Thursday, March 12, 2015

Unactionable advise

Things should be made simpler, but not to such an extent that a big part of the meaning is lost. We often hear of market truism like the following:


1. Buy low, sell high
2. Don't lose your capital
3. Diversify diversify diversify


and many many more. I'm sure if we look hard enough, we can find contradicting truism that runs contrary to an existing one. With regards to the above 3 truism, I can think of the following contradicting ones:


1. Buy high, sell higher
2. If we win more than we lost, we still end up being profitable
3. Focus focus focus


To a newbie, everything is so confusing. If you follow this guru, he'll recommend that you focus all your energy to just a few companies and learn everything you know about it. If you follow another guru, he'll recommend that you'll diversify to reduce your risk and as long as you win bigger than you had lost, you'll still come out ahead winning the game. Who to believe? Who to trust?




The problem with such market truism is that the context that such truism is applied is often lost when reduced to a single sentence. The particular is sacrificed for the general, and in return, we immortalised the real market observation with a catchy soundbite that the public consume readily.


Buy low and sell high. Sure, but how do you know when it is a low and when it is a high? Is there a situation when you can justify buying high and selling it higher? Isn't it what growth investing is about? Don't lose your capital. That's both rule number 1 and rule number 2, repeated ad nauseum to a hungry crowd of fans. Who in the right mind wants to lose capital? Of course nobody expects to lose their capital, but how does one NOT lose capital? By not investing? By investing wisely? Then what's wisely? Even the guru himself lost money, so what can we minions do about it? Diversify to reduce market risk, says one guru. Concentrate and don't diworsify, says another. What is happening?


It doesn't take a lot of intelligence to understand these market truism, but it takes a lot of wisdom to know when each will apply. How does one gain wisdom? By making mistakes and learning from them. How does one make mistakes? By trying, failing and getting up all the time until you learn from it. Do you really think after attending a course and reading a few books, you can start getting double digit yields?


Similarly, a lot of advise are also inactionable, because by immortalising them in short soundbites, we lost the context in which the advice works. Think about these:


1. Bring an umbrella when it rains
2. Be careful, don't make careless mistakes
3. Check their financial statements; you don't know if they will have accounting irregularities


When do you know it will rain? If you can careful, how do you make careless mistakes? If their accounts are rigged, why do you still read them? These are all very nice and well meaning advise, but I think ultimately, they are unactionable. You can't act because you don't know when the advise will apply. It's only after the deed is done can you sit back, reflect and rationalise the facts leading up to the deed and say, oh, I should have done this and that. Perhaps after a few rounds of iteration, we will finally know the when part of bringing an umbrella when it rains.


Perhaps, not even then.

18 comments :

Jay Chia said...

Very well written!!!

Speaks the mind of many of my clients!

I think end of the day, choice is needed. It is very hard to adopt 2 sides of the coin. Because every advises have advantages & disadvantages. It is up to the individual to believe which side of the coin is suitable to yourself.

la papillion said...

Hi Jay,

Thanks! It's really hard to believe something without trying it though, so I think people must eventually try it out for themselves and see which one works better for them. You can tick the choices in a risk profile form saying you're conservative and so on, but it's only when you have skin the market that you'll do your real risk profile. I believe it's the same for this too. Read up, try it and see whag works better for your temperament ;)

B said...

Hi LP

Too many gurus, not sure which is better. Better is worse or worst is better. The bull market we are in right now makes the situation even worse. Everything looks so rosy and good.

Look at ourselves in the mirror. Can't even trust ourselves these days.

temperament said...

Buy high sell higher, Buy low sell high are 2 'games' with the same aim. Which game you choose to play more often depends on your make-up.
Both games can make you money but i prefer the latter. It may not be necessary correct but to me i think the former is a more dangerous game to play. i still don't know how to trade with safety mechanism built in. And yet i dare to play the former game from time to time.

Singapore Man of Leisure said...

LP,

"Let's play carefully tonight at poker.

This way, everyone will win money."


Createwealth8888 said...


Many still prefer to join Group Tour for simple reason.

:-)

la papillion said...

Hi B,

You're right. In this kind of market, everything looks nice and sweet. There'll go a time where the gurus will disappear one by one, lol

la papillion said...

Hi temperament,

Actually when I buy, I also don't know if I'm buying high and selling higher. Do you? We thought we are getting a cheap deal, but we can really only tell on hindsight. I'm sure those traders who pple think they are buying high and seller higher are also thinking that the price is cheap compared to the future. If not, who would buy?

It's not so easy to know which games I'm playing - buy high sell higher or buy low sell high.

la papillion said...

Hi SMOL,

Haha, play 'carefully'! I don't know how to play carefully!

la papillion said...

Hi bro8888,

Yes, indeed. If we follow people, everything is planned and thought out, so things are easy. There will always be people who will join a herd and people who will be lone rangers :)

S-Reit System Investor said...

Hi LP,

Excellent post. People pay attention to the content but not the context. In trying to imitate gurus/idols, they lose sight of their own circumstances and wonder why they attain different results.

I'm more for marching to the beat of your own drum. And I make sure I carry an umbrella in my bag all of the time.

Richard Ng said...

LP : I guess it is all voice down to perspective (of the gurus) and the followers. There is no right or wrong, in most thing in life (investing is not excluded), so many grey area...hence the 50 shades of grey ;-)

When everything else fail, follow our heart lor....

la papillion said...

Hi SRSI,

I guess it's okay to follow others, but in the end, you'll realise that if you follow your heart, you'll also reach the same conclusions. Following others can accelerate that path, but you must be willing to listen to your own beating heart.

Bringing an umbrella always helps ;) Weather getting a bit unpredictable these days lol

la papillion said...

Hi Richard,

Haha, you good, can link this to 50 shades of grey :) I don't know what's the big fuss about that movie/book though, not very interesting to me haha!

Rolf Suey said...

Hi LP,

Excellent post. Whenever anyone of my friends and colleagues ask me for stock advice, I will show them your post.

My opinion as follows.

1) In the initial stage, without any knowledge and experience, we expose ourselves and learn as much as we can.

2) With some knowledge, we begin to invest. Not your entire fortune though. Win or lose we gain experiences and learn. Never give up and continue. Ignore the outside noises, and focus on our inner voice.

3) As we continue to try and learn, we also adjust until gradually, we start to see and then develop a style of our own. A style which we are most comfortable with, and which bring us the most winnings. More importantly, it is the style that best suits us, and bring the best out of ourselves.

It will be a long journey, persist. Remember, no one shirt fits all.

la papillion said...

Hi Rolf,

Haha, when pple ask me for advice, I usually ask them a lot of questions back. It's impossible to tell them the answers directly, because I think it'll do them more harm than good. A little knowledge, in this case, will be disastrous.

We have to own our mistakes. And we do that by making the mistakes our own ;)

Createwealth8888 said...

More "worries" are those actionable "advices" under the cover of "talking to ourselves". No?

Investing Wolf said...

Many people have their own way of investing. No 1 method fits all. It all comes down to how you manage your losses when you are wrong and how much you make when you are right.