Bali Reflections Part 2: Surfing the Stock Market
In my previous post, I wrote about getting a coach. In addition, I also noticed how surfing has very uncanny characteristic, similar to investing. While it is my 12th year anniversary in the investing world, I am ashamed to have only discovered it during this trip to Bali.
The Market is Always Right, Respect the Market
After I have learned some skills from Rais (my surfing coach), I started to surf on my own. Looking at the waves, it was gentle and the water was shallow – the perfect conditions for a new surfer. After consulting with my coach, he agreed to let me venture out on my own.
Excited to be on my own, I pushed my surfboard with great enthusiasm. As I reached the optimal distance, I recalled and followed through every steps that Rais taught me. Learning from my past experience, I waited patiently and paddled back and fro to catch the ideal wave.
However, as I was hanging onto my surfboard, the waves started to turn rough. Each time I tried to get on the board, I was been hit by strong and tall waves. Waves after waves, I hunkered down with my surfboard.
Refusing to give up, I pushed deeper into the sea, hoping to catch a gentler wave. Believing that with my newfound skills and instructions from my coach, I MUST be able to surf on my own.
However, after countless waves, I was utterly exhausted. The waves were no longer gentle and I could no longer feel my fingers in the frigid waters. So I decided to give it one last try. I waited patiently for a good wave. Using my bit of strength to hop on the surfboard, I paddled like never before to catch the wave.
While this wave looks good from afar, it was beginning to look ominous, and within a few seconds, it was crashing down on me. As though, the sea was trying to send me a message, this wave was particular rough and my surfboard smacked right into my shoulder before I was sent tossing and turning in the waves.
As I come to my senses, I realised I was actually almost washed ashore. With my ego bruised just like my shoulder, I slowly paddled back to shore, dragging my surfboard along.
While this is a surfing experience, it has very similar characteristics as the stock market. While we are confident of our investment analysis, we must never forget that the Market is Always Right. No matter, how confident we may be, we cannot ignore the market sentiment.
Even if you are 100% certain that an investment thesis is correct, if the market disagree with you, you will not make any money.
Timing Matters
There is a saying,
“An investment that is poorly timed is indistinguishable from a bad investment”
For me, this lesson came true last year. There is a company called TESLA. Yes the famous electric car company by Elon Musk.
Based on the fundamentals and business outlook, I was very confident that this company would not make a good investment. In fact, I was so certain that I actually took a short position on this company. This means if the share price drops, I will profit from it. The financials of the company were atrocious. There was no way the company could survive. Or so I thought.
When I first noticed the company, the share price was $350. Feeling that it was super overvalued, I took a short position. Afterwhich, the price promptly fell to $200. Thinking that I got it right, I added to the position.
Soon after, there was “good news” about the company’s production numbers. Despite company financial deteriorating, the share price promptly climbed to over $400.
After having “my face is ripped off”, I took the pain and cut the losses.
The saying goes, “The market can stay irrational longer than you can stay solvent.”
This was exactly my situation with Tesla.
While I still believe the Tesla’s long term prospect is not bright, it does not matter anymore. Whether my bearish thesis on Tesla is wrong or mistimed, the reality is that the market was not agreeing with me and I paid the price for it.
Just like surfing, when I insisted on surfing the waves despite the poor conditions, I also paid the price with my bruised shoulder.
Today, Tesla’s share price is over $500. Imagine if I hang on to my own beliefs, how much would I have lost.
Can You Hold On?
No matter, how sure you are about your investment thesis , the market may disagree with you for prolong periods of time and destroy you if you do not have the holding power. While I may be right about Tesla in the future, I will not live to witness it if my losses become too big before that.
Therefore, when I invest, I will make sure I can outlast the market and be able to wait for my investment thesis to play out. But I know in the short term, I need to respect the market, just as I should respect the sea.
Rising Tide Floats All Boats
Everyone surfs well when the wave is good
– Rais
It does not take a genius to make money in 2019. The overall market went up by 31%. This means you could achieve 31% return by doing nothing but investing in the general market.
When I was doing consultations with my students, I realised almost everyone made money in 2019. Even those who did trades which were very risky and dangerous. Despite their wrong actions, they still made money.
This is also the time when I am most worried for my students. Especially those who started investing in 2019. No matter what they did, right or wrong, deliberate or impulsive, they would have seen positive returns. They might mistake their once-off good luck in 2019 as permanent superior skills.
The key to investing is not just the returns, but also the risk. How much risk did you take to achieve your returns? Is it worth it?
Just like Rais said,
"You can surf a 10 metre (wave) and survive to brag about it, but you are still an idiot."
Warren Buffett also mentioned something similar, “Only when the tide is gone, then we will know who is swimming naked”.
Don’t Underestimate the Element of Luck
Fortunately or unfortunately (depending on how you view it), investing involves an element of luck. A total newbie could luck out, invest in penny stock and make a lot of money. It does not mean he has the skill to do this repeatedly.
Similarly, a very thoughtful investor could be doing all the correct analysis and investment but fail to make money in the short term.
However, while there is an element of luck, luck does not last forever. Only probability do.
The newbie who invest in penny stock will eventually run out of luck and lose money in the long term. While the seasoned investor may not make money in the few months or a year, his analysis and consistent investment in good companies will eventually bring about good returns in the long run.
You could follow the correct set of rules and still lose money in the near term. Don’t lose sleep over it. Continue to do the correct things and the odds will show itself over the long run.
Be Careful of Once-off Success
Don’t mistake a year’s return as a definitive proof of success. It is only a datapoint, and one datapoint does not make a consistent trend. Go for strategies that is replicable and with repeated success.
If you need more reading on this, I highly recommend reading Annie Duke’s Thinking in Bets. She is the only woman to have won the World Series of Poker Tournament of Champions. She knows a thing or two about probabilistic thinking.
I may not be able to surf the roughest sea, but the sea will eventually provide great surfing opportunities. Be ready when that comes.
One more reflection post to go for Bali! Hang on for the trilogy.
