Talent, luck and thrill of the chase make investing in stocks a game
• It is a myth that emotions are at the root of all problems in the market, says psychologist
People who claim to know jackrabbits will tell you they are primarily motivated by fear, stupidity and craziness. But I have spent enough time in jackrabbit country to know that most of them lead pretty dull lives; they are bored with their daily routines: eat, f**k, sleep, hop around a bush now and then. No wonder some of them drift over the line into cheap thrills once in a while; there has to be a powerful adrenalin rush in crouching by the side of a road, waiting for the next set of headlights to come along, then streaking out of the bushes with split-second timing and making it across to the other side just inches in front of the speeding front tyres.” — Hunter S Thompson.
Let’s face it, passive investing is boring. It makes a lot of sense — it’s low cost, it saves you the bother of trying to beat the markets — but what if that’s not all you’re after?
“I don’t care whether they’re big investors or little investors,” wrote Adam Smith in The Money Game. “If they make a little money, they’re happy, if they lose a little money, they’re not too unhappy. What they want to do is call you up. They want to say, ‘How’s my stock? Is it up? Is it down? What about the earnings? What about that merger? What’s going on?’ And they want to do this every day, they want a friend, they want someone on the telephone, they want to be part of what’s going on, and if you gave them a choice between making money, guaranteed, or staying in the game, and if you put it in some face-saving form, every last one of them would pick staying in the game. It doesn’t make sense, or the kind of sense you expect, but it makes a nutty kind of sense if you see it for the way it is.”
“Investing should be more like watching paint dry or watching grass grow; if you want excitement take $800 and go to Las Vegas,” says Paul Samuelson. It’s poor advice though. You’re better off “playing” the markets than going to Vegas. For a start, the markets don’t care about you.
According to Larry Hite they don’t care about anything.
“They don’t care whether you leave or stay ... part of the problem, if you’re going to ‘beat the house’ is casinos won’t like you. They’ll tell you in rather strong ways to take your business elsewhere. Well, the beautiful thing about the markets is they don’t like you, they don’t dislike you, they just don’t care. They are there every day.
“You want to play, you can play. You don’t want to play, don’t play. And you can choose. There is no penalty … you can be there and wait. You can go home and wait. It doesn’t matter. And that’s really a terrific thing.”
Time makes a difference, as Peter Bernstein explains: “Time is the dominant factor in gambling. It transforms risk, the nature of risk is shaped by the time horizon. Time matters most when decisions are irreversible. If we buy a share on the stock market today we can always sell it tomorrow. But once the croupier at the roulette table cries ‘no more bets!’ there is no going back.”
Also, the odds of winning are better in the markets — or, at least, they should be. Nicholas Darvas, who wrote the book How I Made $2m in the Market, saw it like this: “Expect to be wrong about half the time. Your goal is to lose as little as possible when you are … I have no ego in the stock market. If I make a mistake I admit it immediately and get out fast. If you could play roulette with the assurance that whenever you bet $100 you could get out for $98 if you lost your bet, wouldn’t you call that good odds?”
Trading psychologist Brett Steenbarger says the notion that emotions (presumably, that includes excitement) are at the root of all problems in the market is a myth. “Yes, emotions can interfere with concentration and performance, but that doesn’t mean they are a primary cause. No amount of emotional selfcontrol can turn a person into a successful trader. Nor is a lack of discipline the main cause of trading failure.… In truth, the main cause of trading failure is a lack of an objective edge in the marketplace.”
Basically, there’s no reason why investors with a passion for the game, who acknowledge the odds of succeeding, should avoid “playing” it.
In fact they may do best by treating it more like a trip to the casino, as opposed to the bank. For a start, by bringing only the money they can afford to lose.
The advice of Jim Rogers is to “acknowledge the complexity of the world and resist the impression that you easily understand it. Ultimately, [investing] is really an art requiring a certain talent and the presence of a mysterious force called luck.”
Truth is, stock market investing is nothing but a game, no matter how seriously you want to treat it. No one really knows what a corporation is worth, but we agree on a price and pretend it makes sense. Very few people ever question how it all works behind the scenes. The amount of faith we all put into the markets, businesses and institutions is nonsensical when you think about it.
We all have a system, and some are terribly clever – in the sense of being developed by PhDs and running on supercomputers — but that doesn’t stop Amazon adding billions to its market cap or Exxon Mobil shedding billions in the space of a few months.
Do these businesses really change that much in such a short time? It seems unlikely. What’s more likely to have changed is investors’ expectations, opinions, time horizons and strategies — things that can shift in a very short space of time; things that are difficult to predict and make it almost impossible to peg the price of anything with any certainty.
So, you’re essentially left with two alternatives: the one is to assume that you can’t possibly make any sense of it all, in which case why bother trying? The other option — if you think you have the talent to make the right choices, or the art to recognise a story that will catch the fancy of others, and some luck – is to try to take advantage of the chaos. And, as difficult as that might be, it’s got to be the more exciting of the two.
YOU WANT TO PLAY, YOU CAN PLAY. YOU DON’T WANT TO PLAY, DON’T PLAY. THERE IS NO PENALTY. YOU CAN GO HOME ...