We cannot beat the market. No one does. Those who thinks they can have yet to come out from of world of investment fallacy. For retail investors, the handicap we all have is that we lack the tools, time and sophisticated research to outperform the full-time pros. But perhaps the worst of all is that we have to somehow suppress the innate human trait – psychological weakness in greed and fear. These are our natural enemies of investment.
Enemy#3: Mr Market
Benjamin Graham described Mr. Market as an opponent who will buy your shares or offer you some stocks. Mr. Market can be emotional at time and behave irrationally depending on his mood.
Enemy#2: Professional fund managers
Even the full time professionals find it difficult to beat Mr. Market. Retail investors who are generally classified as amateur with limited funds, time and knowledge will be hard pressed to face the professionals in the market. They say – if you cannot beat them, join them! So play their game and follow the tide. Follow the tide is NOT the same as follow the herd, as the former refers to
“riding the waves” after doing own due diligence instead of opposing it while the latter means investing based solely on hearsay without doing own research.
Another option is play in a different field where the big boys are not playing (eg mid-cap stocks ignored by big funds due to lack of liquidity).
Enemy#1: Our own self
As for final opponent, we are our biggest enemy. The hardest one to beat, although they may appear cute like Ms Feng Yi or Mr Fu Wa. We must discover, recognize and embrace our individual weaknesses. Then learn to overcome our limitations. For example:
- If you can’t take losses, then don’t go for trading stocks.
- If you do not have time, leave your portfolio to professionals.
- If you like excitement from trading, learn how to cut loss.
Some known behavioral weaknesses include, but not limited to:
- Peer Pressure
- Herd Mentality
- Gambler’s fallacy – the mistaken belief that if something happens more frequently than normal during some period, then it will happen less frequently in the future, and vice-versa
- Loss aversion – best describing folks who only find comfort in locking their funds into FD
- Recency bias – where an investor evaluates their portfolio performance based on recent results or on their perspective of recent results and make incorrect conclusions that ultimately lead to incorrect decisions about how the stock market behaves.
- Regret aversion – investors avoid taking decisive actions because they fear that, in hindsight, whatever course they select will prove less than optimal
Having these 3 natural enemies in investment is like facing against 3 bears, now matter how bullish you feel.
Investing is like being in business. Investing is putting your money in businesses. To quote what Tan Sri Robert Kuok once said, “Every business has its own risks so if you are afraid, you just leave. It won’t be a problem if there is a better opportunity as you can always grab the second one.
But if you are not brave enough, you will always be poor.”
*Adapted from PCM’s From the Desk of CIO memo