May 29, 2016

Why Investing is an Extremely Hard Game to Play?

Think about any game.

In most of the games following aspects will generally hold good:
  • Past records are known and are a good predictor of future performance.
  • Rules of game are well defined.
  • Skill is more important than luck (other than in some cases like chance-based card games).
  • Rules of game do not change all of a sudden due to any unexpected event occurring suddenly.
  • Every player knows how many players and who all are playing the game.
  • Duration for which a game is played is known.
  • Played in open so what any player does is visible immediately or after a short time lag to all the other players.
  • Kind of homework and preparation that needs to be done is known to all players.
  • Involves use of both physical and mental faculties (degree of usage varies).
  • Uncertainty about future does not have a large bearing on the final outcome of the game.
  • Risks that may materialize are limited in number and mostly known to all players.
Investing can also be viewed as a game!

So what does the game of investing involve? Here are some key aspects:
  • Past records are known but are not a good predictor of future performance and can only be used to make hypothesized projection of the future performance.
  • Rules of game are well defined only in terms of the transactions that need to be made and not the strategy that gets deployed (there are legal considerations as well which need to be adhered to otherwise the penalty incurred may wipe out the entire gains).
  • Skill is more important than luck but role of luck is also huge in terms of the uncertainty about the future. Skill is used to analyze past performance and hypothesized projection of the future performance to arrive at an investment decision but a "black swan" event in the future can tilt the final outcome in either direction. Luck or the lack of it can play the role of an angel or a devil respectively.
  • Rules of game do not change all of a sudden due to any unexpected event occurring suddenly but since they do not apply to the strategy part of the investing process, the way many of these rules get applied by a player can have a significant material impact on the other players.
  • The choice of investment portfolios and the investments within each any player can hold is infinite. The players playing the game of investing would not know how many and who all are playing the game. Not only that, players may be independently playing a game of their own individual choice with multiple intersections though with games being played by the other players simultaneously.
  • The duration and the time to enter and exit an investment is not specified and, in fact, forms a crucial part of the strategy to improve the final investment outcome (a player can actually enter and exit multiple number of times).
  • Played mostly privately (the first few critical moves are always private) so what any player does is either not visible at all or only after a long time lag to all the other players.
  • Kind of homework and preparation that needs to be done is known to all players but is very wide ranging from subjects such as Economic History, Macro Economics, Micro Economics, Behavioral Economics, World History, Politics, Finance & Accounting, Capital Markets, Human Psychology, Mathematics, Statistics. With such a wide range of subjects a player ought to understand, the homework and preparation required is indeed a tough one and since things are ever evolving it always remains in a work in progress state.
  • Involves use of mental faculties primarily (analysis and due deliberation performed at times are very comprehensive and highly complex).
  • Uncertainty about future has a large bearing on the final outcome of the game (both on the negative as well as the positive side).
  • Risks that may materialize are large in number (including geo-political and macro-economic factors across the world) and not known to all players in equal measure and at the same time.
So it is evident that investing is like any other game.

However, investing, is unlike other games in many ways. The nature, scope and complexity of the game of investing makes it extremely hard.

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