It’s back to the basics in this edition, and we talk about two really important things.
The importance of having a trading plan. This equally applies to investors as well.
Your biggest asset when thinking about retirement.
Historical IPOs in India.
Some good reads about Warren Buffett & Howard Marks.
Have a plan and stick to it like grim death
One piece of trading advice you hear over and over again is to have a trading plan, so much so that it’s become a bit of a cliché. But that doesn’t change the fact that it’s really good advice.
Apart from all the obvious reasons why having a plan is really important, there’s a cognitive and a behavioural reason as well. Psychologist and behavioural finance expert Daniel Crosby talks about it in his must-read book The Behavioral Investor:
The capacity of the entire processing system conscious and unconscious – is enormous, about 11,200,000 bits. But Dr. Bob Nease suggests that of the millions of bits of information our brains process each second, a mere 50 bits are allotted to conscious thought! As Ap Dijksterhuis says, “…the unconscious does not have a capacity problem. If the unconscious is a modern computer, consciousness is nothing more than an old abacus.”
Our conscious brain is basically like a floppy disk, it has very limited capacity, and the best way to deal with this limitation is to have a plan. One thing I keep noticing is that people have this romantic notion of trading—a person looks at charts, reads the news and then intuitively pulls the trigger, making millions. This might happen in the movies, but trading in real life rarely works like that.
Like we discussed in the previous issue, trading is an intense activity that can trigger our emotions, causing us to make mistakes. Meaning, the odds of things not working out well are far higher than the odds of things working out.
To complicate things, the markets are complex adaptive systems and ever-changing. Trading is all about the unknown, and as much as we’d like to think that we can predict things, we can’t, but we can prepare. That’s the advantage of having a trading plan—with experience; you can react instantly without thinking twice, rather than trade by the seat of your pants.
By now, you must have noticed a recurring theme about just how basic and rudimentary most of the trading advice is. Despite that, 9 out of 10 traders don’t follow it. This goes to show just how hard it is to have a plan and stick to it. This is precisely why less than 1% of the traders make money.
This week’s Innerworth article talks about the same thing—why it’s important to have a plan and how it can help you navigate the ever-unpredictable markets.
Detailed Action Plans: A Precursor For Trading Success – Varsity by Zerodha
An idiot with a plan can beat a genius without a plan.
— Warren Buffett
Your biggest asset
When people build their personal balance sheets, on the asset side, they’ll have their investments, property, cars, cash etc. They’ll have their mortgage, credit card debt, and loans on the liability side. But what I see time and again is that people rarely think about their biggest asset—human capital or future earnings potential.
Sure, the returns you get from your investments are important. But the returns from developing your human capital (your earnings potential) will be far greater than the returns from any stock or mutual fund. When you think about your retirement 30-40 years down the line, it’s important to consider this and invest not only in financial assets but also in developing your skills no matter how old you are—constantly learning things is an edge.
Karthik last week explained this in a brilliant Twitter thread👇
And as for learning how to build your financial assets, we have an entire module on personal finance for you😀
IPO frenzy
There’s a lot of talk about how crazy today’s IPO markets are, but they were much crazier in the 90s. Nithin last weekend tweeted about this; check out the numbers👇
Interesting discussions
Thanks for reading this issue of the Mind over markets newsletter. Do share it with your friends if you enjoyed reading.