The diminishing return and SEAL exercise

This article "Why the best things in life are all backwards" has given me the 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


Many things in life exhibit the diminishing return effect (according to the 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). 

To put it simply, when you overdo something, that something becomes less rewarding. A few examples  are - 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 an article or a vlog brings new concepts to me, there is only that much that I can learn about fundamental and technical analysis from theories. Because certain principles don't change. Most of these resources are merely paraphrasing the nuances or using different illustrations for the same concepts. Thus, I might find myself writing the same thing for FA, TA, 3Ms and so on, while reflecting on my portfolio.


That is also why we shouldn't spend more time than necessary on analyzing and monitoring. The more we analyze and act, the less we stand to gain.


Allowing ourselves to totally sink before acting


Like the SEAL exercise (also mentioned in the article at the start of this post) - we should 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. Does it sound paradoxical to you?


We cannot control the market, but we know we can control our mind and how we choose to react to market situations. I have identified three broad types of investor behaviors in the market. They are the over-reactor, the opportunist and the non-reactor.


1) The Over-reactor

He 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 Opportunist

He will analyze 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. He's patient and will wait for the right price point to sell or sell in successions. He has plans on his portfolio construct.

3) The Non-reactor

He will DCA or automate his investing decision regardless of market conditions. He does not react to market situations or price changes, and generally believes in "holding long term" (or succumb to "fate").


One thing I would like to point out is - if we know roughly where the bottom of the pool lies, it's easier for our 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 "sensed" the bottom, we can choose to do something about it (push ourselves up) or nothing and pray for miracle to happen (get fished out when unconscious).


---

Wait a minute... in case you thought I am encouraging you to always "buy the dip". That's not my intention. Although it's not going to be a life and death situation for investing, we can apply the same practice when we have a sinking portfolio.

For example, in the early 2012 market correction, I chose to totally revamp my portfolio and cut losses short 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. Be prepared to sink.



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Comments

  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?

    Shalom.

    ReplyDelete
    Replies
    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?

      Hehe

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

    Why?

    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,......

    LOL!

    ReplyDelete
  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.

    Shalom.

    ReplyDelete

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