Sir Isaac Newton and Investing? What’s the connection?
Let me tell you.
Way back in 1720, this Physicist owned shares in the South Sea Company, the hottest stock in England that time.
He sold the shares sensing bad things in market and pocketed 100% profit in this. His total profit was 7000 GBP that time.
But few months later he again entered stock market at a much higher price and lost 20,000 GBP.
For the rest of his life, he didn’t allow anyone to use the words “South Sea” in his presence.
As per Benjamin Graham, father of Value Investing, you don’t need to be extra genius to succeed in investing.
He emphasizes on having traits related to the character rather than of the brain.
Traits like—Patience, Discipline, Eagerness to learn—are important for investors.
Only high Intelligence Quotient(IQ) and higher education will not make you a smart investor.
You have already seen the example of Sir Isaac Newton.
Second example would be of Long-Term Capital Management (LTCM), a hedge fund run by a team of mathematicians, computer scientists and two Nobel prize winning economists.
This hedge fund,LTCM, lost more than $2 billion in a huge bet, that too in weeks.
Now, you understand that only IQ is not enough. As per Benjamin Graham, having character traits are more important in such cases.
Third example would that be of dot-com bubble, or dot-com boom.
During 1997-2000, there was a mad rush for creating and investing in dot com or internet companies. These companies didn’t have any solid business model. Venture Capital money ran such companies. Every company having ‘e’ as a prefix and .com as suffix would be termed as internet company then.
But in 2000 this bubble burst and many companies were swept out of the market. Many companies filed for bankruptcy. Even companies like Cisco and Amazon were hit badly due to this bubble.
Much of this damage could have been avoided if the investors had emotional discipline,as Graham says.
Investors in all these cases forgot to ask one simple question—“How much?”
People in this dot com period didn’t check the value of such shares, they didn’t even check the simple metric like P/E before investing in such stock. They should have asked one question, “How much is this stock worth?”
Don’t always go overboard in stock markets,as Graham warns –
“While enthusiasm may be necessary for great accomplishments elsewhere, on wall street it almost leads to disaster.”
Overconfidence sometimes leads us into trouble. Look at examples like—Satyam, Suzlon and Kingfisher Airlines.
If you use important traits of your character like—Patience,Discipline, Eagerness to learn—there will only be upside to your investments.
Think again 🙂