The One Percent Almanack

Wit and Wisdom on Investing, Business, and Life

Behaviouronomics: How to Win Russian Roulette

If you’ve been a reader of Safalniveshak for sometime you’d already be familiar with the game of Russian Roulette. For those who aren’t, here’s a quick explanation.

In fact I’ll let Nassim Taleb, author of Fooled By Randomness, do the explaining –

Imagine you are offered $10 million to play Russian roulette, i.e., to put a revolver containing one bullet in the six available chambers to your head and pull the trigger. Each realisation would count as one history, for a total of six possible histories of equal probabilities. Five out of these six histories would lead to enrichment; one would lead to a statistic, that is, an obituary with an embarrassing (but certainly original) cause of death.

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Bookworm: Why We Sleep

Imagine you were born in the era of our ancient forebears. I wouldn’t need to remind you that life as hunter gatherer wasn’t as safe as it is today. You would spend the day plucking fruits and digging roots. Some days you’d be chasing a rabbit and on other you’d find yourself being chased by a saber toothed tiger.

However, the biggest risk wasn’t your adventures during the day. It was the night. And it wasn’t the darkness that made you vulnerable. It was something something else. It was sleep.

Going to sleep was an open invitation to all sorts of nasty predators. It was equivalent to screaming, ‘Come, eat me!’
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Spotlight: Investing’s Few Eternal Truths

Investing is simple, but not easy. Still there are a few eternal rules that, if you can tie them well with your investment process, should make the journey profitable.

The Wizard: Do not arouse the wrath of the great and powerful Oz! I said come back tomorrow!

Dorothy: If you were really Great and Powerful, you’d keep your promises!

The Wizard: [As Toto reveals him behind a curtain] You presume to criticize the Great Oz? You ungrateful creatures! You’re lucky that I’m only holding this till tomorrow, instead of the next twenty years from now!

Dorothy: [Pulling aside the curtain] Who are you?

The Wizard: I am the great and powerful…Wizard…of Oz.

Dorothy: You are? I don’t believe you.

The Wizard: I’m afraid it’s true. There’s no other Wizard except me.

Dorothy: Oh, you’re a very bad man!

The Wizard: Oh, no, my dear, I… I’m a very good man – I’m just a very bad Wizard.

In the noted 1939 American musical comedy-drama fantasy film The Wizard of Oz, one of the lead characters Dorothy, along with her dog Toto, is swept away by a tornado to the Land of Oz. It is ruled by a tyrant in whom people had vested extraordinary powers, but who was later exposed as vulnerable as the spell surrounding Oz is broken.

The stock market is like that Wizard in which people vest extraordinary powers from time to time. Look back to the mania of 1999 or 2007 and you’d know where I am coming from.

The promise of easy money lures more and more people to the stock market during such times when “nothing can go wrong” and “investing looks very easy.” But when the spell breaks – it ultimately does – those very people appear vulnerable. These are the times when Warren Buffett’s quote appears like a gospel truth –

Only when the tide goes out do you discover who’s been swimming naked.

Charlie Munger says –

[Investing is] not supposed to be easy. Anyone who finds it easy is stupid.

Now, that’s a great deal of wisdom packed into a few words. What Charlie supposedly means by this is that while it is pretty simple to earn average results from stocks, it isn’t easy to make superior investments and earn outsized returns for a long period of times. So people, let by the spell of bull markets, who think making great money from stocks is easy are in for a nasty surprise.
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Behaviouronomics: On Intelligence

Yogi Berra famously said, “In theory there is no difference between theory and practice, but in practice there is.”

Whenever one starts learning about a new field of knowledge or begins acquiring a new skill, the first confusion is always this — what’s the right combination of theory and practice?

You can devour a hundred books on swimming but nothing happens until you jump in the water. At the same time, just splashing around won’t get you anywhere unless you know the theory about how humans swim, how to move in the right way.

We’ve all acquired many skills over our life time. Some basic skills like speaking and walking are either biological or a product of our environment. Other skills which might have looked impossible for pre-historic man — like reading, writing, cycling, driving — are also so common today that we rarely pause to deconstruct how we acquired those skills.

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Spotlight: Zebras Don’t Get Ulcers, Investors Do

Most of us invest in the first place is to attain financial freedom so that we do not have to worry about money. But most of us become slaves of the short term stock price movements. And that creates stress. And stress is bad, very bad.

9:20 AM – Log into trading account/portfolio tracker. Check today’s gains/losses. Close window.
10:00 AM – Log into trading account/portfolio tracker. Check today’s gains/losses. Close window.
3:00 PM – Log into trading account/portfolio tracker. Check today’s gains/losses. Close window.
3:15 PM – Attempt to start a project at work. Fail. Open window. Log into trading account/portfolio tracker. Check today’s gains/losses. Close window.
3:16 PM – See last 15 minutes and extrapolate…

Sound familiar? Is this what you do? Are you constantly checking your stock trading account or online portfolio tracker minute after minute, day after day, wasting your time and probably killing your peace and returns? Well, since you are a subscriber to Value Investing Almanack, there’s a great probability that this situation does not sound familiar.

But in case you have been an investor in stocks over the past 10-15 years, and have seen occasional periods of great volatility, there’s a great probability that you have been through such situations when you repeatedly and stressfully checked your stock account to see how down you were on a given day or month.
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