Trading

Memories have a bad reputation for not being the best record-keeper of what happened.

As we experienced the worst of 2020 and 2021, we missed things that we otherwise didn’t even think much about or took for granted.

Whether it’s the office gossip, the daily commute, the hustle/bustle of normal regular working day compared to WFH.

What happened in the past gets scattered in our brain in bits and pieces that we remember.

It’s like a researcher getting a story write by joining the various parts or like bringing together pieces of a jigsaw puzzle.

Shades of Grey

Negative memories often fade away more quickly than the positive ones.

Or maybe it’s our coping mechanism to stay positive.

People in a driving accident fear driving for a while and get cautious, however within no time their confidence comes back, and they forget what caused the accident in the first place.

On the other hand, there is that chai/coffee shop from our college days that we reminisce about even after 20 years that evokes positive memories.

So, its but obvious that the chai/coffee shop/college canteens bring back positive memories that we want to remember and on the other hand an accident has painful memories that we wish to forget.

Short Memory

Our current lens acts as the filter to our world view.

If you are in the middle of a deadly pandemic, of-course you bring back positive nostalgia that helps you overcome some of the pain of the isolation.

The positive memories help us trade our pain for something that we feel good about or look forward to.

Manipulated Memories

The sequence of event the way they happened, and the way recall might have a link which might have manipulated the details that we don’t like.

This is most evident when people write autobiographies.

Some of the most famous and accomplished people in the world had complex lives (like most of us), however if you read their autobiographies, you will come inspired from their stories.

One is their writing skills and 2nd is what they choose to tell you about themselves.

Trading

You know the truth about yourself and what’s your story is.

That’s an assumption we make about people when we are not convinced about what they tell us.

However, it is possible that their mental model has convinced them to believe in a particular narrative about themselves and that’s what they are convinced about now.

I know hordes of investors that read Benjamin Graham and warren Buffett during the pandemic and figured that they now understand how the markets work.

They picked up theories like “Fundamental analysis” and “Good business”.

Their balloon got busted by the recent downtrend in the markets with some of those smart stories turning sour

Now whether they want to waste this accident and revel in the great show that 2020 and 21 were or wish to learn something from this purely depends upon what they think stand for.

End of the day whatever you believe you are will be tested by the reality of the day and tough times will showcase the real man in the mirror.

Happy Reading

Wedding Planner

As per a report published by KPMG, India’s current wedding market is estimated at $50 billion, accompanied by a rapid annual growth rate. Thereby, making it one of the biggest contributors to the travel and hospitality industries. 

Since times immemorial, when a wedding was scheduled to take place, the entire village would come together, lend a helping hand and ensure all preparations were nothing short of perfect.

Today’s millennial couples take the onus of organising, planning and budgeting for their own wedding, as opposed to families being the key decision makers previously. 

At its core, the wedding industry is driven by cultures, traditions, and the union of 2 families.

From traditional weddings to destination and theme based wedding with the hoopla of social media, weddings in India have evolved over time.

From a simple wedding that might cost INR 10Lakh for a middle class Indian family to a destination wedding that might cost in crores, families and couples spend huge energy on getting the perfect wedding.

Panning starts the day wedding date is finalised and reaches a crescendo in terms of preparation and the stress involved as it gets closer to the D-day.

Getting the perfect dress to the perfect venue/destination, the perfect gifts and planning the itineraries for the guest keeping in mind the sensitivities of each relationship, families and couples stress themselves out over each details.

The big fat Indian wedding is a popular phenomenon around the world but the amount of effort that goes behind it is unimaginable.

What’s next?

Whether it’s a simple wedding or a complex big fat one, real life starts the day the wedding gets over.

Whichever way someone married, in a court or in a temple, at home or at a destination means nothing to what the life would be once they are married.

A marriage is at the end of the day a relationship and it requires all the hard work that a relationship requires to make it work.

Understanding each other, the families, the friends.

Understanding how each individual likes to live when the façade of the wedding planning is over and real life starts.

What are their preferences, what are your preferences?

Kind of things one wants to do, how will you react when the partner doesn’t want what you want.

Yes, that’s true lot of hard work.

It’s probably 100 of times more work than you put in planning the wedding.

The astonishing fact is that divorce rates have doubled in India over the last 2 decades.

Not a statistic that we can be proud of.

However, the millennial, YOLO generation doesn’t believe in living with pain.

They believe in surgery.

More time Planning the wedding than the marriage

Wedding is the event while marriage is life.

If people would spend as much time (as a proportion) as they spend in planning a wedding in planning the marriage, it would not perhaps end in unhappiness.

Life is not as simple as deleting an app or unsubscribing a streaming service.

It requires effort.

This is perhaps true for every aspect of life.

You can either sleep walk through life or make an effort to excel at it.

The difference between excellence and just being there is starkly visible to us all around.

When people question success and why so few people are successful, they think about luck, timing, privilege but forget about the hard work that goes into it.

This exactly is what you require in investing.

Got money, start investing.

Simple-not really.

Getting started needs understanding, your objectives, goals, risk, your reacting to risk and the exit plan.

What would keep you awake and how to reduce that stress.

What do you pay for and what do you do yourself?

These are questions that are about discovering yourself as much as understanding where and how you want to invest.

And just like a marriage can’t be successful without putting in the work, so can’t investing.

The bad news, everything is work.

Good news, its’ worth putting in the work or paying for it.

Happy Reading

Odometer

Ever wondered why do highways use 1/4 mile increments when car odometers only supply tenths?

At 60 miles an hour, that is about a mile a minute.

At that speed, if a signs were posted at each tenth of a mile, you’d be seeing a sign once every six seconds. On the highway, such frequency and accuracy are unnecessary, in addition to serving no practical purpose. It’s like closely monitoring the second hand on your watch.

I think it’s a “rule of thumb” type thing. How many people compare their odometers to the road signs for precision.

“Alright. It says 3/10 of a mile … wait a tick! What’s that?

My odometer says 5/12 of a mile!!

The point of road signs is to basically say, “Hey, you there! There’s this thing ahead. Pay attention.” And, “Hey, I said this once, I’m saying it one last time, there’s this thing ahead. Pay attention!”

Also If you crash, they use those markers to know where you are on the interstate. You should be exact as you can when telling (the emergency line that you called) your location. They need to know where you are in order to send an emergency vehicle out to you.

Also, yeah. You can tell how close you are to the next exit.

They are not useless, they can be lifesaving.

Does everything need to be logical?

Maybe/maybe not, however it is useful to think logically about everything.

It’s like Plato thought, if it has happened, it must be real, while Aristotle wanted everything to be proven for him to believe it.

The key here is some people look for a logical explanation and evidence before making up their mind while for others it is just another happening that they don’t need to worry about.

Usually people have too many challenges then to think about-

Why sun rises in the east, why the sky is blue etc., etc.,.

While there are others who have devoted their lives to answering such questions.

How Does it Concern me?

Not everything concerns, excites you, draws or even deserves your attention.

However, if you are expected to or want to achieve/deliver/do something, not knowing the logic doesn’t help.

Ultimately, almost all of us can conjecture about reasons for something, however having evidence improves the outcome and our understanding of it.

For example in investing, you don’t have to check the markets (odometer), every 6 seconds, in-fact not checking the odometer at all for long intervals, might help you even more.

However, knowing:

  • Where you are headed?
  • The distance and the direction?
  • The risk and the rewards?
  • As also when to look at the odometer and defining a logic for the same can help successfully navigate the journey.

So while you might not have a need to understand the logic of everything that happens around you, thinking about almost everything you do around developing the competence to navigate the journey in a logical manner might help.

Thanks for Reading

Deserve

Robin Sharma said “Success is never deserved, it’s always earned”

Webster’s dictionary has very straight forward definitions of the two terms that are clearly distinct and different in their own right:

Deserve is defined as “to be worthy of” or in other words, to be entitled to. 

Earn is defined as “to receive as return for effort and especially for work done or services rendered.”

To receive cause, you exist

I remember an incident, early in my career, when during an employee exit, employee demanded for certain things that according to him he deserved for his service and my Chief Executive responded-“you don’t deserve anything, you need to earn everything”

World over, there are 2 thoughts around dealing with the poor and the destitute.

One thought is to ensure that they get what every human must to leave in a humane manner.

While the other thought is to avoid handouts so people go out and work for what they need and the taxes from the Haves can be used in a more directed manner.

Those with the 2nd thought process think of handouts creating lazy population without motivation to do anything because they know there is a backstop.

They feel you need to earn a living, there is no free lunch, you cant feel entitled to anything in life.

While those with the 1st thought believe that not everyone has the same opportunity in life and hence the have-nots’ need to be supported.

Entitled

However, what about people who are not have-not’s but have a natural sense of entitlement due to their circumstances or their environment.

All of us have an inflated sense of what we bring to the table and hence the feeling of entitlement.

Stephen Covey in his book “7 habits of highly effective people” wrote about the passbook concept.

In a bank passbook the entry in the passbook matches the money deposited by us.

However, in the passbook of life, what you think you deposited might not have the same value to the recipient and that’s where the gap emerges in what we feel we deserve and what we get.

Work for it

Think about an actor or an athlete or a doctor who is the son of a successful actor, athlete or a doctor-they don’t deserve success because of what the parent has achieved.

It’s a fresh field and you will need to work hard.

You might have doors open for you-best of movie producers, coaches or hospital to work at, but that’s it, after that it’s what you and not where you come from that will determine your success.

No Entitlement in Markets

Same applies to the markets, there is no entitlement.

If you beat the market 1 year, well the market doesn’t care, you will need to keep working to ensure that you come out on top again.

Your past success has no meaning today, every day is a fresh day and fresh challenge.

All your past success does is to give you a template, you either keep working to solidify it or rest on the laurels.

However, as the best of them have realized, the moment you rest on the laurels, you lose the script.

End of the day, like the debate around have-not’s, all we deserve is a chance to compete, success is not a guarantee and will never be.

Happy Reading

Rashomon

Akira Kurosawa’s 1950 classic Rashomon was based on 2 stories by Ryunosuke Akutagawa.

The movie starts with 3 characters, a priest, a woodcutter and a commoner seeking shelter from a rainstorm.

As they wait the discuss a recent crime where the wife of a samurai was raped, husband killed by either suicide or murder and a thief arrested.

Kurosawa provides 4 different versions of the same event-from the perspective of the wife, thief, woodcutter and the spirit of the husband.

All 4 descriptions different from each other in terms of the detailing.

Rashomon Effect

The Rashomon Effect is a term used in psychology to describe the phenomenon of different people having different perceptions or memories of the same event.

There are different way to interpret it:

  • One way to look at it is how there is no single truth to any event
  • The other way to think about it is, how where we stand can affect our perception of a situation making it something different from what it is
  • Another way to think about it is what can you rely own when truth has different versions

Mark Twain once said, and I quote

“Truth is stranger than fiction, because fiction is obliged to stick to possibilities, while truth isn’t”

The movie “12 angry men” depicts the story of a jury trial where one dissenting juror turns around the case.

But the interesting thing is the interpretation of the same facts by different jurors’ basis their personal life experiences and biases.

Personal Applications

There are often, multiple versions of a story that we like to tell.

One is for us, and the other is for the audiences and as the audience changes so does our facts.

Which version is the more relevant to us though?

For example, in investing, often the price action changes the way we relate to the market irrespective of the fundamentals.

2 days the market goes up and the only thing, the anchor can think of is “how a bull run is upon us” and in the opposite case, a recession is just around the corner.

How does something fits into our version of the reality, which is these days also called “post truth determines the version we want to believe in and work with.

One of the reasons so many investors get scarred by the markets is this “unrealistic”, emotional response to money than anything else.

When you let outcome define success, the reality is not based on facts but your personal fiction.

Trapped

If you, feel trapped, maybe it’s not the markets or advisors but it’s your own “fantasy world”, “post-truth” or “Rashomon effect” and has actually nothing to do with the reality.

Now the choice of getting out of the trap is with you, however, I can understand if you find it difficult to eject yourself out of it.

However next time this happens to you, instead of making yourself believe the post-truth, think about what happened and try to go with it for a change.

Maybe the actual reality compared to the alternate reality might help you survive the shock and move on

Thank you for Reading

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SugarMan

Sixto Rodrigues, an American musician released 2 albums in the 1970’s which bombed so badly that he landed up eventually in construction work.

However, as it often happens, 2 South African lads travelling to America found his albums, loved them, took it along to South Africa.

There the shared the music with friends and families leading to Rodrigues becoming a cult success in South Africa.

Eventually Malik Bendjelloul made an Oscar winning documentary on this phenomenon giving a second lease of life to Sixto.

Sebastian Mallaby, the author of Power Law, describes this as the ultimate example of how success begets success. A sort of 2 parallel world where you succeed in one while failing in the other ones.

How the network effect got created for Sixto when these South African men shared the album in their home country and without him knowing or even trying to create it.

Influences

Mathew Salganik created the Musiclab experiment in 2004.

Where he enrolled 14000 participants to download and listen to songs.

Participants were divided in 2 groups:

  • 1st group received additional information on number of times the song had been downloaded

Additionally, they were divided into 8 groups where they would keep getting additional information on what their group was downloading

  • 2nd group got songs with only song title and band names

The results were interesting

  • In the Group 2-where decision making was independent, the result was predictable, popular songs became more popular and unpopular songs were less popular
  • However, in the Group 1, while the popular songs never did very badly and the unpopular songs never came out on the top, literally anything else was possible.
  • The success of the song depended upon its ranking along with its quality

Success begets more success and so can failure

Think of a movie director whose first film becomes a big success.

Take M. Night Shyamalan for instance.

Sixth Sense was a big hit, nominated for 6 Oscars including one for best director.

Everybody expected big things from him.

He was compared to Steven Spielberg.

But then it all became too predictable and coming to a situation where these days his name is not even being mentioned on the marketing material of his films.

What the makers are trying to avoid is exactly what the Musiclab experiment achieved.

If his name comes up, scores of people might opt not to even watch the movie expecting the predictable even though he positioned himself for unpredictability.

Without his name the movie might make big dollars which let’s say “The Last Airbender” did.

Social Influence or the Herd Tribe

Change can happen in 3 ways

  • By Rational argument
  • By Force, or
  • By Influence

Think about investors investing basis Reddit forums or taking tips from family and friends.

The comfort of doing something which someone known to you is already doing makes you skip the hard work that goes into a decision.

So, while you avoid the hard work and feel happy knowing you are doing what some or lot of other people like you are into, you could lose time, money and get stress in bargain.

The network effect can be good when trying to grow a business or even creating s social movement around a worthy cause.

However, whether it is about buying a product, investing in a business, or participating in a social movement, your own thought process, rationale and objectives should be in place, lest you become the “Sugar man” yourself-failing in one place and succeeding somewhere else purely randomly and not by design.

Of-course there can be no design, if you didn’t even make an effort to design.

By the way there is nothing wrong in getting influenced, till the ultimate decision has your finger-prints on it.

Thank you for Reading

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Get Out

In his amazing essay on “Long termism”, Max Roser posits

“How many humans have ever lived?”

Demographers Toshiko Kaneda and Carl Haub have tackled the question using the ​​historical knowledge that we do have and as per them, considering a 200,000 years deadline when first humans came into existence, about 109 billion people have lived and died.

Past Created the Present

We are an outcome of all of these people’s struggles, efforts, experiments and achievements that we are bearing the fruits of.

The 7.95Bn people alive today constitute only 6-7% of the total humans that have walked the world ever.

Evolution

Think about the evolution of language, Some researchers claim that it happened in a single leap, creating through one mutation the complete system in the brain by which humans express complex meanings through combinations of sounds. These people also tend to claim that there are few aspects of language that are not already present in animals.

Other researchers suspect that the special properties of language evolved in stages, perhaps over some millions of years, through a succession of hominid lines.

In order to achieve a large vocabulary, an important advance would have been the ability to ‘digitize’ signals into sequences of discrete speech sounds – consonants and vowels – rather than unstructured calls.

Unrecognised

A large part of the evolution remains unrecognised.

When those, like Socrates, Plato, Aristotle, Confucius, who are still remembered today even after 2000-2500 years, were born, a large part of the basic structure was already in place.

So what we have in terms of history is a very small fraction of the 200,000 years since humans have inhabited the earth.

The number of people who are remembered even today in this 2500 years history are actually a very small fraction of the total that was born and lived through the entire history of human kind.

Maybe around 100,000 and no more (that’s just a guess).

Some Questions

How many of these people do you remember?

What do you remember them for?

How many of them contributed to how we think, talk, behave or relate to the world?

Today we have them as a reference point, what were their reference points?

What Differentiated this small minority?

Leonardo Da Vinci was enamoured now just by the art of painting but even by its craft.

He is remembered even today for how deeply he worked on displaying the human anatomy on the canvas.

To learn about human anatomy, he actually dissected and studied over 1000 bodies and the result is evident.

What’s the Key here?

Just reading this opens your mind to the differentiating factors:

  • A sense of curiosity that goes beyond the basic
  • An effort to genuinely satisfy that curiosity
  • Make an attempt to excel and now just finish a task
  • Driven not just by the outcome but by the process

It all sounds basics, however you realise that not many practice any of this leave aside all of it and that’s possibly the reason that only a very small fraction of people are remembered through the history rest all gone unnoticed.

It is also possible that as a large part of this history was spent by people struggling to survive, not many had evolution as a priority and your priorities do define your outcome.

Simple-Yeah

A recent survey revealed that buyers spend 11 hours researching a car purchase compared to 1 hours obtaining a home loan.

That’s the priority.

I can bet my bottom dollar that most , if not all, investors spend even less in taking an investment decision and then repent the losses.

The objective is not to make everyone great enough to be remembered.

The objective is to use the reference points from the greats in history to be able to make important decisions in a manner that’s logical.

______Happy Reading_______

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What Survives?

In his book “Rise & Fall of Dinosaurs, Steve Brusatta tried to visualize the day that led to the extinction of the “Dinosaurs”.

“WHAT HAPPENED ON that day—was a catastrophe of unimaginable scale that, thankfully, humankind has never experienced.

A comet or an asteroid—collided with the Earth, hitting what is now the Yucatán Peninsula of Mexico.

It was about six miles (ten kilometers) wide, or about the size of Mount Everest moving at a speed of around 67,000 miles per hour (108,000 kilometers per hour), more than a hundred times faster than a jet airliner.

When it slammed into our planet, it hit with the force of over 100 trillion tons of TNT, somewhere in the vicinity of a billion nuclear bombs’ worth of energy.

It plowed some twenty-five miles (forty kilometers) through the crust and into the mantle, leaving a crater that was over 100 miles (160 kilometers) wide.”

What survived?

‘Plants were less affected than animals because their seeds and pollen can survive harsh periods for longer.

After the dinosaurs’ extinction, flowering plants dominated Earth, continuing a process that had started in the Cretaceous, and continue to do so today.

But all land animals weighing over 25 kilogrammes died out.

‘What we’re left with are basically the seeds of what we have today. Many of the major animal groups that are alive today were in place before the asteroid impact and they all suffered some level of extinction – but the lines that led to modern animals got through’.

Why didn’t the Dinosaurs survive?

The most significant thing about dinosaurs was their very large size and very few species, unlike mammals, with several different species with different size and structures.

Dinosaurs laid eggs. Now eggs have a constraint on size given larger eggs require a thicker shells and embryo needs to be supplied oxygen through the shell thereby constraining how thick it can be.

This led to young ones being smaller than their parent. Parent being 2500 times heavier than the baby.

This means that they were competing not only with their own types but also with larger mammals and also they were larger than any other species in every growth stage.

As all the large species went extinct, dinosaurs with no medium or small variety were destroyed completely.

Now diversity could have helped them survive, the way it worked with mammals who were smaller size at the time of dinosaurs extinction and developed into larger species as evolution happened.

Diversity has an advantage

Genetic diversity helps a specie adapt, evolve and survive.

For example-Populations of wild cheetahs have very low genetic variation. Because wild cheetahs are threatened, their species has a very low genetic diversity. This low genetic diversity means they are often susceptible to disease and often pass on lethal recessive mutations; only about 5% of cheetahs survive to adulthood.

Survival needs adaptability & Evolution

If you need to survive, life or even investing, that is my key area of interest, you need to learn adaptability and evolution.

Investors jump headlong into markets when things are rosy and then panic exit when things turn awry.’

These same investors who have lost money in markets either get so scared that they abandon the idea of investing till the next tidal wave of market high appears or start thinking of markets like a casino, going away never to return.

The challenge in both entering, panic exiting and then coming back still doesn’t show adaptability and evolution.

How do species adapt?

The long necks of giraffes for feeding in the tops of trees, the streamlined bodies of aquatic fish and mammals, the light bones of flying birds and mammals, and the long daggerlike canine teeth of carnivores.

The adaption doesn’t happen by being part of the herd but by developing abilities to channelise the learnings of each experience into how you will face the future and how will you make a decision to deal with a situation next time.

Evolution can’t happen if reasons for failure are outside and attributes for success are your own.

Evolution happens by being humble, reflecting on your experiences and learning from them and not by running away.

Hopefully next time the readers shall keep this in mind before taking a decision on how to approach the markets.

Fetch Rock

Playing “go fetch me a rock” is a favourite time-pass for clients and managers.

You are asked to produce something with little or no details and no specific goal.

When you accomplish the task, the response is this is not what was required you are sent on another wild goose chase and this goes on and on.

It’s like “go fetch me a rock, no this is not the right size, get a bigger one, no this is not the right shape, go get me a different shape and so you rock-fetch, rock-fetch & rock fetch….

It’s a pointless, useless activity that just keeps people occupied without achieving anything and frustrates the hell out of people.

“Unfair”

It seems unfair when someone makes you fetch rocks likes this, isn’t it.

However so many of us don’t realise how we spend so much time fetching rocks ourselves without paying attention to what’s happening.

In India mythology, when Lord Hanuman was asked to fetch a certain herb with medicinal qualities and he couldn’t differentiate between the various herbs that were growing on the mountain from which he was supposed to get them, he picked up the entire mountain and got it, or so goes the story.

Well, at-least he knew he needed to fetch the herb even if he couldn’t identify the right one so he did what he thought was best.

However when you don’t know what you are going for, you spend a lot of your time on meaningless/pointless activities that are akin to “fetch-rock”.

End of the day, “fetch-rock” is like walking without a destination in mind and as they say “ if you don’t know where you are going, then you are Alice in Wonderland.

Simple to Complex

For generations, investors were used to getting steady yields in their fixed income portfolios.

There were pension benefits, bank deposits used to provide a good yield.

Life was simple.

You could be a saver and sail through.

You really didn’t need to identify how much you needed, things were simple.

First there was pension and if that was not enough, your bank deposit would make up for the shortfall.

No complex equations were required.

You had not need to think about investing.

It was not a necessity.

Over the last decade or so things changed dramatically.

Inflation got reined-in.

Interest rates dropped.

Savers used to stability were caught unawares.

Suddenly no rules applied anymore.

Follow the “Rabbit”

As the rabbit of low rates kept moving deeper the financial wonderland took investors on a fantasy trip.

Now you had to make decisions that you are not prepared for.

You don’t know what you need to achieve.

There is excitement as well as fear of the “unknown” and the financial roller coaster gives you the ride of the lifetime.

The excitement of equity markets overshadowed the objectives and suddenly people were all over the place.

The roller-coaster made emotions jump up & down and all people ended up doing was “fetch rocks”.

Jigsaw Puzzle

The question is are you in it for the “excitement” or for a purpose that is no longer fulfilled by the simple saving methods.

The “excitement” of the rise makes people often forget the purpose.

It becomes then a classic “rock-fetch”.

The jigsaw puzzle has a purpose and a method.

However if you randomly try to construct it, you can never put it all together.

There is good news

The good news is that this “rock-fetch” is in your control.

Like everything in life-for example studying to become a professional (doctor, Engineers etc.,) doing a business or job to find meaning and also making some dough, investing needs to have the defined goal.

Once the goal is in place, you will be fetching lesser rocks while solving the jigsaw successfully.

So defining a purpose and a goal as you see is critical not just while dealing with a boss/client or some other power but even in how you lead your life.

——————– HAPPY READING———————–

Random

Till the cricket world cup hosted by India, Pakistan, and Sri Lanka in 1996, host country had never managed to win the cup which had always been won by the team batting first.

Both these myths were broken as Sri Lanka, one of the host countries won the cup handsomely batting second.

India never loses to Pakistan in a Cricket tournament organized by International Cricket Council-a myth broken in 2009 and since than Pakistan has defeated India in ICC tournaments thrice.

Paul the Octopus who even though predicted only 4 out of 6 matches correctly in the 2008 UEFA cup was considered so highly that he was used in the 2010 world cup again where it ended up predicting all the winners correctly.

The reason I am listing all the above is because these are just random events that happen without any correlation to each other and where the outcome is considered the proof of the evidence.

Just the way “Absence of evidence is not evidence of absence”, just because few successive events randomly without any correlation happen successively doesn’t mean they are indicating a pattern.

Gambler’s Fallacy

When an event or series event occur multiple times close to each other people tend to create co-relation believing that their future occurrence is more likely or less likely to occur. This is called the Gambler’s fallacy.

Investors often commit gambler’s fallacy when they believe that a stock will lose or gain value after a series of trading sessions with the exact opposite movement.

For example, consider a series of 10 coin flips that have all landed with the “heads” side up. A person might predict that the next coin flip is more likely to land with the “tails” side up. However, if the person knows that this is a fair coin with a 50/50 chance of landing on either side and that the coin flips are not systematically related to one another by some mechanism then they are committing the gambler’s fallacy.

The most famous example of gambler’s fallacy occurred at the Monte Carlo casino in Las Vegas in 1913. The roulette wheel’s ball had fallen on black several times in a row. This led people to believe that it would fall on red soon and they started pushing their chips, betting that the ball would fall in a red square on the next roulette wheel turn. The ball fell on the red square after 27 turns. Accounts state that millions of dollars had been lost by then.

History Doesn’t repeat but it rhymes

History doesn’t repeat itself but it rhymes is a cliché.

In the markets history does repeat itself but there is always a twist that makes it different.

The whole cycle does play out but each time there is an angle that has probably not been experienced before lulling even the most experienced, leave aside the newbies into a comfort zone that prevents them from getting trapped.

The cycle looks something like this:

Courtesy “Forbes”

What’s the Key?

  • Keep your focus and goals up front and centre
  • Stick to your risk-profile
  • Understand new opportunities and experience them with a small (5%) or so of overall allocation), if you want, to avoid both regret and loss minimization and also be able to take a bigger call or avoid the opportunity next time basis this experience.

It will also give you the ability to evaluate another opportunity in the future

  • Markets behave like a “spring”, they bounce back with a vengeance even if it takes time to bounce.

Take advantage of accumulation when markets decline or stay flat so that the “spring” effect plays out and you can achieve your long term goals

Ultimately “Stay the Course”

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