Forum Topics Stock Market Analogy
UncleWally
3 years ago

I probably spend more time thinking about the Psycological side of Investing than I do the financal so I find this an interesting discussion.

Before I retired, I was a farmer for 26 years and also an agricultural advisor for most of that time.

I’ve also played golf since I was 13 years old. At one point I considered a career as a professional but matters of the heart meant I was destined to marry a farmer’s daughter and ended up on the land.     There is no pass time more noble than to provide food and fibre for the masses and I did enjoy making a living off the land, though not a very good one!

Whilst I would agree with most of the points jwrostagro27 listed in his Farming Analogy and I understand the comparison he is trying to draw, I feel compelled to share my experience as a farmer in relation to the “Macro”

In farming you have little control. You are mostly a price taker not a price maker, you are subjected to the vagaries of the weather, droughts, fires, floods and cyclones all have a devastating impact on your crop, your income and your life.

Then there are the disease outbreaks, fluctuating currency markets, cantankerous customers and  government subsidised competitors. To the inexperienced this may seem an overly negative assessment and I’m happy to acknowledge that others may have a more positive experiences on the land than I but farmers face these problems every day and they are dominant and have to be dealt with.

I used to say to farmers in my advisory capacity that, “Farming is the art of making money whilst moving from one disaster to another” most agreed.

But, there is one thing farming did prepare me for and that was the difficult times, and in investing, handling difficult times is as important as anything.

I much prefer to think of investing in terms of a round of Golf.

·       There is no such thing as a perfect round of golf but you can still get a good result.

·       Some rounds are going to be better than others.

·       Each shot you play can always be better with the exception of a hole in one.

·       Holes in one only happen rarely and not everyone achieves one.

·       One bad hole doesn’t necessarily ruin a round of golf but it will have an impact.

·       A well thought out and executed round is very rewarding.

And my favourite golf quote from arguably the best golfer ever- Jack Nicklaus. “It isn’t the player that makes the most great shots that wins, it’s the player that makes the least bad shots.”

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umop3pisdn
3 years ago

Does anyone have a good analogy for the stock market?

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nerdag
3 years ago

Learning to play blackjack at first, you win some, you lose some. Looks random to the casual observer.

Then you learn how to count cards, and as you hone your skill, and learn when to bet big, and when to reduce your stake.

As you master the skill, you get better at it and make more out of it, but nothing is ever foolproof and a wrong assumption, missed card, or just plain bad luck means you can get wiped out if you bet too much.

 

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CanadianAussie
3 years ago

Great analogy. I'd add that Blackjack teaches you about thinking in probabilities. The house has ~2% edge but if you're counting cards this will fluctuate through play. At any one time, counting gives you an informational edge over the house - similar to what can be gained in the stock market with deep research or a variant perception. When the odds are against you, bet the minimum, when they're in your favour bet big but not too big.

This last point teaches you about risk management. I was taught to play with a bankroll of at least 20x your minimum bet. If you're betting $10, have a bankroll of at least $200. Otherwise a few bad hands in a row can wipe you out. Similar to portfolio management if you have only 2-3 stocks, or a single large position, and they all go bust you've blown up your account.

Furthermore on risk managemet - always splitting 8's. You still incur losses over the long-term but you lose less money by always splitting. I'd suggest this is similar to cutting your losers early or setting a stop loss for traders.

Wait for your fat pitch and swing hard when it's there; for example doubling on an 8, 9, 10, or 11 against a dealers 6 or splitting Aces.

If you hit a hard 19 in Blackjack and get a 2 you have a successful outcome. If you invested in a meme stock and sold at the top you also have a successful outcome but neither mean you have a repeatable process or know what you're doing. In fact if you keep playing or investing that way you won't be around for long. Proccess >> outcome.

If you're going to be successful at Blackjack you have to take your emotion out of it and stick to basic strategy (probability). Do you get rattled when you lose 5 hands in a row? Do you get rattled during market crashes or volatility? Do you abandon your process when you're not getting short term results?

It's important to block out the noise in investing. There's always people telling you to sell or be fearful of a market crash. Or that investing is gambling or microcaps are "too risky". A Blackjack table can get "noisy" as well with people upset your hitting a hard 16 vs a dealer 9 or trying to tell you how to play.

Leading indicators can give you a huge advantage in investing (ie getting information before it shows up in financial statements or company releases). Similarly, shuffle tracking tells you when a group of high or low value cards are coming up in the shuffle and you can adjust your bets accordingly.

 

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