Issue#7: Investing 101: Uncertainty is the Only Certainity ✨
The past exists as your present interpretation of it. The future is unknown. Present is eternal.
The moment I try to put something in words, I leave out vast amount of information.
It is like trying to express a 3D figure by drawing it in a notebook.
We always experience things. The reality we see is something we have formed. It’s not the actual reality.
And I am trying to convey my own reality to you in form of words. I know that this medium is inefficient.
But still the best medium (videos, audio being other) to express my ideas, experiences. 😁
Like all things, investing is an experience. Whatever I say now is translation of my experience in words.
Let’s move a bit further. How do I classify this experience into some definitions, terms that we know?
First, I would say investing is a skill. Skill that shines more you practice.
It is an Art too. All investors style is different.
It is science. We can employ mathematics as a tool to “do” investing.
It is an emotion. To invest is to deal with future. Future is unknown and unknown things makes us uncomfortable.
It is lot of things. Not ONLY just skill or art but instead a combination of things.
Investing was practiced since ancient times.
Long ago when we were hunting and gathering for food, the next day would be a mystery.
A caveman after his successful hunt would eat his fill. Now he has several choices.
One to store it somewhere. Storing it has chances of the food rotting, but he gets a certainty that he has some food. He might try to add natural preservatives that he learnt from his ancestors.
Other choice is to eat it fully. Since it might go bad, better to eat now.
Or he can use it to bait other animals in future too. He doesn’t get anything now, but there is a chance to get a bigger fish tomorrow.
He might also give it to a similar tribe nearby to build relationship with them.
He has many choices of utilizing the present meat. All comes with tradeoffs. Choosing from all the alternatives, the leader makes a choice. That choice is his investment.
What exactly is investing? Isn’t it just managing resources for optimal use? Yes, in a way.
We can also say then that it is resource management or simply economy. Again, it’s a play of words to categorize an experience in words.
To me, investing is a way of making a choice with a resource. The starting point of making a decision is to be clear on what is it that you want to do with the said resource.
What you want to do with it → your goal or expectation.
Investing is a way to utilize a resource X with an expectation of Y.
Expectation means a future which we do not know.
It need not be necessarily money as resource and profit as expectation.
X and Y can be many things.
X → Time, Y → Skill
X → Money, Y → Desires
X → Time, Y → meaningful relationships
Assume I have 1 Lakh ₹ as surplus which I got in my year-end bonus. Yay! Only time I like my boss.
I have many ideas on what I can do with it.
Travel to foreign country.
Get my favorite phone.
Give my mom a new saree.
Give the money to an orphanage.
Save it for rainy day.
Buy a momo stall to own a business.
Here resource is money and expectations are different.
Investing is then much vaster than simply looking at monetary profits. Sure, they are nice, and I love it. But on my deathbed, I am not counting money. I am going to look at my experiences.
The major challenge in making good investment decision is our inability to see the future. If we could see the future, then investing is a game that is easily winnable.
How to deal with such uncertainties? When we don’t know what is going to happen, we get stressed, anxious, panic and keep worrying.
Emotionally there is no tool to be used. This is important. Managing your emotions. It’s not a skill to be mastered. Instead, it’s about knowing yourself. More you know yourself, more you stay still.
A rational, still you is in top priority when making investments.
I will write more on this topic in future issue.
Now let’s look at other important tool we can use to deal with uncertainties.
Maths.
Specifically, the field of probabilities.
I am not going to teach you maths here. Thats not what I am good at. My objective is to tell you how I convert expectations, events to numbers. Numbers which I try to get approximately right. I do not really care about being 100% correct.
A fun fact:
Did you know that probability was discovered (or invented) by a gambler who loved playing cards?
This field of math made him a better gambler. A person who used math as his tool to win more matches.
The real Chad employing a legal hack to win in gambling.
Like gambling, life is always uncertain. We can never say what is going to happen tomorrow. Never. No matter how much certain we think an event is.
Govt job are famous for their security. But how do we know an AI won’t replace bureaucratic work? Or a company like google going bust? Nothing is certain.
Probabilities deal with these uncertainties by assigning a number to the choices you care about.
Let us assume, I use my resource time to develop a skill in programming.
I want to learn this skill in the hope of getting a job in good company. So, my expectation is a job. In three month’s time, if I apply in a company opening, what is the chance that I get a job?
First, we list out possible outcomes -
I get a job.
I do not get a job.
Now if we don’t have any other information, we can simply say both have 50-50 chance. This means if I try this exercise for 100 times, then I get job 50 times approximately.
This is fine, but not very useful. To make our numbers more accurate, we need more information. I can ask few questions to myself:
Have I ever been successful in learning a skill in 3 months?
Are there enough openings?
Is the skill I am learning a growing skill?
How hard is the skill from 1-5 range?
Are there enough resources to learn the skill efficiently?
…
You might include a lot of information in this exercise. Asking the right question makes lot of difference. A bad question can give good results (as in which you want) but a bad model for reality.
Some information has more weight than others. Like my past success. Some have less, like the resources to learn the skill.
I ask myself these questions and assign a weight.
total score = 8 * 10 + 7 * 10 + 5 * 10 + 3 * 10 = 230
total score = 56 + 56 + 25 + 30 = 167
In this exercise, I score 167 out of 230.
Is this probability? No, it is not. To find the true probability, we need to find total applicants who applied for programming jobs and who got the job. We can then say probability is:
successful_applicants / total_applicants
This is too troublesome for this simple exercise.
I am gonna substitute this score as a measure to know if I am getting a job.
167 / 230 = 0.72
72% score.
or 72% chance.
If I try for one job I have 72% chance of getting it.
But I know from my experience that this is false. There is no way I am going to get a job in 2-3 tries.
So, my assumptions were too optimistic. Or maybe I missed out an important question to ask which has high weight. By my intuition, it should lie around ~5-10% chance. Or even less.
How is this model useful? First, it helps me draw out the factors which I think is important. Second, they force me to assign a weight/importance to a factor. Third it gives me a number to think about. Fourth if my intuition and this exercise doesn’t match it forces me to think more. Fifth I can represent my idea in numbers.
Is it always helpful? Probably not. It certainly gives a new light for me to think about when making decisions.
Conclusion
Investing thus consists of
Your valuable Resource X.
Your expectation/goal Y.
Your emotions.
Facts, research
Assumptions
Your mental model of finding probabilities.
Strictly speaking, probabilities aren’t necessary and it’s a tool. You may not use it to your aid in your investing. But that wouldn’t be smart. Because it’s the best tool we know to deal with uncertainties.
And this way to thinking, would help you in lot of things. Not just to earn profit but a good life as well. Time is the most valuable resource and more we try to invest it the better we utilize it. Of course, at one end we have people who always try to “invest” time/money to get the best return/expectation. But that is not wise. If you always keep calculating, you will never really relax. You cannot enjoy and take things slow.
Like all things in life, it should be used in moderation.
That’s it for today. I hope you enjoyed it. Until next time.
Cheers
Asish Panda