Wednesday, May 02, 2007

Don't Worry About The Market

Do you think about beating the stock market? Well you shouldn't. I don’t. Here’s why.

During my first year of law school, like many other first year law students, I was very stressed out about exams. In law school unlike undergrad, there are no mid-terms, papers, or other ways to earn points towards your final grade. There is but one examination which can cover a semester or even two semesters worth of material.

This of course leads to much discussion among students about the “test.” How difficult the exam is and whether one could do well enough to “beat” the test were common concerns raised. And for a while I joined in the stress fest, until someone told me a funny story.

The story went like this:

There were these two hunters who decide one day to go hunting for a bear. After several days on the hunt they had yet to capture their prize when out of nowhere a bear jumps from behind a thicket. Being the inexperienced hunters that they were, the hunters drop their weapons and begin to run down the trail with this very angry bear hot on their heels.

After a bit of time, and without much success of eluding the bear, one hunter turns to the other and gasps “Hey, I sure hope we can outrun this bear.” Being a bit more in shape than the other, the second hunter just turns and smiles and as he begins to run faster yells back over his shoulder “I don’t have to out run the bear, I just have to outrun you!”
Once I heard that I never worried about law school exams again. Oh sure, I still studied hard in order to get the best result I could, but the anxiety of failing dropped away. You see, law school exams are graded on a curve. Therefore, nobody beats the test. If there are a hundred points on the exam and the best score is 90 then that is the A+ paper. All other grades flow from that. I realized I did not need to beat the test to survive, I just needed to do better than my fellow students.

Once I knew that, any stress I had about the test disappeared. I began to look around at my fellow students and assessed my chances of running faster than them. And I liked the odds.

Now of course by now you may be wondering what does this have to do about the stock market for a new investor or trader. I think it is important to remember that the market is made up of individuals. When you buy or sell you are not buying/selling to the market, you are conducting an individual transaction between you and another person. Consequently, you should not be worrying about beating a market or some arbitrary index, you should be thinking about the person on the other side of the trade.

If you are a fundamental investor and you buy a stock because you think it is undervalued, you should ask yourself “why does the person selling think it is overvalued enough to sell.” If you rely on charts which indicate you should sell, do you ask yourself “what does the buyer see in his chart that I do not?” Instead of getting excited that the market has made a mistake, you should look to make sure you are not the slow one making the mistake.

As you develop as a trader or investor don’t spend too much time worrying about beating the market. Instead focus your energy on doing the best you can do relative to other investors and traders. You don’t have to beat the market, you just have to be more right than the next person when you make a decision.

After all, the devil always takes the hindmost, don’t let that person be you.

1 comment:

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