A few months ago, I downloaded a mobile game called "DomiNations". This game is similar to the "Age of Empires", in which you develop your civilisation and lead it through different ages.
Besides developing buildings, you could also lead an army to attack and loot other players. Likewise, you could also be attacked by others. To master the game, I tried to search online for an official game manual which could describe the strengths and weaknesses of different buildings and army units, as well as how to place the buildings for the best defence. Unfortunately, I could not find a good game manual, much less an official one. It is like the stock market, isn't it, which does not come with an official game manual. It does not teach you what stocks to buy, when to buy and when to sell. Although this void is filled by many investment books written by others, there are still gaps. For example, there is actually no book that talks about "troubleshooting", which advises you what you should do when the stock market "malfunctions", i.e. crashes.
Consider the recent stock market downturn in Aug, which book could you rely upon to advise you how to navigate the downturn? While there are many investment books on how to pick stocks, read technical charts, analyse financial statements and understand investor psychology, I am not aware of any book which is able to guide investors on how to navigate a stock market decline. The closest book I could think of is Jeremy Siegel's "Stocks for the Long Run", which shows that historically, Sep is the worst month for stocks and Oct is the most volatile month (but can be up or down). Even so, it is not a fool-proof guide; it requires quite a lot of faith to believe that the worst is over once you past Sep and Oct. It is also not a context-sensitive guide; does what is generally true apply to the economic situations we had in Sep when China was slowing, interest rates were rising and oil price was falling, etc? In situations where there are no official game manuals, there are only 2 ways that players can learn how to be a better player.
Learning from Mistakes
When there is no official game manual, the best way players can master the game is to experiment and learn what works and what does not. In the DomiNations game, I thought my original placement of defensive buildings was good. It worked the first time I was attacked, successfully repelling the attacker with minimal loss of gold and food resources. However, when a more sophisticated attacker came the second time, my city's defences were completely and utterly overrun! It exposed, firstly, fundamental flaws in my defensive placements, and secondly, but more importantly, over-confidence in my original defensive strategy. The moral of the story is this: when you win, you practically learn nothing, but when you lose, you learn a valuable lesson in what does not work. In fact, the greater the loss, the more deeply you will learn and not repeat it. The more mistakes you make, the more knowledge you gain on what does not work. Over time, as you gain more knowledge on what does not work, you will eventually become a better player.
Winning generally does not teach you anything. Most people, when they win, they will bathe in the euphoria of winning. Seldom will anyone analyse the reasons for the victory, and even if he does, he might attribute it to the wrong reasons, which will only serve to increase the hubris of the player and eventually lead to a greater downfall! To win, you need a combination of factors in your favour, but to lose, you just need one single key factor against you. Thus, when you win and you managed to find a reason for your victory, it might be only one out of many factors contributing to your win. But when you lose, the key factor resulting in your loss is usually clearly visible. As this might not be the only factor contributing to your loss, the more losses you have, the more factors you will be able to identify that affect the outcome of your battles. The more factors you are able to have in your favour, the more likely you are able to replicate success in your next battle. So, remember to learn from your mistakes!
Learning from Others
In the DomiNations game, you could join an alliance with other players, chat with them and observe their defensive placements. Likely, these players have been playing the game longer and gained a lot more experience than you have. To save time and efforts in learning from your mistakes, you could join an alliance and learn from them. Where there are unofficial game strategies written by experienced players, read them too. It will save you from a lot of unnecessary heartaches later!
While I might be describing my experience from playing a mobile game, these lessons are equally applicable to stock investments that do not come with an official game manual. Learning from mistakes and learning from others are the best ways to become a better investor. Despite having 29 years of experience in the stock market, I am still learning from mistakes and I also have alliance members whom I can learn from – investment books in the library and financial bloggers on TheFinance.sg and Singapore Investment Bloggers!
Thanks for staying tuned to this blog throughout the year. Wishing all readers Merry Christmas and a Happy, Prosperous and Healthy 2016!
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Hi Chin Wai,ReplyDelete
"when you win, you practically learn nothing, but when you lose, you learn a valuable lesson in what does not work. In fact, the greater the loss, the more deeply you will learn and not repeat it. The more mistakes you make, the more knowledge you gain on what does not work. Over time, as you gain more knowledge on what does not work, you will eventually become a better player."
I am totally align with your philosophy of "learning from mistakes".
In fact, it is during crisis that you can see who are the really good ones, be it in a stock/company or in a person.
I wish you happy new year 2016. Best of health, wealth and loads of happy momnents.
Thks. Wishing you a Happy, Prosperous & Healthy 2016 too!