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The secret of successful investing

What is the secret to becoming a successful investor? What is the secret of finding out what the secret is?

The secret of successful investing

There is no secret to achieving success as an investor. Just as there are no hidden secrets to taking good care of your health, there are no hidden secrets to taking good care of your savings. All the knowledge you need for either is out there, available for free. There is no secret known only to the lucky few privileged ones who are hiding it from the rest of us.

In this time of the Chinese virus, when each one of us is facing the constant fear of a sudden severe illness, there are any number of secret sauces for staying healthy that are floating around. If you go to Amazon India and do a product search for the word 'immunity', the search turns up more than 10,000 results and I guess it's 10,000 because that's the maximum number that an Amazon product search displays. That's a lot of immunity on offer. Does it work? Your guess is as good as mine but let me give you one hot tip - you can buy an antivirus ceiling fan too. Does that work? Let me just sidestep that by saying that this is not my area of expertise.

Anyhow, as I said that the underlying problem is deep disbelief in obvious facts and easily available knowledge and a belief that there must be some secret known only to the anointed few. As I've been watching for years, this is the same story in investing and no doubt in many other walks of life. How do you think that the stock market works? I don't mean that question the obvious way - that it's a place where people buy and sell stocks. What I mean is how you think stock prices are really set. What is your mental model of how prices are decided?

This is the most widespread one: 'There are people who know when a stock's price is about to rise. If one of them tells me, then I can make money.' This is the hidden secret model of the stock markets, akin to the immunity and antivirus snake oil. It isn't so much a mental model as the lack of one. Unfortunately, this is a very common one. There seem to be a lot of people who believe that someone out there knows which way things will move and everything depends on somehow getting to know these secrets.

Then there's the conspiracy model. Under the conspiracy model, people believe that there are some people ('operators') who manipulate stocks and what one needs is to figure out what the operators are doing and then somehow, manage to ride the stock while the operator is pushing it. This model is actually realistic. Outside the big, high-volume tickers, many, many stocks are routinely manipulated by the so-called 'operators', at least in the short term. However, this model is useful only for the operators themselves. For the ordinary saver, it's invariably harmful to try and ride this in any way.

What does this leave you with? Everything actually. Everything that can work for you. Everything that is obvious and easily available. You lose nothing by not being in on any secrets or conspiracies. All you have to do is accept uncertainty and variability. You see when people go chasing after the hidden secret model or the conspiracy model, what they are really trying to do is to eliminate risk and variability. If these models are right, then there are other people who KNOW what's going to happen. There is no risk.

We know that that's not true. For investors who want to reap the benefits of investing in equity or equity-backed investments, there is no way around uncertainty. Learning to choose fundamentally sound investments and relying on the basics like arriving upon personally asset allocation, asset rebalancing and above all, diversification. There are no secrets here.