Investing and Storytelling

For centuries, people used stories to pass on knowledge and storytelling can make learning more effective. Stories help us process and remember information which is embedded in the context of a story, it is transferred to a listener or reader in a unique way. 

Stories can motivate an audience toward a learning goal and an encouraging story will inspire someone to take action.

In the game of investing, there is no lack of good stories which related to investment ideas or philosophy.

I would like to quote below a few good stories which may change your mind on investing.

Keynesian beauty contest

Keynes described the action of rational agents in a market using an analogy based on a fictional newspaper beauty contest, in which entrants are asked to choose the six most attractive faces from a hundred photographs. Those who picked the most popular faces are then eligible for a prize.

A naive strategy would be to choose the face that, in the opinion of the entrant, is the most prettiest. A more sophisticated contest entrant, wishing to maximize the chances of winning a prize, would think about what the majority perception of attractive is, and then make a selection based on some inference from his knowledge of public perceptions. This can be carried one step further to take into account the fact that other entrants would each have their own opinion of what public perceptions are. Thus the strategy can be extended to the next order and the next and so on, at each level attempting to predict the eventual outcome of the process based on the reasoning of other rational agents.

"It is not a case of choosing those [faces] that, to the best of one's judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligence to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practise the fourth, fifth and higher degrees." (Keynes, General Theory of Employment, Interest and Money, 1936).

Keynes believed that similar behaviour was at work within the stock market. This would have people pricing shares not based on what they think their fundamental value is, but rather on what they think everyone else thinks their value is, or what everybody else would predict the average assessment of value to be.

< The moral of the story:  One should pick or select a stock not just “ fundamentally undervalue “ but will need to consider the momentum ( or how other investors think about the contestant (stocks ). FA ( Fundamental analysis and TA ( Technical analysis ) both are equally important. >

Walking the Dog vs Investing

    Investing is like walking a dog on a leash and the difference between the economy and the stock market centres around a man and his dog, walking through the park. The man’s course is steady, for the most part, as he strolls from one end of the park to the other. His hand clutches a leash which is attached to a dog, whose course is anything but steady. The dog never walk in a straight line, the dog darts left and right, hither and yon – lunging at a pigeon, scurrying backwards in fear of a speeding bicycle, leaping up at his master spontaneously and stopping repeatedly to pee, bark or scratch himself.

The man continues forward, altering his pace from time to time and occasionally stopping to check his watch. The dog is frantic, careening back and forth, even if he ultimately ends up heading in the same direction as the man holding the leash and it is the dog’s owner that ultimately guides the frenetic dog on the walk. But, most people are watching the dog ( the stock market ), because the man ( the fundamental aspect of the underlying investment )  is boring.

< The moral of the story: Ignore that dog and look at the man J >

Charles Ellis: «Investing is like playing tennis»

Think of investing as a game of tennis!

In Charlie Ellis book – Winning the Losers Game he describes how Dr Simon Ramo, a Physicist, Engineer and Business Leader (sometimes known as the father of the Intercontinental Ballistics Missile) studied the game of tennis for many years. He observed that tennis is essentially played by 2 types of players, Professionals and the rest of us.  Both play using the same rules, clothing and equipment but they play 2 very different games:

·        A)  In professional tennis the result is determined by the actions of the winner who will beat the opponent by placing more precision shots just out of reach or forcing more faults from their opponent.

·         B) The amateur game is decided largely upon the actions of the loser since precision shots and long rallies are rare and points are normally lost by driving the ball into the net, hitting it out or double-faulting.  Instead of trying precision shots or faster serves, normally beyond their ability, in an attempt to become the winner, the more reliable approach is simply to concentrate on getting the ball back and leave it to the opponent to make the mistakes in their attempt to become the winner.  Of course they will hit a few winners and may even look as though they might win (which will make you doubt your strategy) but as they get more confident they will make more mistakes and you will win in the long term.

      Successful investing is like being that pragmatic disciplined tennis player that just keeps dinking the ball back time after time, year after year waiting for other people to make the mistakes to improve your chances of success.  Not the most exciting way to invest but investing is ultimately about achieving peace of mind that you can achieve your life goals; it should not be the source of excitement.  If you need excitement go to a casino with some money you can afford to lose not the money that your future relies on.

Remember that beating the market involves outsmarting on a consistent basis within millions of participants, most of whom have far more time and resources than you and can play in different parts of the world while you are asleep.

< The moral of the story: If we think we are just an amateur in this investing world, let’s learn to avoid the mistake or value trap, maybe investing in Index ETF will be better for those who really have no times to study the market and understand different methods of investing .>

The Stock Market Is Like Playing Musical Chairs

The problem with investing in the stock market is that most amateurs don’t feel safe until the market has already gone up. The safer you want to feel, the further it has already gone up, and the later you are to the party. Most investors are starting to buy right now and are starting to make a little money. But in the not-too-distant future, the market will start to come back down because this increase in prices is not sustainable. When prices start to come back down, amateurs don’t know whether or not they should sell. Then they typically don’t sell until the damage is done.

Remember the game Musical Chairs? It seems that investors on Wall Street have been playing this game again and again, as more and more we are seeing signs that the bull market may be reaching its final stages. Each new sign that appears represents just one more chair being taken away from the game. The question investors need to ask is "where will I be when the music stops"?

< The moral of the story: Don’t chasse high or hype in any of the bull markets, listen to the “music “ carefully J >

Warren Buffet: “It’s only when the tide goes out that you learn who has been swimming naked?

Things may look good and rosy up to a certain point, but if a company is leveraged too much expecting a wave to come, but instead the tide goes out, everything will be exposed. “

< The moral of the story: Swimming naked is cute only for Babies. J >

Quote Of The Day:

<October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February. ~Mark Twain>