What does it mean to invest intelligently?
In life, I often find that it’s a lot easier by starting out trying to define what something is by showing examples of what it is not.
1. It is not a risk seeking behavior. A risk seeking behavior is one that actively seeks risk reward situations in which the risk is significantly greater than the reward. This brings us to the next question: what is risk?
a. Risk is not volatility in stock price. Risk is not beta. Academics that get caught up writing algebraic formulas designed to most efficiently allocate capital might say that it is. For example, a triple or nothing strategy with the odds of 50:50 may or may not be seen as a risky behavior given the quantity of plays you’re allowed and the capital required to play.
b. Risk is the depreciation in stock price and the permanent loss of capital.
2. It is not successful without a logical premise. In all statistics courses, there is an emphasis on the fact that there needs to be reasoning behind the variables and whether or not they impact the outcome. For example, the relationship between crime and ice cream sales are a correlation due to higher crime rates in the summer and not having anything to do with ice cream triggering criminal behavior.
a. Is there a solar cycle/stock market cycle correlation or causation?
b. Can you predict the stock market using terra cards?
c. Does previous price performance indicate future price performance (technical analysis)?
d. Can you beat the market?
3. Positive and Negative feedback
a. The most successful investment strategies are not always successful for short durations of time. If they were, then everyone would all-aboard and those investments would begin to receive the average market return.
4. Research and effort doesn’t always pay off.
a. In high school and college, basically the land of academia, a lot of my friends put in a lot of “time and effort” but were unable to push above average grades. Since time and effort are subjective and some achievements require more effort and time than others, it seems like a lot of people who don’t receive the positive feedback of being better than average begin settling.
b. I’ve worked a variety of jobs. I’ve worked those that require long hours and lots of effort as well as after school jobs that require little time and occasional effort. I guarantee you that when I worked my first construction job and dug a 1x1x1 meter hole and filled it in, it required time and effort — but it didn’t pay off.
