the end of the year? I don’t know.

Where will Crude be a year from now? I don’t know.

Is Gold a good investment here? I don’t know.

Will the U.S. enter a recession this year? I don’t know.

What will be the best performing stocks/sectors/asset classes over the next day/month/year? I don’t know.

Will the Fed hike rates this year? I don’t know.

Who will win the election and what impact will it have on the economy/markets? I don’t know.

If I tried this know-nothing routine on TV they would never have me back on but as an investor it’s your best weapon. You diversify because in any given year you don’t know which asset class will be at the top and which will be at the bottom of the performance rankings (see table below). As an investor today, you don’t know if the 7-year expansion/bull market will end this year or continue for a few more years. You don’t know if U.S. stocks will continue to crush international/EM in the years to come or finally start to lag. You don’t know if the 36-year secular bull market in Treasury bonds is going to continue or if yields will finally begin to rise. You don’t know if the Fed will hike rates once, twice or not at all this year and what impact if any that will have on markets. You just don’t know.

But that’s alright, because as luck would have it “knowing” (or more accurately, thinking you know) the future is not a prerequisite to making money in markets. In fact, just the opposite is true: admitting you know nothing is just about the best thing you can do.

Here is the link to the entire post.

The 3 Most Important Words in Investing

It reminds me of what I have written in the book at many places. In fact, we have a full chapter on “Knowledge”. Here is another one-liner that I have written in the book:

“The more I know, the more I realise how little I know”.

#RidingTheRollerCoaster – 154


Knowledge of your ignorance

“Knowing that you know nothing makes you the smartest of all.” Said Socrates

See the similarity Our tweet dated 15th November 2015 from the book

Feel good.

Knowledge and expertise are not fungible

“All of them were clearly intelligent and knowledgeable about a great many things – as long as those things had nothing to do with their money.

Most of them simply didn’t understand the principles of investing.”

Liz Davidson, Founder and CEO of Financial Finesse writes in the book “What Your Financial Advisor Isn’t Telling You – The 10 essential truths you need to know about your money”

Financial Finesse is a sort of a helpline in the US for people to get guidance on their personal finance matters. The above lines talk about the behaviour and attitude of generally intelligent and successful people. These are educated and intelligent people, successful in their respective fields of work. However, that expertise and knowledge are not fungible. Expertise in one area may not mean expertise with money.

In the absence of proper knowledge one is unable to understand or see the risks properly. Half knowledge can sometimes be dangerous. As we know from the Mahabharata, it was half knowledge that actually killed Abhimanyu.

As with Abhimanyu, who could not get out of the seventh chakra of the chakravyuh due to insufficient knowledge, many investors have painfully found that it is easy to get in an investment, but it is most difficult to get out of it, if one does not know enough.

Be careful with your investment. If required, take professional help.

#RidingTheRollerCoaster – 123

If you don’t know whether you are right …

If you don’t know whether you are right … what is the option?

So many investors keep asking the so-called experts what investment avenues are good for them. In many cases, the discussion revolves around the returns or guarantee. However, seldom the discussion is about both returns and risks together.

The problem with such an approach is that the upside is assumed to be a certainty, even when it is not. This leads to a portfolio either too loaded in favour of risky investments or completely avoiding these.

When you don’t know whether you are right, the best defence you have is to diversify. In the world of investing, this is the only “proverbial free lunch”.

If you don’t know whether you are right, diversify. When in doubt, diversify.

#RidingTheRollerCoaster – 100

Lehman Brothers or Lehman Sisters

I am back tweeting about the book after a long gap. On this day, International Women’s Day, it would be appropriate to pay a tribute to all the wonderful ladies in my life.

In the year 2008, Lehman Brothers collapsed and filed for bankruptcy. Someone said, “It wouldn’t have collapsed had it been Lehman Sisters”.

Yes, women are believed to be wiser than men when it comes to financial decisions. Please read again – the key word is “wise”, and not “intelligent” or “knowledgeable”.

History suggests that eventually wisdom wins over intelligence. The men at Lehman Brothers, and even at many other firms were intelligent and knowledgeable. However, history also tells us that we don’t learn from history.

Lehman Brothers went bust in 2008. It was just a decade ago in 1998 that they had the best view of what went wrong with Long Term Capital Management. Lehman Brothers were custodians for LTCM.

#RidingTheRollerCoaster – 90

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.

#RidingTheRollerCoaster – 77