Investor's attitude to be able to predict all variables

 

Investors:

Investors are confused and confused as too many external variables rush in at once.

Do you need to be able to predict all these variables in advance to be a good investor?

 

Or, is it the attitude of a wise investor to ignore all of this and go on my way?

Let's think about what to see and how to respond whenever these external variables explode.

It would not be a healthy attitude to blindly ignore the occasional external variable and simply dismiss it as 'bad luck', nor an attitude conducive to profitability.

It is, of course, impossible to predict all of these events.

Then, since there are many variables that are difficult to predict, is it only a good attitude to avoid unconditionally conservatively? In that case, there may be no need to venture into the world of investment.

Luck and skill:

What is 'skill' in an area where unexpected variables appear, and 'luck' in a broad sense has a large impact?

To summarize quickly, luck is 'the degree to which the outcome value in a single trial is more favorable than the expected value', and skill is 'the ability to infer a probability distribution and produce an expected value as an actual result through multiple trials'.

For example, let's say you roll a dice and the higher the value, the better the game:

The expected value of the scale would be 3.5. If a scale of 5 came out, it could be expressed as ‘I was as lucky as 1.5’ after subtracting the expected value of 3.5, and if it came out on a scale of 1, I could say ‘I was unlucky by 2.5’. (Skill may mean the skill of adjusting the snap of the wrist well to get a value greater than 3.5, but

Let's assume that there is no such skill.) Here, skill means,
1) Can we infer an expected value of 3.5?
2) If 3.5 comes out, is it an advantageous game for me?
3) To be able to throw multiple times to converge to 3.5
We can talk about running the game or not. In other words, skill in an area where luck largely depends on the ‘decision-making process’.

[caption id="attachment_6111" align="alignright" width="310"] Decision making[/caption]

Luck and skill are not equal concepts. Luck works in each ‘individual trial’.

Skill is a concept that operates in the ‘decision-making process’, that is, the ability to extract good results even in consideration of the system in which randomness operates.

At the moment of rolling the dice, regardless of the result, those who have skills and those who lack skills are already decided.

How can we apply these concepts to cases like epidemics?

Let's look at it step by step. The maxim's pitfall There is a notion that a good investor must be brave enough to venture out when fear is at its peak.

[caption id="attachment_6295" align="alignleft" width="300"] Warren Buffet[/caption]

Furthermore, there are many people who consider 'reverse thinking investment' as an excellent investment strategy. Quoting Warren Buffett's quote, "fearful when others are greedy and greedy when others are fearful".

By the way, how do you know that the fear is 'peak'? What do you mean by 'best' or 'lowest'?

In order to say that a value was 'best', you can only say that the value has decreased since then.

[caption id="attachment_6114" align="alignright" width="161"] Peter Lynch[/caption]

As the situation progresses, you don't know if this is the best time or if it will get worse in the future.

There is a saying worthy of this, 'I thought it was a floor, but there is a basement'.

As a counter to the saying 'save when your fear is at its peak', there is a saying by Peter Lynch,

'Don't try to catch a falling blade'.

Aphorisms are meaningful by connoting their wisdom briefly:

 

 

I have to understand the depth and apply it to my decision-making process, but it is difficult to get good results by applying conflicting maxims piecemeal.

Rather, it is helpful to understand the psychology of the market to see what maxims people are repeating right now.

For example, if the message 'investment is originally to be held for the long term!' is gaining strength, it can be understood that 'there are many people who have a hard time being bitten', or 'if the corporate value has not changed, a fall in stock price is an opportunity to buy at a low price'. If more people are crying out, it can be interpreted as 'People haven't lost hope yet' or 'It will be safe to see more bloody seas'.

signal and noise:

 

People who have studied investing a bit often bring up the topic of 'signals and noise'.

Investors with experience spit out the cool (?!) saying 'response rather than predict'.

It is impossible to predict the future anyway, so whenever there is new news, it is argued that the way to become a master is to distinguish between signals and noises and respond well.

 

Would that be true? Now, let's take a look at this new corona virus. What shall we see?...

The number of deaths, confirmed cases, quarantine measures, etc. is updated daily. There are many attempts to view the slowdown in the number of confirmed cases as a trigger for a stock price rebound.

I try to predict how long the situation will last by looking at past cases.

It is a very healthy approach to look into the future by looking at the evolution of a situation, determining the root cause, and examining the past. good.

what should investors who interprets data do?

 

[caption id="attachment_6119" align="alignleft" width="310"] Data Interpreting[/caption]

Let's say you've come to the conclusion that this is likely to last for more than a month. So do you sell all the stocks?

Should I sell and then buy again by accurately 'predicting' the bottom?

Or do you come to the conclusion that it is not a big deal and continue to increase the quantity by trying to 'pick up' every time it goes down?

Or do you bet on a decline and buy a put option or an inverse ETF?

* Put option: The right to ‘sell’ a specific product at a specific price at a specific time regardless of the market price.

* Inverse ETF: A product that can make a profit only when the price of the relevant index falls

 

At this point, let's clear our head and think carefully. What was I trying to do in the first place?

Every investor has their own position. For example, 60% stocks, 20% real estate, 10% bonds, 10% cash, and so on. As you build each position, there will be a reason for holding it.

In other words, there must be something you want to do. What is the relationship between the original reason and the current corona crisis?

Every investor plays their own game:

 

 

Important questions in distinguishing between signal and noise are 'what did I try to predict', 'how do I define the game', and 'how do I know I was wrong'?

If you buy a stock over a period of more than one year, the epidemic issue is noise because it is highly likely to be buried within one year (based on past cases). The game isn't over, so you haven't lost the game.

If you bet for one month, the plunge caused by the epidemic issue is fatal.

If you have suffered a loss for a month, you have accumulated a record of one loss.

However, we can closely monitor the timing of a short-term rebound after the sharp decline.

For these investors, day-to-day issues are a signal.

 

The attitude of 'I'm a long-term investor, so I'll ignore short-term issues' is also dangerous.

Even if you've been betting for more than a year, as in the former case, there will be reasons for the price to go up after one year.

As it is often said, the company's performance improves (bottom-up),
If the demand for Chinese tourists increases (top-down),
There must be some idea related to the US presidential election (event driven) or something like that.

Epidemic impact on economy:

 

Taking the case of SARS, the epidemic has little impact on the economy. However, compared to 2003, China's influence in the global economy has grown tremendously.

In particular, Wuhan is an important transportation hub in China. If China's production and consumption contract together, it could have a bigger impact than expected on the global economy, which was expected to be spurred by the resolution of the US-China dispute.

The question "How do you differentiate between a signal and a noise?" is pointless.

In terms of engineering, in order to design a noise filter, you must first decide which frequency band to 'set' as noise. What is a signal and what is a noise depends on your position and your ideas.

[caption id="attachment_6126" align="aligncenter" width="335"] Epidemic impact[/caption]

The question should be replaced with the question "How are my positions and ideas affected by this issue?"

What the signal is is up to me. If you bet on the fundamentals, you can see if the fundamentals are broken, and if you bet on the psychology, you can see how much the psychology is broken.

Changes in fundamentals are continuous, and changes in psychology are short-lived. It changes every day.
1) If the fundamentals are broken and the psychology is broken: It is inevitable to lose a stop, but it may give you an exit chance when the psychology returns.
2) If the fundamentals are broken and the psychology is not broken: Now is a good exit opportunity.
3) If the fundamentals are not broken and the psychology is broken: You can take a leisurely look or make additional purchases.
4) If the fundamentals are not broken and the psychology is not broken: There is no need to respond.

The concept of 'exposure rather than predict:

 

The advice I mentioned earlier, 'Give up in fear,' applies only to the third.

An additional purchase is reasonable only when the 'expected rate of return has risen' due to a fall in the price.

(It is a separate competency to determine whether the expected return has really risen.) Exposure over prediction I prefer the expression 'exposure over prediction' rather than 'response over prediction'.

If you mistakenly accept the maxim of 'response rather than anticipate', you may make the mistake of destroying your position by responding quickly to meaningless issues even if you have built up a good position.

[caption id="attachment_6129" align="alignright" width="188"] "Prediction"[/caption]

The concept of 'exposure rather than predict' means 'structurally prepare for something that is likely to happen one day, or build a position that can be used conversely'.

For example, let's say that you decide that a certain bridge is likely to collapse within a year because it was made with poor construction.

While betting on exactly how many cars will collapse is 'prediction', having insurance when crossing this bridge is 'exposure'.

Prediction and exposure:

Buying a certain stock at 10,000 won,
If you decide that you will go up to $20, it is ‘prediction’, and if you are lucky, you can go up to $20, but if you are unlucky, it will be difficult to fall below $8 is ‘exposure’.

[caption id="attachment_6301" align="aligncenter" width="351"] Prediction and Exposure[/caption]

Randomness comes into play with any investment, and it's much easier to deduce how much damage or profit you can take or benefit from randomness than it is to predict where your luck will go.

No industry can be unaffected by the economy.

Big or small or in the opposite direction, it moves around depending on the macro variable.

The same goes for assets that are called safe-haven assets. (The term safe asset itself does not mean that it is a less risky asset when ‘the preference for safe assets is strong’ haha)

It is difficult to accurately predict the outbreak or ramifications of an epidemic.

How vulnerable the asset is to external variables?

 

However, at the time of buying an asset, that is, at the time of 'establishing a position', it is possible to infer what kind of risk there will be in the asset price.

Sectors vulnerable to epidemics are: Travel, airlines, casinos, and movie theaters where large numbers of people gather.

Sectors that are resistant to epidemics are: games and online distribution that benefit from fewer people gathering.

3) Sectors that benefit from the epidemic are: mask sellers, etc.
(If the epidemic issue passes, you will suffer from inventory processing.)

Travel Stock:

Similar inferences can be made for earthquakes, terrorism, geopolitical variables, etc.

If you're considering buying a travel stock, you're trying to predict the probability of a decline in travel demand due to terrorism.

 

A person who wants to control exposure should ask the question, 'Is the price that can be dropped as much as possible when demand drops sharply due to terrorism, and is the price that can be raised as much as possible when the business is well conducted without terrorism at an attractive level compared to the current price? Throw.

If you want to avoid losses from terrorism, you could buy a package of defense stocks that will give you an advantage.

In the first paragraph 'Luck and Skill', it was said that with experience, various external variables can be taken into account. However, if experience remains just experience, you may fall into the trap of blindly fearing external variables.

Unconditional avoidance of weak sectors is called 'prefer safe assets' in jargon.

However, no asset in the world is completely safe. The price of gold in 2010 is the same as in 1265, adjusted for inflation.

The success equation of 'luck and skill':

 

Cash is the 'worst investment asset' that definitely loses purchasing power. Let's go back to the book 'The Success Equation of Luck and Skill'.

“Experience is a necessary condition for skill, but not a sufficient condition,” he said. It is a skill to be able to melt experience into probability distribution inference and position sizing. Based on experience, considering various external variables and neutralizing noise by distributing asset weaknesses, you can obtain a return as high as the expected value.

A smart asset allocation may be a safer asset than any other asset.

Don't try to fight predictions. To win the battle of predictions, I have to be smarter than others.

A game that competes with intelligence is, after all, a zero-sum game. When experience allows you to control the exposure of your position, you can go your own way without defeating others.