Consider this a lesson in psychology, there are two people with the following briefs given to you.
One a young candidate, passed out from the University of Chicago. This young researcher specialized in economics, studying under Milton Friedman, Tjalling Koopmans, Jacob Marschak, and Leonard savage.
While a student, he was invited to become a member of Cowell’s commission of research in economics. The young researcher went on to work for RAND Corporation and continued his passion and worked on research optimization techniques. The young researcher earned his doctorate from the University of Chicago.
The second candidate never attended college. 1934 at the age of 18, he worked as a runner on Wall Street. The only course which he took for Investments was at the New York Exchange Institute. In 1955, he went on to start his own investment firm.
Now, little more about candidate one, he won the Nobel Prize in economics in 1990, and in 1989, he won the Jon Von Neumann Theory Prize.
You are in the process of finding an investment advisor and you want to invest a significant amount of your hard-earned money, who would you give your money to? We don’t want to guess because we know the answer.
Let’s come to facts sourced from your money your brain book by Jason Zweig, the young researcher working for RAND Corporation was pondering on his retirement and how much to allocate to stocks and bonds, he being an expert in linear programming, a doctorate in economics, he knew very well he should have computed historical co-variances, done data crunching of asset classes and allocated money efficiently.
Instead, he visualized his grief, if the stock market went up and he wasn’t in it and if it went down, and he was completely in it. The young researcher said my whole intention was to minimize my future regret and he went on to split his money between Stocks and Bonds equally.
The researcher was none other than Harry Markowitz, several years earlier he had written an article called “Portfolio Selection“ for the journal of finance, exactly showing how to calculate the trade-off between risk and return. In 1990 he shared the Nobel in economics for largely the mathematical breakthrough and he was totally incapable of applying this to his own portfolio.
The second human being named is Walter Schloss and he worked for Graham and Newman’s hedge fund and attended the only course taught by Benjamin Graham, he compounded the money for his investors at 15.3% against the S&P 500 at 10%.
Warren Buffet had this to say about him
“He knows how to identify securities that sell at considerably less than their value to a private owner: And that’s all he does… He owns many more stocks than I do and is far less interested in the underlying nature of the business; I don’t seem to have very much influence on Walter. That is one of his strengths; no one has much influence on him.”
Warren even said this about Walter
“My admiration for Walter, it should be noted, is not based on hindsight. A full fifty years ago, Walter was my sole recommendation to a St. Louis family who wanted an honest and able investment manager.”
Walter also went on to generate this phenomenal returns when the whole world was talking about Efficient Market Theory (EMT) EMT theory states that all the information in the stock price are reflected and no one will be able to beat the market at large. Walter contradicted this dogma. The EMT theory is largely credited to Eugene Fama a professor at the University of Chicago, and he also won Nobel Prize in economics in 2013.
In short, what does all this communicate, investing is largely a cognitive process, rather than a numerical approach? What happens inside your mind determines the outcome, money is psychological in nature, and your temperament as an investor determines how far you will travel.
The majority of human beings assume they know a lot about stock markets or investments, which is the most blatant lie which we tell ourselves. Especially, if you want to test your waters of cognition in the Stock Market, this is the most expensive place to test it.
In terms of fame and atmosphere, there is no better place than Wall Street to walk along the bustling streets is to undertake a journey fascinating in its own right. It is a trip through markets and temples of the wealth of a different era and yet proud also of their continued existence which has showered itself on human beings.
The other memory is equally stark but not uplifting, this is also a place where human being’s cognition gets exposed and weakness revealed, which is so succinct and correct. No man can escape his own honesty especially when financial ruins stay very long in the mind even though time passes on.
The aspect of resources in human life is of paramount importance, but the accumulation of money in human life is a journey and not a destination, so long as you keep working and avoids the traps of the emotional valley you will retain the excellence that lies within. Financial freedom is a chapter of human life which always seeks a respectful and accommodating host.
The human emotionally valley if managed well, can uplift your fortune but this is also the most critical part where we as humans are wired differently, think of a stock which you bought when it was at roughly $2 billion market cap and you invested 20% of your savings in it, the stock zoomed to $30 billion market Cap, your emotions will play havoc, and two things are possible one is your exit, and second is you stay, the majority will exit.
Now assume you decide to stay and 2001 Dotcom bubble bursts, the stock is back to earth at the same market cap of $2 Billion, Angry? Damn Angry. The majority will sell fearing that now at least i am getting back my money, eventually, it will go down more. The stock climbs and moves to over $1 trillion in market cap, the stock which we are talking about is Amazon. What played havoc? EMOTIONS.
We as humans get too impressed by the resume of the financial advisors and attach too much value only on badges of CFA, CFP, Ph.D., MBA. Selecting an advisor with the qualification will render you with someone who is on paper competent, but you may not click with him or her, because ultimately he or she needs to manage your emotion when your busting 50% or even 80%. He needs to help you manage your extreme emotion apart from being of unquestionable integrity.
The stock market and the game of investing if seen from the eyes of human beings present itself as beauty sitting with the beast on the other end, success and failure sitting with each other, luck and skill across the table, and emotions of hope marrying the ambitions of the human race.
In all this what matters the most is EMOTIONS, because, beyond that, all else is the only illusion of control the real control is only EMOTIONS what you can control as a human being, hence someone who is a master of this can multiply your money unless you have mastered it yourself.
By Value Investors – Tanvi Mehta, Ramaswamy Ranganathan, and Sudaarshan R