The Notebook of Wisdom: The second impression of my book – The Notebook of Drawing Wisdom – already available. Click here to reserve your copy. Email me at [email protected] if you want to place bulk orders.
At the hospital, relatives gathered in the waiting room, where a family member was very ill. The doctor came in looking tired and bored.
“I’m afraid I’m the bearer of bad news,” he said as he polled worried faces. “The only hope left for his loved one right now is a brain transplant.”
“Oh, how risky the procedure is?” asked a relative.
“It’s an experimental procedure, very risky,” the doctor replied, “but it’s the only hope for your loved one. The insurance will cover the procedure, but you’ll have to pay the BRAIN.”
Family members sat in silence as they absorbed the news. After a while, someone asked, “How much will a brain cost?”
The doctor quickly replied, “Rs 20 lac for a male brain, Rs 5 lac for a female brain.”
The moment became uncomfortable. Some of the men had to “try” not to smile, avoiding eye contact with the women.
A man unable to control his curiosity finally burst out the question everyone wanted to ask, “Why is the male brain so much more than a female brain?”
The doctor smiled at the child’s innocence and explained to the whole group, “It’s just a standard pricing procedure. We have to value women’s brains much lower because they have been used ”.
Well, if you’re a man who reads this, don’t feel bad about what you just read. This is the reality, and especially when investing in the stock market, and especially when trying to make decisions in the middle of a bullish market.
We often fail to use our brains, this invaluable resource that is given for free to every human being at birth … and perhaps because it is given to us for free.
Earl Nightingale wrote in his book The strangest secret…
It is as if the Creator said, “Here you are. You now have a copy of the creative agent who produced Shakespeare’s plays, surpassed San Francisco Bay, and harnessed the energy and fire of the sun. I kept it for the rest of my life. Do whatever you want. “
And we do with our brains what we will do, again, especially when we are investors in the stock market and especially when we try to make decisions in the middle of a bullish market after earning large doses of money effortlessly. Like Newton, he earned and then lost tons of money and his reputation by acting as an investor and then speculator in the South Sea Company shares in the 1720s.
There is nothing more dangerous to rational behavior than making a lot of money in a short period of time.
Warren Buffett wrote in his 2000 letter to shareholders:
The line between investment and speculation, which is never clear and blurred, is further blurred when most market participants have recently enjoyed triumphs. Nothing silences rationality like large doses of effortless money. After such a crazy experience, normally sensitive people engage in behavior similar to Cinderella on the ball. They know that lasting the holidays, that is, continuing to speculate with companies that have gigantic valuations in relation to the cash they will likely generate in the future, will end up causing pumpkins and mice. But, nevertheless, they hate to miss even a minute of what is a Helluva party. Therefore, all dizzying participants are scheduled to leave a few seconds before midnight. But there is a problem: they dance in a room where the clocks have no hands.
Before the music stop
In late 1999 to early 2000, near the top of the knit bubble like, the legendary George Soros and his hedge fund team were working on how to prepare for the inevitable sale of technology stocks.
Soros ’high-profile technology fund manager was Stanley Druckenmiller, one of the best-performing hedge fund managers of all time, so far, and he was busy warning his team that the sale could be imminent and brutal. .
As markets increased further in March 2000, Druckenmiller was quoted as saying, “I don’t like this market. I think we should probably lighten up.” Soros himself regularly warned his team that technological actions were a bubble that would burst.
However, when the sale finally began in mid-March 2000, Soros Fund Management was not prepared for this. Their funds were still laden with high-tech and biotech stocks. In just five days, starting March 15, Soros Island’s Quantum Fund turned what had been a 2% year-on-year gain into an 11% loss. At the end of April, the Quantum Fund fell 22% since the beginning of the year and the smaller Quota Fund fell 32%.
After Soros said in a conference in April 2000: “Maybe I don’t understand the market. Maybe the music has stopped, but people keep dancing. ”
That same month, in another conference, Druckenmiller confessed: “It would have been nice to come out on top, like Michael Jordan. But I overcame my hand.
This is how Druckenmiller summed up his 2000 experience in an interview late last year (November 2013) –
I bought the top tech market in March 2000 [after quickly making money in the same space in mid-late 1999] in an emotional fit I had because I couldn’t stand the fact that I went up so much and broke all the rules I learned in 25 years.
I bought the tech market very well in mid-1999 and sold it all in January and it was very pretty; and he had two internal managers who earned about 5% a day and couldn’t stand it. And I put billions of dollars into a few hours. And, boy, they killed me the next two months.
Howard Marks of Oaktree Capital, wrote this in his seminal book The Most Important Thing –
In bullish markets, usually when things have been going well for a while, people often say, “Risk is my friend.” The more risk I take, the higher my return. I would like more risk, please.
The truth is that risk tolerance is antithetical to successful investing. When people are not afraid of risk, they will accept the risk without being compensated for doing so … and the risk compensation will disappear. But only when investors are risk-averse enough will markets offer adequate risk premiums. When concern is scarce, risky borrowers and dubious systems will have easy access to capital and the financial system will become precarious. Excess money will pursue the risky and the new, increasing asset prices and reducing possible returns and security.
Risk, which Marks and Buffett have often defined as losing significant amounts of money and permanently, often moves in the same direction as valuations.
In other words, the risk increases / decreases as the valuations increase / decrease. At the same time, high valuations imply weak prospective returns, while depressed valuations imply strong prospective returns. Consequently, both Marks and Buffett suggest that the risk is lower precisely when the potential returns are higher, and the risk is higher when the potential returns are the lowest.
Economist and investment strategist Peter Bernstein said:
The riskiest moment is when you are right.
In one of his 2015 posts, Jason Zweig wrote this:
For much of life, doing things right over and over again is a sign of skill; Expert musicians, for example, rarely get a wrong note. And the skill of a professional musician does not make it difficult for others to be equally experts.
But in financial markets, where there are so many highly skilled investors, their shares cancel each other out as they quickly offer bargain prices, paradoxically making luck the main factor that distinguishes one investor from others.
And a streak of reason can make anyone forget the importance of luck in determining the outcome.
I see many rights around me, including people I thought were sensible and humane enough to make mistakes. I see a lot of people (including yours really) have been making large doses of money effortlessly in recent times. And I see a lot of people often move into situations where they don’t want to waste time and effort using their brains to make smart, sensible investment decisions … because all they’re looking at are happy, effortless results.
It’s best to use your brain, mostly because you’ve used it to get the savings you now want to invest, and especially now, when we go through quick, frequent episodes of irrationality.
PD A British neurophysicist has said that if we were to electronically approximate an average human brain, it would cost three billion dollars; that means $ 3,000,000,000,000,000,000,000; and is 37,000 times the world GDP. You and I are lucky to have one for free.
Perhaps only when we remember this number that applies to an average human brain can we sometimes try to use it more rationally, especially by investing our savings during a bullish market and having earned large doses of money without it. effort.
Sometimes we include links to online retail stores. If you click on one and make a purchase we may receive a small commission.