Comments on: Think about more than timing: 6 questions you should ask yourself before making any investment

By: Presh Talwalkar

Presh Talwalkar — Mon, 26 Jan 2009 08:48:46 +0000

Great points about volatility. Stocks may move more often on a day to day basis but the returns may smooth out over a longer holding period.

Scott’s question about how much one can lose is very important. As we saw over the last year one can lose quickly in stocks…

By: Stephen

Stephen — Thu, 22 Jan 2009 21:51:39 +0000

I would like to hear more about what you learned in school about market timing. I guess I think of it as technical analysis. Although by no means do I rely on it, I do like to consult the chart. Thanks!

By: Patrick

Patrick — Thu, 22 Jan 2009 17:53:55 +0000

I agree with Scott. Stock price volatility does not correlate to risk in stock ownership. Stock is best regarded as part ownership of a company. The true value of the underlying business provides the safety. Determining a value for the business and buying at a large discount to that value is a good (the best?) way to establish a margin of safety.

By: Scott

Scott — Thu, 22 Jan 2009 14:22:19 +0000

One question that is always in the back of my mind is, “Worse case scenario: what do I stand to lose?”

Yes, the magnitude of loss isn’t the only factor as one should also be aware of the probability of such a loss as well – when making decisions.

However, a chance is still a chance and one would be foolish to ignore that possibility simply because it is low. Even if you don’t, actually, do anything about it, simply being aware of the possbility and magnitude of loss is better than being caught by it unawares.

In regards to point 2: I am, per your recommendation, currently reading “Fooled by Randomness” by Nassim Nicholas Taleb. He goes into the rare-event fallacy, referencing the peso problem. In short it cautions not to equate non-volatility with security. That is, the volatile nature of a stock should not used as a measure of how “safe” it is. After all, the catastrophic rare event is, by its very nature, unexpected. To quote from his book:

“Rare events are always unexpected, otherwise they would not occur. The typical case is as follows. You invest in a hedge fund that enjoys stable returns and no volatility, until one day, you receive a letter starting with ‘An unforeseen and unexpected event, deemed a rare occurence…’” (p. 109)

Overall, though, I feel this are good “common sense” questions people should ask as I believe knowledge is, in the long run, better than ignorance so long as one avoids common fallacies (which, admittedly, is hard).

Nassim would argue (and does) with the reason that, at least in regards to monitoring stock performance, more detailed analysis results in being exposed to more emotionally “bad” events even if the net performance of the stock is good. Thus, a casual investor shouldn’t concern himself with minute-by-minute updates as the emotional stress may outweight the financial gain.