Mathematical Proof that Checking Share Prices Less Makes You Happier

Small-Cap Value Brexit

One of the many nuggets of wisdom from Fooled by Randomness by Nassim Taleb – I wish I am capable of coming up with such stuff.

Assume that you have an investor who is capable of earning a return of 15% with a 10% volatility. It means that out of 100 sample paths, we expect close to 68 of them to fall within a band of plus and minus 10% around the 15% excess return.

A 15% return with a 10% volatility translate into a 93% probability of success in any given year. But seen on a narrow time scale, this translates into a mere 50.02% probability of success over any given second.

A minute by minute examination of his performance means that each day (assuming 8 hours a day) he will have 241 pleasurable minutes against 239 pleasurable ones. These amount to 60,688 and 60,271 respectively, per year. Studies have shown that investors feel more pain for given negative performance than pleasure in a positive performance of the same magnitude. Therefore, it is likely that the investor incurs a large deficit when examining his performance at a high frequency.

Consider the situation where the investor examines his portfolio only upon receiving the monthly account from the brokerage house. As 67% of his months will be positive, he incurs only 4 pangs of pain per annum and 8 uplifting experiences. This is the same investor following the same strategy. Now consider the investor looking at his performance only every year. Over the next 20 years, that he is expected to live, he will experience 19 pleasant surprises for every unpleasant one!

Final Words

In today’s era of connectivity, it is not uncommon for investors to have live updates on share prices. This only exacerbates the mental assault on investors. Mental discipline is critical in discerning noise from real information – easier said than done, of course. Keep in mind that Taleb is not advocating that investors lose touch with the company fundamentals. The key message would be that the randomness of share prices makes it an insalubrious affair to be monitoring them. However, I guess this can be abit tricky to practise as investors do use share price as a first indication of a change in fundamentals.

 

Value Creation

For exclusive info on hedge funds and the latest news from value investing world at only a few dollars a month check out ValueWalk Premium right here.

Multiple people interested? Check out our new corporate plan right here (We are currently offering a major discount)






About the Author

SG Value Investor
I developed my passion for investment management especially equity research at a relatively young age. My investment journey began when I was 20, at a point in time where markets were still recovering from the Global Financial Crisis. My portfolio started from money I saved over the past years and through working during the holidays. I was fortunate to have a good friend with common investing mentality to began my journey towards value investing. To date, we still research and invest in companies together, discussing valuations and potential risks of a company. To date, I manage a fund with a value investing style. Positions are decided upon via a bottom-up approach or smart speculation (a term I came up with when buying a stock for quick profit due to a mismatch in prices in the market due to takeovers/selling of a subsidiary or associate). Apart from managing my own portfolio, I enjoy sharing my research with family and friends, seeking their opinions and views towards the stock. Reading Economics in London, I constantly keep up with the financial news in Singapore & Hong Kong. Despite my busy schedule, it has not stopped me from enjoying other aspects of life. I enjoy a variety of activities in whatever free time I may have – endurance running, marathons, traveling, fine dining, whiskey appreciation, fashion. Lastly, I enjoy meeting new people, discussing ideas and gaining new perspectives towards issues in the world.

Be the first to comment on "Mathematical Proof that Checking Share Prices Less Makes You Happier"

Leave a comment