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Stock market will rise

Luck has a great deal to do with it. Whenever a stock trades, the buyer thinks the seller is making a mistake. The seller thinks the buyer is mistaken.

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In the second part of the interview, Jason Zweig, the author of ‘Your Money and Your Brain - How the New Science of Neuroeconomics Can Help Make You Rich, talks about the future of the Indian stock market

Does luck have a role in investing?

Luck has a great deal to do with it. Whenever a stock trades, the buyer thinks the seller is making a mistake. The seller thinks the buyer is mistaken. Only one of them can be right.

After they both pay their dealing costs and any taxes on the transaction, neither may show any net profit for his pains.

In the short run, almost anyone can be right a few times in a row, by luck alone - just as anyone can flip a coin right-side up several times in a row without any coin-flipping skill, whatsoever.

Even in the long run, luck can rule the day. It can take years, even decades, to determine whether an investor has genuine and repeatable skill or is just lucky.

The danger comes when you believe you are skillful and, in fact, you turn out to be merely lucky. Then you do things out of a belief that every step you take is the right one, and you end up slipping on a banana peel and falling down the stairs.

You talk about the “illusion of control.” Investors tend to be over-optimistic when they are directly involved and have had no negative experience from the over-optimism.

How does this affect investing decisions?

It is easy to believe “I did it” when a stock you buy goes up. However, your actions did not cause the price to rise. Ask yourself this: If I had not bought the stock at all, would it not have risen without me?

The way to escape the illusion of control is to invest with the aid of a checklist, a series of rules you must always follow before buying or selling any investment.

This way, the rules make the decisions for you, and you take your pride out of the picture, enabling you to be more objective. In my book, I outline some rules that may be useful for many people.

Can financial future be foretold?

Some things can be. I am very confident predicting that the Indian stock market will lose a third of its value over the course of a few months.

However, I have no idea, whatsoever, when this will happen. I am equally confident predicting that the Indian stock market will rise ten-fold and more over the long term.

And I am more confident still in predicting that the true investors who have the courage to buy when the market crashes will make much more money in the long run than the fools who buy only when stocks go up.

Why are investors so addicted to CNBC? Their broadcast gives a feeling the “stock markets are in a crisis all the time.” Does that have an impact on the way investors invest?

Years ago, you could only find out a stock price in tomorrow’s (or sometimes, the next week’s) newspaper. Now you can find out the latest price every few minutes on CNBC or every few seconds online.

This is the tragedy of technology - that the tool that should make us wiser, instead makes us act more foolishly than ever before. The human brain is a pattern-recognition machine.

The more frequently you look at a series of data, the more often you will see “trends” and patterns that are not really there; they are nothing more than chaos clothed in a costume of regularity, illusions of order in streams of data that are utterly random.

After two consecutive stimuli in the same direction, the human brain automatically, involuntarily, and uncontrollably expects a third. We extrapolate repetition out of what actually is randomness.

CNBC is addictive because it continuously presents you with the opportunity to perceive what is not actually there: order, predictability, reliable patterns. It grips us the way all great fiction is gripping, with the added irony that very few of us realise that what we are watching is actually fiction.

Most of the investment experts do not really give any usable information. Is not listening to such experts better than taking them seriously?

I would listen very seriously to any financial expert who would provide a record of every forecast he has ever made, both good and bad. Many forecasters will tell us about every single one of their successes.

However, to the best of my knowledge, there is no financial forecaster alive who has ever provided a complete list of all his predictions, including the failures.

There’s a reason for that: Anyone who really knew how to forecast the financial future would be most unlikely to let others in upon his secrets.

 

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