Life Goes On Without the Market
I am now officially back from vacation and managed to survive one week without internet, phone and computer. Sailing from one island to another without any access to daily price checks and market swings has its benefits.
Sure I missed whatever happened all last week, but taking a vacation from the market is also a good refresher in putting things into perspective – that businesses continue to exist and operate independent of the stock market.
My cruise destination was to the Bahamas and the surrounding islands. On each island that greeted us, the streets were hustling and bustling with tourists and local businesses doing business. These people had no idea what was going on in Europe and didn’t care. They are oblivious to the market seesawing 1-2% up and down each day.
So why do you care? Why do I care? We shouldn’t.
Stress Stress Stress
What the market gyrations does to you is that it causes stress, and stress puts you on high alert. This alertness and being on edge encourages short term focus.
You’ve experienced this yourself. You have a deadline approaching within a couple of hours and you’re furiously trying to complete a test,assignment or project. You become focused on the short term deadline. Nothing else.
Being Right Feels Good, but Being Right isn’t Important
It’s the same with investing. Once you get locked in trying to squeeze quick gains, while it feels good, the short term gains cause excessive portfolio turnover which results in transaction fees, market impact cost, unnecessary tax burdens and ultimately eats up your portfolio performance. In other words, it becomes a sub optimal strategy.
However, I admit that achieving consistent short term gains feels good. It feels good when you are right more times than wrong but how about listening to a guy much smarter than me.
“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”― Albert Einstein
In investing, the frequency of correctness does not matter, it is the magnitude of the correctness that matters.
This type of thinking requires discipline as you are required to constantly think in terms of probabilities and expected values. It is unnatural but leading thinkers and investors have all achieved outsized returns by following just this.
Wall Street makes money off short termism. Value investors lose money from it.
“one of the advantages of a fellow like Buffett is that he automatically thinks in terms of decision trees.” – Charlie Munger
“Take the probability of loss times the amount of possible loss from the probability of gain times the amount of possible gain. That is what we’re trying to do. It’s imperfect, but that’s what it’s all about.” – Warren Buffett