How instaMek Was Started Part 2
In last week’s piece on my everyday struggles, I talked about my first business and the lessons I learned. We learned that eight year olds make terrible employees and plans that might look good on paper don’t always work out.
This week, I’ll talk about my next venture as an active investor that didn’t go so well. Actually the more accurate term to call this venture would be gambling but that’s not the point.
I’m about 8 months into my job, and everyone is telling to get into real estate by buying a house. Being the contrarian I am, I tell them they’re fools and the best way to make money is the stock market. A mirage where most people come in and lose money while a few get rich.
The facts were on my side as well, historically the stock market has a higher rate of return than real estate (without leverage). People say the stock market is riskier but tell that to anyone who bought a house in in 2006 or 2007. All in all, looking at it objectively it’s a pretty good bet to get into the stock market.
I started by reading everything I could about the stock market, blogs, e-books and text books. I had a decent understanding of how things worked relatively quickly and could make sense of all the mumbo jumbo like ratios, technical indicators, price/volume action etc. I had a plan to buy a bunch of dividend playing blue chip stocks like Microsoft and call myself an investor.
I told my friend at work about my plan and he just blew it off a foolish. He was a go for the win type of investor. He said my plan was boring and you make no money doing it that way. He was all about the stocks poised to shoot right up and make 200–300% ROI making you rich.
This is where it all went downhill.
I thought about what he said, and I was like who wants to be 70 and rich? I rather be 32 and rich when I don’t have to worry about hip replacement surgery but rather if I’m going to OD on this blow or not.
So that got me into options, which is the riskiest, and most rewarding of all stock market instruments. You can turn $10,000 into $1,000,000 in less than a year with the right moves.
It’s straight up gambling and just like how derivatives caused the 2008 financial crisis in the world, they caused the same financial crisis in my margin account.
Never the less, there were a ton of lessons to be learned and can be summarized in the following:
The stock market is a clusterfuck of cognitive biases, literally every trick that can possibly played on your brain is in full effect including the following:
- Association bias
- Making decisions under stress/emotion
- Greed/envy
- Confirmation/consistency bias/focusing only on what grabs your attention
- Impatience
- Anchoring and comparative bias
- Availability bias
- Crowd folly
- Actions for the sake action/no reason
The best part is, these cognitive biases affect people every single day in everything they do. When people say shit like “know thyself”, they aren’t kidding.
It’s sad that hardly anyone cares to research as much as humanly possible in their own thinking and how their brain plays tricks on them. I’ve taken it upon myself to learn as much about this field as I can because I think you can literally just succeed at life but not sucking as much as everyone else.
The second thing I learned is, stop being greedy and chasing money. You really lower your chances of getting money that way. Instead do as Benjamin Graham said: find your circle of competence and make big bets on that. If you don’t have a circle of competence, then invest your money in education to develop one.
Remember, there is no great tragedy in other people making money. Envy doesn’t make cents.
The third thing I learned is that I need to learn to play my odds right. Investing, and life is all about probabilities. You want to do everything in your power to make sure you put the odds in you favor by doing everything the right way. That “right” way can be found by your own reading, but taking stupid risks like I did with a 1–2% chance of hitting but a 7000% return is gambling and not worth the odds. Don’t take the lottery approach, but the rather the systematic approach.
Also, one last thing: don’t base your financial future on hope. Trying to get rich on the stock market and other passive investments is basing your financial future on a wish and a prayer.
Originally published at uzairstheoryofeverything.com on February 23, 2015.
