The diminishing return and inverse return effects

This article Why the best things in life are all backwards has just given me a perfect excuse for my laziness and stoic-ness. 
(Hmm does believing in mind to be lazy produce the opposite effect? Opps, ok it doesn't seemed to work that way.)

The diminishing effect of return

A lot of things in life have got the diminishing return effect (he economic textb: the law of diminishing returns states that as one input variable is increased, there is a point at which the marginal increase in output begins to decrease, holding all other inputs constant). In other words, when you overdo something, that something becomes less rewarding. Just to add a few more examples - owning luxury goods, reading investment blogs / books, watching self-help videos and even writing blog posts can have the effect of diminishing return.

"The difference between earning $20,000 and $40,000 is huge and life-changing. The difference between earning $120,000 and $140,000 means your car has slightly nicer seat heaters. The difference between earning $127,020,000 and $127,040,000 is basically a rounding error on your tax return."

Nowadays, as my learning curve plateaued, writing blog posts more frequently no longer brings me as much mental satisfaction as when I started out blogging 10 years back. Unless a reading or a vlog brings new concepts to the table, there is only that much that we can learn about fundamental and technical analysis in investing really. These principles don't change. Most of these resources are merely paraphrasing the nuances or using different illustrations for the same concepts. Thus, there's also only so much that I can talk about for FA, TA, 3Ms and so on, without drawing too much reference to my own portfolio.

That is also why we shouldn't spend more time than necessary on analyzing and monitoring our portfolios.

Allowing yourself to sink before action

Like the SEAL exercise - we can let ourselves sink deep enough without panicking, then perform an action with a clear mind to deal with the situation. It's letting go of control in order to gain control. Sounds paradoxical to you?

Just like we cannot control the market, but we can control our mind and how we choose to react to market situations. I have identified three broad types of people in the market. They are the over-reactor, the chance taker and the non-reactor.

1) The over-reactor jumps at every market correction, big or small, and will sell off his holding at the first sign of red. He is also quick to jump in on any good news.

2) The chance-taker will analyse the market situation to find out if the bad news would give a long term impact on his holding. He will buy in the fundamentally good stocks when their prices drop to attractive points in a correction and may be slow to sell. He has plans on his portfolio construct.

3) The non-reactor would buy as and when he is pleased regardless of market conditions. He does not react to market situations or price changes, and generally believes in "holding long term" (or succumbence to fate).

If you know roughly where the bottom of the pool is, it's easier for your mind to stay calm. It's something like a margin of safety or a set stop-loss cos we know it's there and we can only sink so far. When we kind of sense the bottom, we can choose to do something about it (push ourselves up) or nothing and pray for miracle (to get fished out when unconscious).


Wait a minute... in case you thought I am encouraging you to "buy the dip" every time. No no.

Although it's not going to be a life and death situation for investing, I am just encouraging you to think about what you should do when you have a sinking portfolio. If your coffer is deep, then by all means buy the dips with your own convictions. For example, in the early 2012 market correction, I chose to totally revamp my portfolio instead of buying the dips. What would happen if we chose to believe in articles like this one then?

We don't know just yet the true impact of corona-virus on the global economy (as economic movements have delayed response) but we can keep ourselves braced.

Don't freeze in fear. Don't act on impulses.

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  1. Can i think of diminishing return this way.

    Even too much of a good thing is bad for us.

    Too much money bad for us?

    Funny, i am still trying in the Market leh.

    i still think not enough for me lah?


    1. Hi Uncle Temperament,

      Perhaps I should put it this way - too much money is bad for those who can't handle it. That is for the post tipping-point part. Of course the tipping points may differ based on individual.

      Good for you that your "point of diminishing return" has not yet been reached! :)

      How about too much of the market also can have diminishing (thrill effect) return?


  2. Not for me still look at the markets (look only) everyday since 1987/8 without fail.


    Mostly for something like what happened in the market just for the whole week DJI down by about 12% and VIX shot up the sky. Though i don't short one. i am fighting only with one arm in the market like SMOL likes to say. But it's O. K. as long as i also make money lah.

    Of course, i look at the market everyday for other market's aberrations too. Like IPO, rights issues, mergers, takeover,......


  3. LOL!

    Still look at the market everyday since 1987/88.

    The longer the time, the more experiences gathered, the better the result in the market!?

    But the day may come, really, really have diminishing return due to cognitive skills deteriorating due to age.

    Hope to be able to realise when it comes and get out off the market in time.



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