Beating the markets

There is a tendency among the investors to be able to beat the market averages and their own peers. in this process, many take unnecessary risks or make mistakes. these risks may offer rewards or generate losses. The mistakes take away some part of the earnings that one would have otherwise got from the investment.

The strategy should be to take home as much out of the investment income as possible. It is not about beating the market, it is about participating in the market.

A simple analogy would be to see the average mileage given by a vehicle. If your car runs 15 kmpl, what should be your objective? Should it be to try and get 16 or 17 kmpl? or to get as close to 15 kmpl as possible?

Think of investments in the same manner.

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Amnesia

Jason Zweig writes the following in “The Devil’s Financial Dictionary”:

Wall Street suffers from many ailments also, but amnesia is foremost among them. By burying the past, the financial community can disavow any responsibility to learn from its own mistakes and can minimise the odds that its clients will be able to learn from other people’s mistakes.

In the above paragraph, “Wall Street” is representative of investors at large. That is exactly why in the “Introduction” chapter of the book I have written the following words:

Our memory is short-lived. I would strongly suggest you keep reading this book every year to keep your memory refreshed. (That is why we are printing this book in hardbound format).

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What goes up …

Sooner or later – often sooner than anyone expects – what has gone up will come down. Likewise, whatever has gone down will rise again, typically when the experts least expect it.

  • From the introduction to the book “The Devil’s Financial Dictionary” by Jason Zweig

 

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The financial past – rhymes

The financial past doesn’t repeat itself exactly, but it rhymes. Human nature never changes, no matter how vociferously someone tries to tell you that this time is different. Fads come and go, but fees are forever. On Wall Street, everything has been tried before. Whatever it is, it will almost certainly turn out the same this time as last time.

  • From the introduction to the book “The Devil’s Financial Dictionary” by Jason Zweig

 

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Why understanding investor psychology is important – 2

Continuing from yesterday’s post:

While the various assets would generate various kinds of investment returns, be it current income (in form of rent, interest or dividends) or capital growth over the years, it entirely depends on the behaviour of the investor as to how much of it one takes home.

This gap between what an investment generates and what an investor gets depends on costs (transaction costs, holding costs, maintenance costs, etc.), taxes and investor psychology. To some extent, the former increase due to unstable mind of the investor.

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Why understanding investor psychology is important

he subject of behavioural economics, or behavioural finance, or plain simple investor psychology has been around for decades. However, it came into limelight only in last few years. Today, more number of people are talking about this subject.

This is not new. The role of emotions in our daily life has been explained by our Upanishads. As the famous Amrit Bindu Upanishad says

its-all-in-the-mind

(The mind alone is the reason of our bondage or our freedom.)

The fact is, ever since humans started dealing with other humans – even before money was invented – the relation between price and value has always been a subject of debate. There have been opinions justifying the price for the value and there are opinions questioning the price with respect to the value. Probably trade happens only due to such differences in opinions.

However, when cold logic is applied, it is often difficult to arrive at a decision. Add a pinch of emotions and you are able to arrive at a conclusive decision and act on it.

However, emotional decision making has its own flaws.

It is important to understand the role of emotions in our life and the flaws associated. These emotional flaws reduce the upside in case of our financial decisions or they increase the costs and the risks.

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A short intro …

The book “Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget” is a story of various events that took place in the history of financial markets. More than that, it’s a story of the fickleness of the human mind.

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