The Problem with Investing
Some months back, I wrote about how luck can play a significant role in investing. But I felt that the article was not complete so here we are to discuss the problem with investing, and why most people are bad at investing.
In the world of poker, Phil Ivey is the most recognisable pro player. He is notorious for pulling off crazy bluffs and winning with very bad hands. He won 10 World Series of Poker in his career, with career winnings going into the millions! In 2017, he was even inducted into the Poker Hall of Fame.
However, in the World Series of Poker 2019, he was eliminated in the first round! The audience of WSOP were stunned, some articles even claimed that Ivey has “lost it”.
When he was interviewed after being eliminated, Ivey was asked “What went wrong?” He purportedly replied:
Nothing, I played according to what I thought was the best plan. It just didn’t work out.
Investing vs Poker
Investing, while not gambling, is very similar to poker in this way.
Sometimes, even when you did everything as planned, and carried out the best course of action, you could still lose money when investing.
That’s the problem with investing.
Why?
It is rather counter-intuitive.
Most things in life are related through direct cause and effect. For example, if you practice tennis for 10,000 hours (cause), you will most likely become a pro tennis player, and a newbie player like me will have almost zero chance of beating you (effect).
However in investing, even if I practiced for 10,000 hours and called myself a professional investor. There is still a good chance that a newbie investor can beat my returns in the next month or next year.
Why? Because there is a high element of luck. And this effect of luck is especially significant in the short term, as short term results are highly subjected to randomness.
So what?
This causes many people to misjudge their investing decision.
If they lose money in the short term, they will regard that investing decision as a bad one. If they make money in the short term, they will regard that investing decision as a good one.
This is also known as “Resulting“.
Judging the quality of the decision solely based on the result, and not the decision process.
This is detrimental to investors. While a good decision may result in bad outcome over the short term, it is definitely to be beneficial over the long run when the luck and randomness cancel out through time.
So how?
Next time when you make money in an investment, ask yourself:
"Was it a good plan initially?"
If yes, continue as planned.
If no, adjust the plan accordingly because nobody stays lucky forever.
