Everything has its pros and cons. Our task is to amplify the benefits of the pros, while mitigating the drawbacks of the cons. But it is easier said than done.
The age of computers and information technology is no different. The amount and the speed at which the data can be collected and shared have gone up exponentially over the last few decades. But so has the need to separate noise from information, which is easier said than done, especially, given the fact that our ability to process information is limited.
And as Warren Buffett observed, “when a good management tackles a business with bad economics, it is the bad economics of the business which prevails,” when human beings with their limited processing ability tackle the vast amount of data, it results in confusion in making sense out of the data that prevails.
However, confusion might be an impediment to reach a rational decision but it is still possible to mistake noise for information, which provides an illusion of control, leading to irrational decisions. It relates with the following observation made by Charlie Munger, “to a man with a hammer, everything looks like a nail.”
Misconception: Stock Market = Gambling
Stock market is considered as a playground for creating massive windfalls of wealth over a short term by many. And in a society, where wealth is considered as a means to achieve happiness, it is not surprising that many a people hang onto this belief lest they miss out on the benefits that wealth is expected to provide.
The eagerness to foresee the short term trend of the market and come out victorious, which is so deeply ingrained in the mindset of investor/speculator community at large, is a by-product of the misconceptions discussed above.
As Benjamin Franklin observed, “So convenient a thing it is to be human, for he can make a reason for anything he sets himself upon.” In effect, faith becomes a short cut to knowledge. Ignoring dis-confirming evidence and seeking confirmatory evidence, which is a basic human tendency, makes it possible and sustainable in spite of its inherent weakness.
Catch Yourself Sleeping…
…and you are no more asleep. The same is the case with many of our mistakes/biases.
Just as ups and downs are part and parcel in life, it is for businesses and stock markets as well. The magnitude and frequency of the economic cycle, its ups and downs, are not easy to predict because reflexivity plays a huge part in how things shape up as things proceed.
Afraid of catching the falling knife?
It is well known fact that market discounts future because the value resides in future earnings that are expected from the businesses and the present volatility indicates the immense uncertainty about the future and, rightly so, given the spill over effects seen across various industries and nations.
However, the volatility/uncertainty also provides one with an opportunity to benefit greatly by betting against the expectations built in the stock prices. What Benjamin Franklin observed for marriages – that it always pays to marry somebody with low expectations – also applies for stocks.
This is no rocket science. Moreover, if everybody thinks this way, the proposition loses its value. But the good news is that the fixation on near term outlook, which continues to be bleak, offers investors with long term outlook an opportunity to benefit immensely.
For all those who are simply afraid of catching a falling knife, here is a quote by Mr. Buffett “Occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics is equally unpredictable, both as to duration and degree. Therefore we never try to anticipate the arrival or departure of either. We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful”