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Remember These 13 Points

  1. Predictions do not work as tomorrow is uncertain. We will only boast about things we have predicted right and talk nothing about the other half we got wrong.
  2. Skills can bring us moderate success. However, luck is needed to be a big success. (credit to Jon)
  3. We tend to credit our successes to good skills and blame our failures on poor luck.
  4. Some of us rely on luck (most unknowingly) by investing for high returns (and losses). A few of us will make big money but most of us will end up much poorer.
  5. Some of us deliberately limit the luck factor by choosing investment products with capital guarantee and guaranteed returns. None of us will make big money but none of us will be very much poorer.
  6. We need to know how much we can afford to lose (financially and emotionally) before deciding to be No. 4 or No. 5, or somewhere in between.
  7. We have many biases. The degree of success in investing or trading depends on how much we can keep our biases in check. No, we cannot remove our biases totally.
  8. Confirmation bias – we see what we want to see. We seek out evidence to validate our investment decision and ignore those that suggest otherwise.
  9. Availability bias – we are influenced by the things we observe. If people we knew made a lot of money through property investment, we will think that properties are the best investments in the world and develop a preference for it.
  10. Loss aversion bias – we want to be compensated for high returns before we decide to take the risk to invest. We often wait for markets move and show high returns before we want to invest. We are not interested if markets are not moving.
  11. Hindsight bias – we tend to say “I knew it” after an event has happened.
  12. Survivor-ship bias – we only get to hear stories of successes but many stories of failures were untold.  See No 2 and No 3.
  13. Most us do not know what we want in life. We think we will be happier with more money.

13 Things- Learned About Humans and the Financial Markets

  1. Predictions do not work as tomorrow is uncertain. We will only boast about things we have predicted right and talk nothing about the other half we got wrong.
  2. Skills can bring us moderate success. However, luck is needed to be a big success. (credit to Jon)
  3. We tend to credit our successes to good skills and blame our failures on poor luck.
  4. Some of us rely on luck (most unknowingly) by investing for high returns (and losses). A few of us will make big money but most of us will end up much poorer.
  5. Some of us deliberately limit the luck factor by choosing investment products with capital guarantee and guaranteed returns. None of us will make big money but none of us will be very much poorer.
  6. We need to know how much we can afford to lose (financially and emotionally) before deciding to be No. 4 or No. 5, or somewhere in between.
  7. We have many biases. The degree of success in investing or trading depends on how much we can keep our biases in check. No, we cannot remove our biases totally.
  8. Confirmation bias – we see what we want to see. We seek out evidence to validate our investment decision and ignore those that suggest otherwise.
  9. Availability bias – we are influenced by the things we observe. If people we knew made a lot of money through property investment, we will think that properties are the best investments in the world and develop a preference for it.
  10. Loss aversion bias – we want to be compensated for high returns before we decide to take the risk to invest. We often wait for markets move and show high returns before we want to invest. We are not interested if markets are not moving.
  11. Hindsight bias – we tend to say “I knew it” after an event has happened.
  12. Survivor-ship bias – we only get to hear stories of successes but many stories of failures were untold.  See No 2 and No 3.
  13. Most us do not know what we want in life. We think we will be happier with more money.

The First Requirement for Success

“Sun Tzu said if you sit by the river long enough, you’ll see the bodies of your enemies float by. The key is “long enough.” If you live long enough, you have to be the survivor. When I was a kid, we didn’t have the video games you have today, so we used to listen to comedy records. One of the greatest ones was Mel Brooks doing the 2000 year old man. Carl Reiner says to him, “how did you get to be the world’s oldest man?” And he says, “Simple. Don’t die.” How do you get to be the world’s oldest investor? The answer is don’t crap out.

“So if you look at distressed debt where we started in 1988, I could tell you who our number one competitor was in every year through 1995 and not one is a main competitor today. And it’s not because of what we did; all we did is perform consistently. They crapped out. It sounds simplistic to say, but the first requirement for success is survival…”

– Howard Marks

What steps do you take to ensure survival as a trader? (more…)

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