The Stock Market is for suckers….
I agree with mark’s basic premise which is that one should invest in the stock market only if one has an edge. However I do not agree completely with mark’s extreme view that the stockmarket is a place for suckers and there is always sucker on one side of a trade (although a lot of times there is one). The stockmarket is not a zero sum game and if one can avoid the extremes emotions of greed and fear, then one can get a resonable rate of return. Even on a trade, the buyer and the seller need not be a sucker. The seller may not be comfortable with the risk associated with the stock, may have achieved his targeted return or could be selling for some personal reason. The buyer on the other hand may have a similar view point, but could more comfortable with the risk on the stock, or could be hedging his position on some other stock.
I would say as an individual, I can have the following edge over the market
- long term view : If I have long term view and can think beyond the immediate short term view point of the market, then I can find some good long term investment opportunities. For ex: FMCG in 2004 and early 2005 were good investment opportunities when the market was bearish about the short term outlook of this industry.
- Investing in one’s circle of competence: As charlie munger’s says, it is not in human nature to be an expert in everthing. But if one works hard at it, then one can become an expert in a few areas. For me my circle of competence is limited to FMCG, industrial and a few other industries. So as long as I limit myself to these industries I should do fine. Ofcourse it means that the number opportunties are sometimes limited if these sectors are overvalued. But then as an individual one has the luxury of investing only when the opportunity is right.
- As an individual investor, I have the luxury of being out of the market when I don’t find any values. A proffessional investor cannot do that
But at the same time, if one strays from his circle of competence and gets swept by greed or fear, then I think it is closer to gambling than investing (where the odds are against you )
Mark talks about technology investing in his post. Substitute ‘technology’ with any industry which is outside your circle of competence and I think the result would be the same. I think if one does not invest the required time to develop a deep understanding of atleast a few industries, then it is difficult to get a return higher than the market.