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Navigating investing challenges: Why Mr. Market is an unreliable feedback loop

Updated: Apr 9

In most endeavors, we rely on immediate feedback to refine our skills. For instance, zero sales may signal a need to improve your sales pitch, while a lack of goals as a striker shows the necessity to practice shooting form.

However, investing presents unique challenges in this regard.

In this article, we’ll explore these challenges and offer three practical steps to enhance your proficiency as an investor.

The unpredictable Mr. Market

Investing, unlike many crafts, lacks the advantage of immediate feedback. Benjamin Graham likened the stock market’s fluctuations to bipolar disorder, with Mr. Market swinging between extreme highs and lows based on optimism or pessimism.

From mid-2020 to late 2021, the stock market soared, especially in tech stocks, making everyone feel like an investing guru.

The positive feedback loop resulted in many thinking that investing was easy and that we could achieve financial success without much effort.

However, in 2022, the market experienced a sharp decline, regardless of the business’s quality.

For those who began investing in late 2021, this negative feedback loop might lead them to believe that investing is best left to professionals or that they should stick to “safer” options like bonds, or worse, avoid investing altogether.

This shows that the stock market is not a perfect immediate feedback loop. It can take investors up to five years to determine the results of their investments.

In the short run, the allure of significant gains might deceive, only to reveal themselves as fleeting mirages. Similarly, losses experienced during this period can prove to be transient setbacks.

Focus on the process itself constantly

The delayed feedback in the stock market emphasizes the importance of having a patient, long-term perspective.

There is also no way to shorten or rush that feedback loop.

One of Warren Buffett’s best pieces of advice is to lean on the belief that good things will happen to those who wait. In his own words, Buffett said: “No matter how great the talent or efforts are, some things just take time. You cannot produce a baby in one month by getting nine women pregnant.”

Instead of fixating on short-term gains or losses, focus on honing your investing skills by learning from experienced experts who have a consistent approach and a strong long-term track record, much like Warren Buffett himself.

Here are the three actionable steps you can take:

1. Learn from Warren Buffett’s expertise

Study Warren Buffett’s letters, watch his AGMs and analyse his previous investments. His long and publicly shared record offers valuable wisdom and insights.

Resources like Berkshire Hathaway AGM recordings and Buffett’s letters can serve as a starting point.

You may also want to check out my blog on The five most common investing mistakes warned by Warren Buffett.

2. Stick to fundamental principles

Adhere to the fundamental rule of investing in quality companies at fair prices, with a margin of safety.

By centering our approach to this crucial mantra, we ensure that our investments have a solid foundation, offering the potential for long-term growth and resilience.

This approach helps shield us from impulsive decisions driven by market fluctuations, fostering a disciplined and thoughtful investment journey that stands the test of time.

I analyse companies’ fundamentals and publish my analysis here where you can find wide economic moat companies that are undervalued. You can also check out the Aswath Damodaran valuation playlist, which I find useful.

3. Develop a clear investment thesis

Always formulate a story before investing. Write your investment thesis and assess potential risks.

It is important to understand what conditions must be met for the company to thrive. Even if you lack familiarity with the company, putting your thoughts into writing can help clarify your understanding.

To ensure that your investment in a company remains sound, it is a good idea to periodically check up on the company’s story. This can involve reading the latest reports and inquiring about the earnings and whether they are meeting expectations.

Check out the Instagram post I did regarding Peter Lynch’s 2-minute drill.

Always write down your investment thesis and assess potential risks before investing. This is part of Peter Lynch's teaching.

Bottom line

Mr Market’s irrationality cannot be relied upon as a feedback loop for investors.

Unlike the majority of other crafts, where immediate feedback guides skill development, the stock market’s unpredictable mood swings defy such a pattern.

Acknowledging this limitation is the key to adopting a patient, long-term perspective. By following disciplined strategies and learning from seasoned investors like Warren Buffett, we can navigate the challenges of investing and cultivate a resilient approach that withstands the fluctuations of Mr Market, leading us towards greater financial success in the long run.


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