Stock Investing May Not be For Everyone
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 the 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 continues to be the most sought-after and most-loved book ever written 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 understands 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 “, sometimes 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 the same notion should apply to all “value investors “ on the 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 niece 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 maybe “work hard and save for retirement” may be suitable or better for them.
Same for me, if someone asked me to learn “ how to cook or improving my culinary skills “, it might be a 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%.
|image credit to econompicdata.com|
Competition and competition !!
We are not good for that “game” and maybe we are good for some other task /jobs as I mentioned earlier. Also, the 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, the stock market should perform in accordance with economic activities and company’s earnings 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 mindset “ due to various reasons such as “ bias of overconfidence “ after a 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 phenomenon that one must have it in their portfolio as a form of diversification.
Below article from Financial Times gave us a very good clue on how the ETF may have impact on the 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 the US bourses, but some worry that ETFs are breeding systemic risks”
One of the arguments of 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 earnings 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 strikes and sleeps 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 the 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 ) “?
Quote Of The Day :
" You can beat the horse race, but you can't beat the races. So, It is with the 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
Agree with you on the part of Index ETFs pushing up the market. I chanced upon the same findings while reading up on asset management companies. Dunno when the bubble will pop.
Hi Unintelligent Nerd,Delete
Yah ! When more and more people go for ETF index investment,,, market may become extremely volatile once anything serious or " black swan " happen ... :-( This kind of systemrisk will be a disaster and huge disruption for market ,,,
I think it depends on how the ETF is structured. If is broad-based across industries of balanced loading mechanics and not dictated by few companies, we are just riding on business economic growths. The exchange or panel who decides the stock in the index may not be investor expert when they select the companies criteria.Delete
Hi Cory ,Delete
Yah ! you are right , it should be better to go for more broad-base ETF like Russell 3000 which track US 3000 largest stocks, but another problem arises would be " market cap " weighted issues .. :-(