Monday, April 11, 2011

The difficulties of investing

The most difficult part of investing is the fact that repeating the same thing in different times will end up with different results. That is both frustrating and difficulty to correct. Imagine you are trying to learn how to ride a bicycle. You do an action and immediately you can see the results, hence the learning cycle is reduced. You practically learn how to cycle by trial and error alone. But in investing, the duration that transpired between the action and the results could be a few years apart. If you invest in this company, it's only after a period of time, ranging from a few months to a few years, before you can see the fruits of the action that you sowed. This makes correcting for error in methodology extremely difficult and makes the learning curve steep and treacherous. Do you really want to invest in a company and realizing that it is a dud after a few years, thinking throughout the entire holding period that you need time for the fruits to mature?

The learning curve to ride a bicycle is shorter because of the immediate feedback

This reminds me of an example. Some of the schools that my students are studying in do not have the habit of giving back the test results back to the students. In doing so, the students are deprived of a chance to learn from their mistakes. In other words, they can be doing a thousand tests and still not learn what is right or wrong since they have no feedback mechanism that can enlighten them otherwise. Likewise, investing now and knowing the results after a prolonged period of time can make the learning curve in investing necessarily steep and long. In investing, it helps to be a good student of history, because while circumstances vary, the human emotions that interplay between buyer and seller stays constant. All the panicky market crashes and euphoric bubbles are there for all of us to see, but not all will look at it to learn.

Throughout the whole market cycle, there are times when its profitable to trade, time to invest and a time to gun for yield. I think the key question is when to do which method, in order to get the best out of the current market conditions. In this aspect, I think Anthony Bolton's approach of doing different things at different times is very enlightening. I find his approach well balanced and not siding with either extremes of doing only trading or only investing. You can read more about him in his book "Investing against the tide". That being said, to really learn this, it'll take several market cycles of bull and bear before one can confidently say that one can do it well. To do this well, you have to learn different methods of playing the market and to know the right time to do each method. Difficult?

I quite like this book - it gives a very balanced view of investing vs trading

I offer an alternative that may prove tempting instead of learning how to juggle so many things in one market cycle. You can be a specialist, focusing all your attention to one single trick. You read up, you research, you practice all the time for that one single trick. If the conditions are not right, you wait as patiently as a fisherman with your calm facade suppressing the eagerness to hook a fish. Once the right conditions appear, you strike out using all the training that you've been prepared for. The hardest part of this alternative is to sit on the sideline waiting to do your single powerful trick and waiting patiently in the meantime. It is not easy doing nothing and believing that it will help you get more out of the market.

Then know this, it is even harder doing nothing when people all around you are shouting for action and making profits from the market, while you are doing nothing and believing that the right conditions for your trick is not here yet. Who ever says investing is easy?

*This article is contributed to IM$avvy financial portal, which is managed by Central Provident Fund Board and supported by MoneySense. This site has a noble aim of promoting financial literacy to the general population.


zen trader said...

Hi LP,
I would have thought investing is difficult because the feedback is immediate! Market is always giving me a price and ridiculing me.

Riding a bicycle or passing a test is easy. I do not question the system. I just follow the system. The financial market is harder. For some strange reason, I am always looking for new systems… Is that you too?

Toh Wee

OT83 said...

Hi LP,

I also agree! Investment is tough but to me it is interesting to learn!

Thanks :)

Anonymous said...

Hi LP,
"I think Anthony Bolton's approach of doing different things at different times is very enlightening."
Of course he is correct. So is Warren Buffet, Goerge Soros, Peter Lynch, John Templeton and many, many other great investors.
The problem is how to discover who am i? What am i? So that I can be sucessful in my own way in the market.
Example, if I don't believe in chart analysis (technical analysis) how can i become a short term trader? And there are of course short term sucessful traders in the market like George Soros, etc.

If you have the likeliness of one of the "Greats", congratulations.
Investing in the stock market is made easier only if you have discovered yourself. And patience is the key. In investment no one can "one step reach heaven".

Createwealth8888 said...

You just need to read newspapers for ads and they are telling you investing and trading are easy.

hydrogenperoxide said...

I must say that the feedback thing is really true.. It took me 2 years to know what I've been doing wrong during my uni days, simply because they really never give you back your test paper/assignment at all, not even the grade of your assignment, except for the really final grade, which I don't even know how it's derived from.. :P

Createwealth8888 said...

Stock Market is the Greatest Feeback Machinery; but often we just ignore the feedback as we like to think we are right and the market is wrong.

Singapore Man of Leisure said...
This comment has been removed by the author.
Singapore Man of Leisure said...

Hello LP,

It’s an interesting post! It’s full of contradictions and ironies!

1) You start with the importance of feedback.

2) Then shared the idea of adopting a flexible and generalist approach where we use different methods to fit different times of the market cycle.

3) But the punch-line is in the ending! You mooted the idea of using the specialist and patient approach. Huh!? I bet not all your readers saw it coming!

Tuning out market noise is not acting on the feedback from the market. So is “constant” feedback still needed? Or it’s more about waiting for the “right” feedback?

Specialist versus generalist approaches? Forcing me to "pause" and "think" what are you really advocating in your post. You unbalanced me.

If you have intended it, brilliant!

If you have not intended it, it’s also an interesting example of me reading something out of nothing.

It’s like interpreting ink blots – the same way we interpret charts and balance sheets. We see what we want to see!

la papillion said...

Hi toh wee,

Nah, I'm no longer looking for new system to try. I've found out something that works for me, so i'm more concerned about management rather than methodologies.

But hmm, feedback being immediate...haha, I won't dispute that :)

la papillion said...

Hi OT83,

I hope you make money too. It'll be doubly interesting to learn and make money at the same time, haha

la papillion said...

Hi temperament,

You're right. Their way is certainly right for them, but might not be right for me. Hence your name sake - temperament - plays an important part.

If you do not hve the correct temperament for a particular way of making money in the market, you're doomed to fail. Thanks for sharing your opinions :)

Hi bro8888,

Indeed..200% in 3 days...haha, easier said than done :)

Hi H202,

Hmm, likewise for me. If there's no feedback, it'll be hard to correct your errors.

Thanks for dropping by :)

la papillion said...


Hmm, you're the only one who commented on the way I wrote my article, haha :)

You're right, I've intended to put in different opinions in the same post, though I'd never meant it as a twist. I'm merely showing the difficulties if you do the generalist way and the specialist way. As temperament rightly put it, it's the temperament that determines the final course of action, nevermind which brings the greatest financial reward.

If I've unbalanced you enough to write a comment back, then I've succeeded in this post, haha :) It's important to elicit a response when I blog an article, so thanks for responding :)

Singapore Man of Leisure said...

Naughty naughty. Using your Jedi mind tricks on me. LOL!

I like to way craft your posts - even studying the spacing you use between the paragraphs.

You are defintely not a civil engineer! You are more an architect or an artiste.

I don't see words in your non- stocks related posts. I see imagery and can feel your emotions. Perhaps that's why it's so addictive!

la papillion said...


Thanks for your continued support :)

Indeed, I did space out the paragraphs to make it look visually even. In music, a period of silence is part of a whole collection of notes. Likewise, empty spaces are integral part of an article :)

In a more perfect world, I'll probably be an artist or a musician, haha :)