Is there really a 'correct' way of investing that stands up to rigorous analysis and withstands the test of time?
In any domain, I try to grasp the basics of how it works and why it works that way. I think with regards to scientific disciplines, there's an established framework of empirical validation and reproducible results.
Physics or biology operate on fundamental natural laws that can be repeatedly tested and verified.
I think it's an agreed upon consensus that investing for the most part is loosely based on the former and is more driven by human psychology and market sentiment.
How this is agreed upon, I'm not sure. Maybe a better way of putting it is we've observed certain patterns work more often than not. Or we've studied that successful investors tend to converge on similar principles through experience.
Perhaps also, there are background forces at play that make markets inherently unpredictable, such as creating complex feedback loops between human behavior and market movements.
I'm quite certain at this point in time that markets have a mind of their own. How this mind came to be is an interesting thought..
Layers But Not Really Layers
At first, this is what makes grasping the basics of investing hard for me. Because I wasn't satisfied enough with the conventional answers that "time in the market beats timing the market", "diversification is the only free lunch", etc.
Between accepting that not everything can be made sense of and the curiosity to pierce through the veil of appearances, I somehow always pick the latter.
And based on experience, I sense that there are layers to it, not unlike a wedding cake.
First, market movements can be viewed as an emergent property of countless individual decisions, each influenced by different time horizons, risk tolerances, and information sets.
Tesla's stock is probably a good example of this. Day traders tend to react to Elon Musk's tweets, while institutional investors set their eyes on quarterly delivery numbers, and long-term holders bet on the broader electric vehicle revolution.
These collective decisions don't just stack neatly on top of each other though as is the case with a wedding cake. They interact more like waves in an ocean. Some moments reinforcing each other, other times canceling each other out.
But also, markets operate in a rather fascinating intersection of human psychology, mathematical principles, and social dynamics. One layer somehow influences the other layers and vice versa.
This insight was first born from the Gamestop saga. What began as a mathematical observation about short interest created a social movement on Reddit. This then triggered powerful emotional responses of FOMO and revenge against Wall Street, leading to price movements that defied conventional mathematical models.
I mean, it shows how markets are less like mechanical systems and more like living organisms that adapts and evolves in response to both internal dynamics and external stimuli.
Given that a human is an actual living organism, one could say markets are fundamentally a reflection of collective human behavior, with all its inherent irrationality and unpredictability. This is where it gets its enduring mystery, that keeps even the most seasoned investors humble.
Not Really
So the answer to the question on the first sentence of the post on the "correct way" of investing that stands up to rigorous analysis and withstands the test of time is; Not really, because markets are collective expressions of human nature, which itself defies rigid analysis.
Unless you're willing to evolve with it, staying adaptable while anchoring to timeless principles of value and risk management is a good baseline to aim for.
This doesn't imply I've given up on understanding this "market mind", but I have to get better first at understanding human nature, which is really not a walk in the park.
Thanks for reading!! Share your thoughts below on the comments.
To answer the question you started with... Yes, but very few investors or traders master this. Otherwise, the world would be filled of wealthy people, not of people aspiring to financial independence. Plus, investing is a zero-sum game. When someone wins, someone else loses. There are of course the cases when both win or both lose, but if they have different time horizons or objectives.
Right, this is another interesting way to look at it. There will always be losses when it comes to investments, and I think capital allocation also plays a part. Because we tend to converge into investments that are perceived to have a higher chance of giving us good returns. I think this is where going with the flow or right timing really counts.
It's amazing how we all want the same thing but think about getting it differently.
Thanks for stopping by :)