“It’s not supposed to be easy. Anyone who finds it easy is stupid.” – Charlie munger
Investing is very easy when you are investing in a bull market. If you are ‘unlucky’ to begin investing in a bull market, you start dreaming of being the next Rakesh Jhunjhunwala or Warren Buffett
I used the word unlucky on purpose because every new investor who starts investing in such periods gets a rude awakening in the next bear market
Bull market stories
A common theme during such periods are stories we hear from people who are striking it rich at such times
US covid Tech boom
“Buy quality at any price”
“Chor bane mor”
Secular growth of financial services
Perpetual growth in Infrastructure
The last one was in fashion in 2006-07 when a lot of current investors were not around
What happens at such times is that investors fit a story to the price action and think of it as a law of physics. These stories gain prominence as more investors get sucked into it. Eventually the trend runs its course and a lot of investors are left holding the bag when it eventually turns
Beating the market appears deceptively easy
Can you think of any activity in life which pays well, is competitive in nature and easy all time ? Is it easy to be a doctor, architect, actor, chef ?
Investing seems to be the only field where a lot of people get fooled into thinking that its easy. The reasons are not complex to understand
- For starters this is a probabilistic field with returns accruing in spurts. A 15% CAGR over 10 years is not spread evenly over this period. Its more like +25%, +10%, -15%, + 18% and so on. Anyone who invests during a bull market thinks of it as normal and tends to extrapolate it
- During such bull run making money appears to be easy. Just buy whatever is in fashion and it works. No need for any kind of risk management
- Its easy to trade and getting easier by the day. Open an account in a few days and start trading in F&O. A thousand rupees is enough to get started. There are no qualifications or gate keepers to stop you
Performance over the cycle
Anyone can be a bull market genius. The true measure of performance is over multiple cycles which include several bear markets
Most investors get washed out after a bear market, never to return back. The few who stick around, dig deeper and learn the craft of investing. Even so, this does not assure you of above average performance
The reason for it is that the basis of out-performance changes over time. What worked in early 2000 does not work now. As I look back on my old posts up until 2013/14, it was easy to buy good quality small and midcap companies at cheap prices to make multi-bagger returns. That game is over now
In the same manner, quality at any price worked in the 2015-18 period, or loss making tech companies were the go to place in 2020. A lot of investors tend to stick with the old theme even when the paradigm has shifted
Beware of the snake oil salesmen
If you want to do well over the long run, you have to overcome your natural biases which trip most investors. One has to un-learn and relearn every 3-5 years as the paradigm shifts. If you miss one, then be prepared to live through a period of under performance till you adapt to the new one
That’s the reason why a lot of successful long term investors have said: Trading or active investing is a tough way to make easy money
I can vouch for that. I have worked in the corporate world and invested actively at the same time. I can tell you that making a living from the stock market is much more difficult than a full time job.
So anytime someone tries to tell you that beating the market is easy over the long run, keep these points in mind
- They are trying to sell you something which is not worth buying
- They are lying on purpose
- They are incompetent and a bull market wonder
