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Wednesday, July 26, 2017

The Role of Capability, Liquidity, Equanimity and Serendipity in the Making of a Stock Market Genius

Talking about the stock market, have you ever wondered what makes someone an ordinary investor but someone else a market genius?

Of course, we do know very well that those who put their money in the stock market mostly end up as ordinary investors with ordinary returns (in the range of 5% to 12%, on CAGR basis).

Only a few, just a very very few, end up as market geniuses with super returns (more than 16% and going upto 20%-25%, again on a CAGR basis).

The 12%-16% returns zone is like the no man land's and its hard to label such investors as either ordinary or genius. Such investors might be better than the ordinary investors but they are by no means geniuses.

So what separates the men from the boys, the geniuses from the rest?

In this context, it is useful to look at the role played by four "ity"s - Capability, Liquidity, Equanimity and Serendipity - in the making of a stock market genius.

As an aside, the ordinary investors are perhaps influenced by the fifth and the most dangerous "ity" - Stupidity!

Coming back to the four "ity"s, let us analyze how they can play an important role in the making of a stock market genius.

  • Understanding the financials of the company behind the stock is a core skill. Knowing how to read the annual and quarterly reports is a part of this core skill
  • Knowing how to crunch, slice and dice financial data is another core skill that is a part of stock-picking capability of an investor
  • Understanding the macro-level economic and business factors that affect the entire stock market or specific sectors as well as the micro-level factors influencing a specific stock helps avoid gross mistakes in selecting which stocks to purchase, when and for long hold onto it and equally importantly which ones to avoid
  • Being able to withstand when the market is down with no compulsion to sell gives a lot of holding power to an investor 
  • In fact, being able to purchase even more stocks when the market is down adds to the firing power of an investor
  • Making sure one has enough free cash to spend without resorting to selling stocks to pay for the routine and emergency expenses goes a long way in making an investor firm-footed
  • Being psychologically strong to not react to any bad news in panic and any good news in elation is a core skill that makes an ordinary investor into a genius
  • It is easy to see that those who have managed the "Liquidity" part very well are in a much better position to act with equanimity
  • One's temperament and disposition has a deep impact on how one would react to any given situation in the stock market
  • Being able to control one's urges and not relying on just the first order thinking but taking a pause and spending some more time to exercise the second order thinking is of paramount importance
  • This simply means having the good blessings of lady luck. Since no one knows what the future holds all investment decisions are projection of the future state based on analysis of past information and certain assumptions
  • If things change drastically in the future, analysis of past information may at times not only not be useful but also may be misleading. History may tend to repeat itself but it's hard to guess where exactly it will repeat itself
  • Projection of the future state based on certain assumptions happening exactly as was thought is itself an assumption. If the assumptions made are not correct or complete or important assumptions get missed out, things can go haywire with consequences that are hard to imagine
  • There is nor formula or magic behind finding a stock at the right price, holding it for the right time and exiting from it at the right time. Genius investors tend to experience this more often than the ordinary investors and more than their skill, serendipity may be at work!
Clearly the four "ity"s - Capability, Liquidity, Equanimity and Serendipity - indeed play an important role in the making of a stock market genius.

So do you have the four "ity"s? Are you still an ordinary investor? Or are you now a stock market genius? 

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