Note to self.
If you think about it, you don’t require a huge amount of data to teach machines to buy low and sell high but Humans will always find it difficult to practice.
If at all humans wants to buy low, they want it to be absolute low, that means by definition its something happening “once in the lifetime of a stock” that means “a very low probability event” that means “odds are against you in a big way” that means “its like winning a lottery” that means its nearly impossible to buy it at the absolute bottom.
but for machines, it would not take much to data to understand the absolute bottom points are a very low probability event (simple math) but the most rewarding point of purchase of all but it’s impossible of time it.
Even after understanding it Humans will find it extremely hard to buy something with the thought of it may become cheaper the very next day and it will become cheaper the next very day as the odds are against you in finding the bottom.
and that’s where the divide among the growth and value investors come in, Value investors are trying to find out businesses which are trading cheap with respect to its intrinsic value. you will most probably find them trading at their 52-weeks low and occasionally at their 52-week highs.
Whereas growth investors try to find businesses that are growing very fast and try to figure out if markets are not pricing in the even higher or longer growth into the future.
Like absolute lows, the absolute highs happen once in a lifetime of stock and it happens when markets realize all the optimism around it was just a house of cards or the world has changed.
Having chosen the path of being a value investor and courageous enough to buy a dollar bill trading at 50 cents,
- knowing markets will not agree with you over the short run.
- knowing markets will agree with you someday but you don’t know when.
- knowing price more likely to go down as odds are against you buying at the bottom and
- knowing you might be wrong.
If you happen to take a position knowing all of this, still many psychological forces will start working against you –
You will find it extremely hard not to do what everyone is doing – (to know why please see the below video)
Secondly, even after knowing you have odds against you buying the exact bottom, you going to have a hard time when it actually goes down.
Because of our nature of learning from feedback, When you are learning how to balance a bicycle, you learn every time you fall down.
You will run into trouble if you start seeking feedback from the markets about what you did is correct or not, because markets do crazy things. (Most likely it will go down after you bought something because you think the consensus is wrong)
How to avoid this bias in us from not seeking feedback from the markets?
Well, you can take some help from Buffett’s wisdom – “Markets are there to serve you not instruct you” but at the same time “knowing that you could be wrong” will keep you alive in the game.
So, when you take a contrarian position always have a plan –
- What will be the potential triggers for markets to realize its actually a dollar trading at 50 cents?
- What needs to happen for triggers to come into the play?
- What could go wrong?
- What am I missing, what markets know that I don’t know ( seek out others opinion)?
- Most importantly how much I’ll lose if I am wrong and markets are right – This will help you position size accurately.
In the end, all I can say is “It’s simple but it’s not easy”.
Download: Buffett and Munger Audio encyclopedia.
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Thanks, Dhruva Pandey Email : firstname.lastname@example.org Twitter : https://twitter.com/Dhruvapandey Twitter Handle : @Dhruvapandey