One of the books which have influenced me and my investment journey is “The Most Important Thing by Howard Marks”. This book teaches us the most important thing which we need to develop for becoming a wise investor.
“The Most Important Thing” has many concepts which can help us to our investment journey. I have posted articles on the book. Now, I have compiled different articles into the one file for the ease of reading.
While we involve into any of the investment decisions then those decisions are having dependencies on the future. As we know that future is uncertain and it is difficult to predict it. In such uncertain investment environments, luck plays an important role and we have to recognize the role of luck in our investment journey.
When we get some result or looking at the result then we must have to think the role of randomness in that generated result.
Many outcomes are visible to us but we have to think those outcomes with different viewpoints. If someone has made a risky & uncertain investment and he gets a good outcome from it. We can say that such outcome happens due to luck not due to skill. But people take such outcome as their skill, not consider a role of luck.
For example, baller throw ball towards stump for capturing a wicket of the batsman and that becomes the wrong throw and ball has touch boundary line then it is not a skill of batsman but the role of luck.
Many times, people get the return on investment by just being in the right place at a right time. Not due to their skill.
In short term, we can able to generate a good return and many a time achieved an abnormal return by just being in the right place at a right time. But what about the long-term result? How we can say that luck always keeps on favoring us.
Generally, during a boom period, the person who takes a higher risk get highest returns. But that is not the reason to consider them as the best investors. Very few people appreciate the role of randomness or luck in the life or in investment journey.
Mr. Taleb has mentioned the list of things which are generally mistaken by us.
We should understand that when things going right, luck looks like a skill and people misinterpret lucky investors as skillful investors. Many a time, we get an extremely good reward by chance and we make a mistake to consider such result as our skill.
That means batsman hit ball for six and that ball also declared “No ball” and batsman get free hit and he again hit another six on a free hit.
In short run, we can win and make good returns by an occurrence of chances but in a long run, our wise decision provides us a good reward.
When we realize that investment outcomes get an influenced by the randomness then we can able to focus on every event with the different perspective. Otherwise, we just thought that such outcomes happen due to our skills only.
We have made a list of assumption for the occurrence of events but we also should focus on the occurrence of other different events; which we may not have assumed. It might be possible that sometimes all other events have collectively more probability to occurred compared to the single event on which we have put the huge focus. Such ignorance becomes dangerous for our financial health.
Investing something like a mixture of both skills as well as luck. Investing is not a pure luck like a snake and ladder game or not a purely skilled by the game of chase.
While we play chase then we require a skill to protect ourselves from moves of an opponent’s. We cannot able to win chase just by waiting for the favor of luck and mistake made by an opponent. We have to create a scene where opponent commits a mistake and we can able to win a game.
Whereas, there is not a requirement of a skill in throwing a dice while playing a snake and ladder game.
But we generally consider our winning as our skill while we should recognize that we are winning a snake and ladder just due to a support of a luck. While we should reach towards 100, we should not forget that there is a snake on 99 number which can bring us towards number 7. And transform our success into failure due to highly dependencies luck. Similar happens to us while we play an investment game on the base of pure luck. We may win till number 98 and maybe that our fortune transforms into failure by destruction in our wealth. We climb many ladders, get many multifold return generator stocks but we forget that such occurrence is due to luck. If we do not have our skill involve in it, then our wealth get destroy. We should not forget that investment requires a luck but also it requires a skill. If we fully dependence on the luck then we should never forget a snake on number 99.
We bought an investment in a panic and sell it at the boom. Such an opportunities, we get during the market cycle. But sometimes being inactive and wait for the opportunity works better in an investment.
We bought an investment in a panic and sell it at the boom. Such an opportunities, we get during the market cycle. But sometimes being inactive and wait for the opportunity works better in an investment. We should not be going for chasing an investment rather we should wait for investment opportunities to come to us. When we are chasing an investment then it might happen that we might not get an opportunity at a bargain. We only get bargain where the seller is motivated to sell and such opportunities provide us a bargain.
Every time a great bargain will not be available, cycle – pendulum not at an extreme where we can go against it. Many a time, Market situations are balanced and fairly priced. In that case, we have to make an investment decision from what is available to us.
In cricket, we do not try to hit each and every ball. We try to identify proper pitch to hit and till that opportunities, we just need to wait for a proper pitch or just keeps on rotating strikes.
Same with the investment, we should always wait for the proper pitch which is in our competence area and then needs to hit on it.
In investing, the penalty is the loss of our capital. And if we try to eliminate such possibilities of getting penalized then, of course, we only remain with the rewarding investment opportunities. But many a time, we also need to miss some winning opportunities for getting our perfect pitch. And that can be bearable compared to the penalty of losing our capital. Staying on the pitch is more important compared to sitting at the stadium and seeing dreams of playing well for winning the match.
We should wait for the profit-making opportunities with the control on risk. If we lost our focus on protecting our capital then huge waiting period and higher returns also might not be able to provide us above average returns.
Many a time, we get lucrative profit-making opportunities but for getting those opportunities, we need to take a higher risk and sometimes, we do not even know that we are taking a higher risk.
Generally, people shift towards higher risk investments while they do not get desire returns from the safer investments.
Before the credit crisis occurs, people tend to take borrowing at a cheaper cost and make an investment into the high return opportunities with the belief of low risk.
When prices are keeps on going higher and higher than, we cannot refuse to have a lower returns with the higher risk. Mr.Howard Marks mentioned few aspects while lower returns environments exist.
There is no easy way to cope up with such situations. One major mistake people make is reaching for the returns and forgetting the risk. Always seeing dreams for making a century in every match and forget the risk of losing a wicket before hitting a century.
When there is a low return environment then we need an exceptional skill, high risk bearing capabilities and huge luck for generating higher returns.
The major opportunities for buying an investment comes where the holder of an asset are forced to sell it. Such situations create a bargain opportunities for us. When baller is frustrated and then only there will be a chance of occurring a mistake by him and that creates an opportunity for a batsman to hit six. But for hitting a six, we need to protect our wicket and need to stay on the pitch. We get a good opportunity to make a good score when baller is frustrated and throwing lousy balls; not when he is sharply bowling and chance to lose our wicket is higher. Or batsman is frustrated and want to make score then he will lose his wicket. Similarly with the investment; we do not get good investment returns while we are frustrated and want to make an investment or all our friends are earning & we have missed out opportunities. We get good investment returns while all are negative or frustrated and we have the capability to capture the opportunity.
Sometimes question raised in our mind that seller can be well informed and rational also then why he sell something at the bargain price?
When forced sellers come to sell their assets then market requires a liquidity to buy assets at a bargain price. So that the person who is waiting for an opportunity those only can capture such opportunities.