Investment Lessons - Paradoxes of successful investing

Speculation can be fun. But investing is not supposed to be fun. Wise investors saw it for what it is: a temporary price adjustment based on non-fundamental factors. Some people like to keep a small portion of their money in cash for exactly this kind of speculative event.

Speculation is fun. It's why a lot of people love investing, and if you speculate with only money you can afford to lose, events like these can be exciting and sometimes profitable.

If you are new to investing and don't understand the difference between fundamental value and market price, this is not for you.

If you are considering putting money on the line that you need for your present or future security: stop, breathe, and walk away. Just like you wouldn't take your rent money to Las Vegas, don't put your life savings on the line trying to guess what the herd will do next. If you can't afford to be wrong, don't make the bet. And certainly not with money you cannot afford to lose.

One of the paradoxes of successful investing: When it’s clicking, you tend to feel nothing, or worse.

You put the money in, you leave it alone, watch it fitfully grow, and repeat the process. Less tends to be more when it comes to making investment decisions and trading. The more you do, the more it tends to cost you in the form of inopportune purchases and sales.

But it’s not exciting, and it's hardly good conversation fodder. You’re not going to boast to friends and neighbours about your investment in an index fund or a systematic investment plan (SIP).

Yet, when we reflect on some of the biggest breakthroughs investors have had in achieving better outcomes, we find they stem from removing discretion and enforcing routine. Systematic investing and automatic contributions to the Employee Provident Fund (EPF) is mundane, but valuable in ensuring that investors save and invest on a regular basis. Target-date funds is another unsexy yet very effective step to take decisions like asset allocation, fund selection, and rebalancing off their plate, simplifying matters.

Think March 2020, the euro crisis before that, the Global Financial Crisis, and the tech bubble. At times like those, even the most boring and regimented steps we take as investors might seem like an act of valour. You’re charging up that hill while droves of others are clambering down. That’s not going to leave you feeling affirmed or charged up. You’re going to feel dumb and drained, questioning yourself.

That one went up, why? Wait what, that one lost money? Should I sell my winners and buy my losers? Investing inverts intuition and scrambles patterns, whereas we’re wired to trust our instincts and popular culture lionizes those who follow breadcrumbs or crack codes. Stories are expected to have clear protagonists and antiheroes, follow arcs, impart lessons, or at least reach a satisfying conclusion. Investing is caked in inscrutabilities like cash flows that stretch into perpetuity. You don’t get the guy or gal at the end and there’s no sunset to walk off into. Again, this is when investing is working.

There seems to be a morality narrative doing the rounds: GameStop buyers punish short sellers and the rally would also damage hedge funds, which held most of those short positions. (Read: Short selling is not for the faint hearted).

Not too long ago, short sellers were popular heroes. Remember The Big Short? Dr Michael Burry (Christian Bale) shorted collateralized mortgages in his hedge fund and Mark Baum’s character (Steve Carrell) was based on real-life investor Steve Eisman, who (yes) managed a hedge fund and (yes) shorted investments.

Neither The Big Short's portrayal of short-sellers as champions nor WSB's belief that they harm innocent parties can be justified. Burry and Eisman were not heroes. They were professionals who saw the chance to make an investment buck. That was their job, and not a particularly dangerous or noble occupation at that. They neither risked nor saved lives. Admittedly, their trades were financially hazardous--but so, too, is the launch of any local restaurant, which places the founder's capital at risk.

What's more, The Big Short's transactions only profited if homeowners failed. Those investments would languish unless mortgage defaults increased. Quite literally, for Burry and Eisman to be vindicated--that is, for audiences to cheer the success of the film's protagonists--residential homeowners needed to suffer.

Phrasing the matter that way--which is how GameStop's shareholders view the issue--makes short sellers sound depraved indeed. But plenty of long positions also profit from unhappiness. Pharmaceutical companies require medical conditions that need curing, as do hospitals and medical suppliers. For their part, insurers would not exist were there not natural disasters, thefts, and accidents to protect against. Is it unethical to own stock in such companies?

Whether their positions are short or long, investors are investors. And if short sellers sometimes exaggerate their target's shortcomings, so as well do those with long positions. Investment hype flies in both directions. (Elon Musk attacks short sellers but not those who predict grand achievements for his company.)

Nor should hedge funds be regarded as villains. It seems, the belief arises more from symbolism than from actual events. The problem is not crimes that hedge funds have committed--Overcharged their customers?

Underperformed the stock market?--but instead what they represent: Wall Street at its most privileged and coddled.

Neither the motives of WSB's readers nor their methods deserve criticism. If GameStop's buyers invested for personal reasons as well as pecuniary, that is their right. The stock market does not test investor intentions. Whether participants are motivated solely by the wish to make money or have other desires is immaterial. Those who bought GameStop were not nobler than those who had sold it short.

If those trades were legal, as with the GameStop purchase, it is nobody's fault if the market wobbles. If the regulators perceived a problem, then they can devise a solution to prevent its reoccurrence.