First of all , allow me to quote below from a legendary investor ( some may call him great speculators and some may not agree with that as the way he took his own life in 1940 ) : Jesse Livermore
“ The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the
, the mentally lazy, the man of inferior emotion balance or for the get-rich
quick adventurer. They will die poor .”
**remark: I don’t think the "stupid" is a proper word there as the “smart” investors also fail in most of investing or speculating ( like famous case of LTCM -click ).
I have two books about Jesse Livermore , one is " How To Trade in Stocks" written shortly before his death in 1940. How to Trade Stocks offered traders their first account of his famously tight-lipped operator's trading system. Another one is " Reminiscences of a Stock Operator by Edwin LeFevre written in 1923.
The book continue to be the most sought-after and most-loved book ever writeen on the subject of trading and speculation. In this novel, LeFevre brilliantly describes the life and times of the book's protagonist. Larry Livingston , a pseudonym for Jesse Livermore, one of the history's most famous traders. Livermore never considered himself as an investor; he was a speculator. He didn't mind being long or short, he just wanted to be correct. His approach was to figure out what the path of least resistance was and then go with the flow , he understand well about “market psychology “.
You may find more about him on below :
From Investopedia “The Greatest Investors: Jesse L. Livermore” (here )
From Wikipedia “Jesse Lauriston Livermore (here)
It’s very difficult to draw a clear line between “ Investing and Speculating “ , sometime we think we are an investor ( a long term value investor ) but in actual fact we are doing the speculation about the future of the stock price.
As such, I think same notion should apply to all “value investors “ on above quote from Jesse Livermore.
Each human being is born into this life with his or her own unique, natural, God-given talents and abilities. Those unique, natural talents are the core of who we are. Those talents never change and hardly be taught to others.
Sometimes , when I talked to friends or even my own nice or nephew in topics related to investment and try to “influence “ them towards learning how to invest . They felt difficult and no motivation or lack of interest to do that ,thinking may be “work hard and save for retirement” may be suitable or better for them.
Same for me, if someone asking me to learn “ how to cook or improving my culinary skills “ , it might be nightmare for me . This prompted me to ponder that “investing may not be for everyone and whether success investors were “born by nature or be nurtured ?”
Why I say stock may not be for everyone ?
Market is not just about valuation or “figure “ : “Psychology count “
It’s really difficult to decide which stocks to buy and it’s not just picking stocks and watching it go up 100 or 1000% or buying them and watching them go down 80% before they end up going 20% from your original price. Investing is a “waiting game” and “ Psychology” is at least 80% of the game. I don’t need to go over the statistics. Most people sell at the bottom and buy at the high.
Individual investors underperform the market. The average return of the market over the past 20 years is around 9.8% while the average return of the individual investor is only close to 3.6%.
Competition and competition !!
We are not good for that “game” and may be we are good for some other task /jobs as I mentioned earlier. Also , market is full of “full time “ pro investors and almost 90% of vol done by these peoples or institution. Those are the deeply committed , well prepared with required tools and skills , some even with “political connection or insider info “ where they would have additional advantages.
Stock market is like a “ Big Casino “ ( at least for short term or day trader ) and full of traps !! Although we knew that in the long run , stock market should perform in accordance with economic activities and company’s earning growth , as Father of Value Investing ( Benjamin Graham ) famous quote ““In the short run, the market is a voting machine but in the long run, it is a weighing machine.”
As retail investors , we might be easily fall into such “gambling mind-set “ due to various reasons such as “ bias of over confidence “ after few successful trading , peer-pressure while seeing others making money in betting speculative stocks , frequent news and stories of successful “millionaire in the making “ etc…
How about ETF ?
Many people think that ETF might be a better solution if investors can’t really pick the stocks by their own. ETF has become such a phenomena that one must have it in their portfolio as form of diversification.
Below article from Financial Times gave us a very good clues on how the ETF may have impact on overall market. Since we are buying the market , regardless of good or bad of an underlying company in any ETF , this may create a systematic risk and make the market more volatile.
Exchange traded funds: taking over the markets ( here )
“The products have transformed US bourses, but some worry that ETFs are breeding systemic risks”
One of the argument on current high valuation of US market ( S&P500 / Dow ) were partly due to more and more investor are switching to passive Index Fund hence push up the index accordingly , regardless of fundamental valuation on each individual stock ( such as their earning or book value).
Investors should also understand that “index investing “ is not that passive at all and are subject to short term market swing , which could range from +ve to –ve i.e 20% - 40% in any year. One should prepare for such market volatility when it strike and sleep well during these stormy days.
The ABCs Of Stock Indexes : The Good and The Bad ( from Investopedia ) (here )
For active investors out there, the over-reaction of market due to indexing may pose some opportunities for those who can really pick the good undervalue stocks during short term market knee-jerk reaction.
What do you think ? should one “ Invest or Not Invest "and if invest , should he or she do Indexing ( passive investing ) or not Indexing (active investing ) “ ?
" You can beat the horse race, but you can't beat the races. So, It is with market operation, there are times when money can be made investing and speculating in stocks, but money can not consistently be made trading every day or every week during the year " by Jesse Livermore