John Meriwether Genius’s Limits

We always have a dilemma to our mind that we need to be intelligent to become a wise investor. But does it a reality? Do we really require to be an immense intelligence for the decision making to investing field? We have an example of a few highly intelligent person who has intelligence but lack of the real skill which needed to become a wise investor. I am going to explain it to the current article. Isaac Newton also cannot be saved from emotional biases such as greed and fear, though he has a brilliant mind.

We should understand that a higher IQ, intelligence does not protect us from the emotional biases. We need to be a master of emotional biases for earning money through investment. If we do not have mastery on our own emotion then we incur losses into the investment.

Few emotional biases –BIBLIOPHILE: THE MOST IMPORTANT THING BY HOWARD MARKS “COMBATING NEGATIVE INFLUENCES”

We have seen that the winner of the Nobel prize in economic of Long Term Capital Management (LTCM) also failed terrifically. They count as a genius mind during an era. During a tough time, their leverage position reaches the 100:1 which has killed the entire business.

No model is perfect which can capture behavioral aspects of human. But we keep focusing on the same that our constructed model is going to capture all the madness and which make us mad. LTCM failure teaches us that we should not be overconfident to our model, we should focus on the risk management and we cannot capture the behavioral aspects of human. So that we should have control on own behavioral aspects that can help us for a longer period of time. Our intelligence should not be getting converted to the overconfidence, and if getting converted then it will definitely going to harmful for our investment career. Rather if we have a control on to our emotion then it will be going to help to our investment career though we have a little intelligence.

Read for more detail: Big Mistakes: The Best Investors and Their Worst Investments by Michael Batnick

SIMPLE IS BETTER – ISSUE -15 – MERGER

We have seen about the demerger into the last issue of the series. Now, I am going to explain similarly to the merger.

Merger-

“A merger is an agreement that unites two existing companies into one new company. Mergers and acquisitions are commonly done to expand a company’s reach, expand into new segments, or gain market share. All of these are done to please shareholders and create value.” – Investopedia

For Detail Issue, Click here —> SIMPLE IS BETTER – ISSUE -15 – MERGER

Mark Twain Don’t Get Attached

When we have an expectation from anything then it will start creating an attachment towards it. Such attachment can affect us while our expectation does not meet in real. Attachment ties us with particular things and we cannot able to go away from those particular things. So that we should be reasonably expected from our investment and never ever get attached to any of the investment made by us. When our assumptions got wrong then we should exit from the particular investment. But due to ego, attachment towards an investment, we keep on holding a wrong investment also. Many a time, Initial small losses can be transformed to the huge losses due to our attachment towards our investment.

Many a time, we all have experienced our thought – “I will exit my investment when it comes to a break-even” when we are in loss, we keep on thinking that how much more it will go down; let me add more money to the same idea. Such thoughts can kill us without informing us.

We need to focus on capital protection because –

Percentage Fall	Percentage to make up for the capital to 100%
10%	11%
25%	33%
40%	67%
50%	100%
60%	150%
80%	400%
90%	900%
95%	1900%

If we fall by 10% then we need to rise by 11% to reach a break-even point. And similarly, 100% require when we fall by 50%.

When we come to know that we are wrong then we should exit from a particular investment rather put more money to it. Many of us make such mistakes where we keep on averaging our losing ideas. We should have a stringent process where we should have a clear exit criterion also so that we should not be affected by emotion. Having a clear process is to work as a blessing for us during the worst time of our investment journey.

Mr. Twain has declined to make an investment which was suggested by Mr. Bell. Mr. Twain considers himself as well informed and well experience but in reality, he has an experience of failure to the investment field. We have to analyze ourselves whether we are really well experienced or not. And we only can perform such own analysis when we do not have an arrogance, overconfidence and ignorant into our mind.

I have seen many investors/analyst who has made plenty of mistakes and wrong investment decision but they consider themselves as a well experienced and more knowledgeable investor compare to others. They are not ready to accept that they have a history of failed investment, they do not realize it and learn from it. They keep on repeating those mistakes again and again. We should come out of from the behavior and work on what we know and what we do not know our strength and weaknesses, in-short self-analysis, knowing ourselves better than others. When we come to know about our strength and weaknesses then we can have a chance to perform to overcome our weaknesses and stronger our strength.

We need to identify that we are wrong and for that, we have to be self-analytic. As we come to know that we are wrong then we must have to admit it and work on come out of it. If we found that our investment was wrong then we should book it without looking to loss or profit. I know it is difficult to do. I also got attached to one of the newspaper business at the initial days of my career and it took one year to admit my mistake and booked losses. But that investment has taught me that when you realized regarding the wrong decision than first go and close the position. Otherwise, it will stop us from focusing on the right decision also.

This is the best way to manage our risk. I can give one example of the same. If I have a one investment idea where I want to make an investment and I am ready to take a loss of Rs.30 per unit of investment. Now, I count 1% of my portfolio (Let’s say as an example, it’s an Rs.1000000) so 1% of Rs.10,00,000 I.e. Rs.10,000. So that I should buy 333 units of particular investment (Rs.10,000 / Rs.30 loss I am ready to take). Here, if I go wrong then also I have taken a risk of 1% on my entire portfolio which helps me to stand for a longer period of time. Percentage of risk is different by person to person and probability of winning and losing from the particular odds.

Read for more detail: Big Mistakes: The Best Investors and Their Worst Investments by Michael Batnick

Jesse Livermore Manage Your Risk

We cannot make a rule of thumb for the investing world because there are lots of parameters which can affect the price of a business. If today some parameters driving prices of businesses then tomorrow there will be some another parameter which drives the prices of businesses.

We need to focus on to be on the right side. If we cannot short the overvalued businesses then also we can book the position of overvalued businesses, we hold into our portfolio.

When Mr. Livermore was learning about the market, he kept records of his trades to the journal. Keeps journal of our trades helps us to overcome many emotional biases and help us to stick with our predecided process. I am keeping a journal for my investment studies and decision since the last 2+ years which has helped me to build strong decisions.

In May 1901, Mr. Livermore has experienced first larger loss as a professional speculator. He put an order of short sale of US Steel and Santa Fe Railroad at $100 and $80 respectively before the market got opened. He had also taken leverage for this trade. But his US steel and Santa got executed at $85 and $65 respectively, it is a price where he intended to cover his position.

When we are engaged in the trading or into the investment, we need to spend the time to learn. We have to train ourselves as we get training in any other field. We cannot able to survive and win without getting thorough education, knowledge, experience, and temperament. If we are making an investment without spending time on above points then we have depends on the luck which we do not know that favor us or not. Rather being dependent on luck, we should work for developing our skills and temperament. If luck wants to favor us then it will add additional advantages to us.

He has a conviction on his position with the proper logic and he did not change his conviction into the worst period which has made him a rich man.

Many times, we get influenced by the other person or information overload (noise) which affect our decision. We should work on evolving our process but should not make a decision by just getting influenced by others. We should increase our position to the odds which are into our favors, not to the odds which are not into our favors. While we keep on accumulating our winners then we can have a huge probability to win. And when we keep on accumulating our losers then we can have a huge probability to lose.

We need to do our homework before making an investment, we cannot bet our money on the decision of others. If we see the past track record of so-called professionals then we can realize the importance of own homework.

Mr. Livermore had been cheated by people many times which also teach us that we should not trust others easily. We should work on what we know, not what others want us to do. If someone knows much then lets them take benefits. Because staying on the pitch is much important rather than getting wiped out. I have already implemented such learning into my investing career but still struggling with my personal life.

After the few snake and ladder game, Mr. Livermore has started to short from the year 1927 and the great recession of the year 1929 has created fortune of him.

The year 1932 was set for the bottom of Dow Jones but Mr. Livermore was on the wrong side. He had made the biggest mistake ever, he covers his shorts and goes for long on the top of the Dow Jones. After this failure, he declared bankruptcy for the second time.

One of the biggest lesson from Mr. Livermore –

We also need to prepare a list of “Don’ts” and which can be through our own experience or through the experience of others, such as learning from the mistakes of others.

He was also failed in his last attempts in the year 1939 and after that, he took his own life.

As Mr. Livermore quoted that there are a huge amount of mistakes available to the investing filed. We cannot avoid all of them but we can definitely avoid repeating those mistakes again and again.

The main lesson from the mistake of Mr. Livermore is to manage risk. He has not properly managed risk and he blows up. Investing itself as an uncertain and we cannot control our return, we cannot control uncertainty but we only can manage risk which is only into our hand. We need to construct our investment process in a way which can help us to manage risk and avoiding a few of the mistakes which can increase the probability of our winning. We need to work on the checklist, process, do’s and don’ts etc. I have work on the same and still making my checklist and process stronger which has to help me well.

Read for more detail: Big Mistakes: The Best Investors and Their Worst Investments by Michael Batnick