Complex Adaptive Systems & Investing – Part 2

Amar Pandit , CFA , CFP

I am assuming here that after reading Part 1, you agree with me on the fact that a stock market is a complex adaptive system. If you don’t, I encourage you to read Part 1 till you agree with me ☺ (kidding).

Based on that above assumption, we will never know what the market will do next.

Why is it then really surprising to people when the stock market corrects after they have invested?

Stock Markets will correct at some point of time as they are now. It is simply in their nature. This is how stock markets are supposed to behave. They are technically supposed to go up in the long term and go up, down and sideways in the short term.

Do you not expect that the markets will go down temporarily after you invest?

It will for sure. No one can avoid this. No one should avoid this. Because this is the only way to consistently earn the long term returns of the stock market. Understand the emphasis on the word consistently.

You might be lucky to get out once or twice but that does not mean you will be able to consistently get in and get out. Those who claim to achieve this feat consistently are liars.

As I have mentioned earlier, the stock market can go down 15% in a year, 30% in 3-5 years and over 50% a few times in your lifetime. Write this down somewhere and internalize this.

So that the next time you come across a correction or crash, you embrace it with grace. Yes, embrace it (I have written a Nano on the embrace part which I will release shortly).

Declines are always temporary. Advances are generally permanent.

Let me illustrate what I mean with some questions.

Can you buy now at 1995 prices? Can you buy at 2000 prices? Can you buy at 2005 or even 2008 prices?

The answer is NO because the markets have advanced permanently from the 1995, 2000, 2005 and 2008 prices.

Can you even buy now at the lows made in March 2020?

Maybe. But I will go with the answer NO.

If you read the question “Can you buy now at the lows made in March 2020”, carefully, 2 things have to happen.

  1. The stock market has to correct by 55%+ from here.
  2. Assuming it does, you need to have the courage to buy in a crash like this with all the financial pornography networks screaming DOOM 24 *7.

We are witnessing a Correction Now.

What are you doing about it?

Are you waiting to invest? OR have you already invested? OR are you regularly (gradually)investing through the correction?

People who are waiting to invest will not invest even if the market falls by another 10% because they will expect the market to fall further then.

Can you see what’s really happening here?

They are speculating. You read it right. They are not Investing. They are speculating on prices going down and their future behaviour. They think the market will decline, and they will then have the courage to buy at lower prices.

However, this is how the film plays every single time.

People first wait for corrections. When corrections happen, they wait more. They don’t have the courage to buy. Then, the stock market goes up.

As I wrote in Part 1, Real Investing is Boring…It’s Super Boring.

John Maynard Keynes would agree with me on this. He wrote “Investing is intolerably boring and over-exacting to anyone who is entirely exempt from the gambling instinct; whilst he who has it must pay to this propensity the appropriate toll.

Keynes says people who have the gambling instinct must pay the appropriate toll and they do.

On the other hand, wise people invest their long-term money when they have the money to invest. They might keep some liquidity to take advantage of corrections but generally they invest. It is because they are not investing for the next 20% or for the next 2 years. They are investing for decades and for compounding to really work for them. Their 2 most powerful warriors are given in a Leo Tolstoy quote. “The 2 most powerful warriors are patience and time.

The successful investors have these warriors by their side and in their arsenal all the time.

Do you?

If so, are you taking help of these warriors or getting these warriors to work for you and your investments?