Spotlight

Randomness in itself is not risky when it comes to investing in the stock market. But how you manage that randomness is what matters in the final outcome of your investment process.

Imagine you are offered to play a betting game with a regular dice. The deal is that if your chosen number turns up, you win and get back double the amount you bet. Would you play this game?

Using simple probabilities, we can see that the expected value of this wager is negative. How? The probability of each number on the dice (with six faces) is 1/6. So expected value = 2 x (⅙) – 1 x (⅚) i.e., -(1/2).

If someone agrees to play this game, he’s blindly speculating. Isn’t he? He obviously doesn’t understand probability. The outcome of a dice throw is pretty random and you can’t hope to make money from randomness. But hang on. The game is about to get little more interesting and profitable.

If you’re informed (by reliable sources) that the dice is completely loaded (unfair) and number 6 turns up on every throw, would you bet your money now? Of course. The game is no more random for you. But for a person who doesn’t have this specialized information about dice, the game is still plagued by randomness.

Which means randomness could be subjective. It is not absolute – the same event is more random to one person than to another. Notice that the extent of randomness decreases with the knowledge we obtain (the dice is loaded and favours the number 6). Which simply translates to the idea that the better we understand the business we are exposed to, professionally or through a stock purchase, the less random the environment is to us.

The dice example might look very obvious and uninsightful but if you could draw a parallel in investing, the lesson learnt can turn a losing investment strategy to a winning one. Because there is strong correlation between randomness and risk.
[Read more…] about Spotlight: Randomness and Investment Risk

This is the fourth part of the series where I’m sharing those essays, articles, and speeches that pass the Lindy Filter. If you haven’t heard about this strange term called Lindy Filter, please read a detailed post I had written about Lindy Effect a few years back.

[Read more…] about Lindy Beyond Books – Part 5

This is the fourth part of the series where I’m sharing with you those essays, articles, and speeches that pass the Lindy Filter. If you haven’t heard about this strange term called Lindy Filter, please read a detailed post I had written about Lindy Effect a few years back.

20 Rules of Formulating Knowledge

It’s estimated that one thing common between forty percent of medical students in western countries is a tool called Anki. Anki assists them in assimilating a gargantuan amount of information that medical education requires. Similarly, many language learning enthusiasts also use Anki to memorize the vocabulary of a new language. However, outside these two cohorts, Anki software is pretty much unknown. Recently, Anki has been picking up interest among people from the programming community and a bunch of self-proclaimed life-long-learners — Yours truly being one of them.
[Read more…] about Spotlight: Lindy Beyond Books – Part 4

This is the third part of the series. The idea is to share with you those essays, articles, and speeches that pass the Lindy Filter.

Investing in the Unknown and Unknowable

Written by Richard Zeckhauser in 2006, the paper looks at how to invest rationally in unknown and unknowable situations and how behavioral finance can shed light on these situations and decisions.

He starts by differentiating between Risk and Uncertainty. He defines risk as the probability of permanent loss of capital whereas uncertainty is the inherent unpredictability of the future.
[Read more…] about Spotlight: Lindy Beyond Books – Part 3

This is the second episode of the series I started last month. The idea is to share with you those essays, articles, and speeches that pass the Lindy Filter.

Inventing on Principle

Bret Victor is an interface designer and computer scientist. In January 2012 he delivered a speech titled Inventing on Principle at CUSEC (Canadian University Software Engineering Conference).

It’s perhaps one of the most remarkable talks on design, creativity, and how one should decide the work which is worth doing. Bret spends an hour advocating for a career built not on a craft or a process, but guided by a principle. In the process, he explains his own guiding principle, looks at examples from history and lays out the case for discovering one’s own guiding principle.
[Read more…] about Spotlight: Lindy Beyond Books – Part 2