I recently read a post of Morgan Housel where he commented that it is easy to lump everyone into a category called “investors” and view them as playing on the same field called “markets.” But investors play wildly different games.
Let’s draw an analogy from sports.
Different sports require different skills. A sprinter will focus on developing fast-twitch muscle fibers using plyometric exercises and strength training. The focus is on improving speed, strength and power. Marathoners focus on developing cardiorespiratory fitness, muscular endurance and stamina.
Within a sport, the player may require a change in training to develop specific skills. If a tennis player wanted to develop a forehand on the run, she could isolate this movement by being hand-fed one challenging wide ball at a time - which would require her to move explosively towards it and attempt to hit it with substantial power. Once power and explosiveness are consolidated to a higher degree, then the player can focus on accuracy.
Years ago, in Money Management, Edward Smith employed an analogy of cyclists to drive home his point of building a winning investing strategy.
Sprinters have perfect timing and immense power, and can switch on a burst of acceleration over a short distance. However, the sprinter’s attribute of pure power entailing plenty of fast-twitch muscle, becomes a liability in the mountains.
For mountain climbers it is the power-to-weight ratio. They invariably have a bird-like frame, are mentally very tough and have immense stamina. Unfortunately, mountain climbers can’t sprint with the best.
Time trial specialists have plenty of power coupled with a highly efficient cardiovascular system, allowing them to maintain high power output for long periods of time. But they must grit their teeth to hang on in the mountains. Long stages on rough roads tend to wear down the lighter riders who are better at mountain climbs, but suit time-trialists who are both strong and fit.
In a nutshell, no one cyclist is good at all geographical conditions. Similarly, what is good for one investor, may not be good for another.
Investing is not a homogeneous game. There’s idiosyncratic game-playing and strategy behind every winner.
What you want your money to do for you is very different from what I want my money to do for me.
Our level of income and sources may differ. For the sake of argument, let’s say they do not. Then other factors change the dynamic – the number of dependents, liabilities, other income earners in the family, and age. Along come the non-numerical issues such as risk capability, and skills which could ensure a higher income. There are behavioural aspects – your relationship with money, and your ability to withstand volatility.
So even if two people are of the same age and earn the same income, it is not the same field. Hence, investments suited to you, may be a disaster for me.
Which brings us to the next point.
Decision making is never one size fits all.
In The Reasonable Formation of Unreasonable Things, the writer threw an interesting question to the reader: How much should you have paid for Yahoo! stock in 1999?
Why Yahoo!?
It was an iconic brand that ruled the internet in its early days and was the most popular starting point for web users. On April 12, 1996, Yahoo! traded publicly for the first time. At the end of its first day of trading, its stock closed at a (split-adjusted) price of $1.38. On January 3, 2000, it closed at an all-time high of $118.75. Between these two dates, Yahoo!’s stock price increased by 8,505%. That is less than 4 years!!!
How much should you have paid for Yahoo! stock in 1999? The answer depends on your investing philosophy.
- 30-year time horizon: the smart price would require a sober analysis of Yahoo!’s discounted cash flows over the subsequent 30-years.
- 10-year time horizon: analysis about the industry’s potential over the next decade and whether management could execute on its vision.
- 1-year time horizon: analysis of current product sales cycles and whether we’ll have a bear market.
- Day trader: who cares? You’re just trying to squeeze a few basis points out of whatever happens between now and lunchtime, which can be accomplished at any price. A day trader could accomplish what he needed whether Yahoo! was at $5 a share or $500 a share, as long as it moved in the right direction.
- If you were just running with the crowd and convinced that the stock will keep scaling new highs, you would not have cared anyway.
Replace this with any stock of your preference, but the lessons are the same. Prices that look ridiculous for one person make sense to another. Because each one is paying attention to different factors and parameters, and want something different from the stock.
This is important:
#1. Don’t get swayed by the calls of others. A long-term investor should never take his cues from a short-term investor or a trader.
#2. There is no one rational price to a stock.
#3. Understand and act upon your own time horizon. Other people’s goals, motives and time horizons are not your business.
#4. You decide the rules of your game, and stick to it.
#5. Don’t be persuaded by the actions of other people; what drives them and what they want could be radically different from what you seek.
#6. When it comes to investing, there is a rarely a clear-cut right or wrong. It is just different perspectives.