Thursday, November 02, 2006
Business and investing quote of wisdom of the week
Someone once mentioned "History is a poor teacher and humans are an atrocious bunch of students." In general, this is every true in many cases. People hardly learn the hard lesson taught by experience or history even though personal experience is encountered. For instance, there will always be people who will spend every cent of their salary on extravagance and then they encounter hardship in their daily expenditures. And when they encounter hardship, they make a resolution to budget properly and do away with unnecessary spending. But then when all is well again, they forgot what they had gone through in the past, they go back to their old habits when they have a little more cash on hand.
Particularly, this phenomenon is no where more prominent than in the field of investment. Many times, investors do not learn from the lessons and facts that were taught in the past. Historically, it has been proven that when asset price is bought when price is being chased up, the chances of losing is much more than winning. But, here, the psychology of human takes control over logic. They get more comfortable to invest when prices are on the high side than to invest when it is on the low end. Another case is investors perpetually likes to invest in the sexiest business in issue that has been so rosily painted by Wall Street even though not a single cent has been earned yet. Hands were burnt before, and these hands withdrew by themselves but yet again, lessons were not inscribed in their memories, they still put their hands in it once again.
Here, if history does not teaches investors a lasting lesson. These sort of investors should in fact behave like how Buffett once described: "A cat who once sat on a hot stove will not sit on another stove again, hot or cold." At least, the behavior akin to the cat will save these investors from losses. But if an investor is able to learn from the past, he or she must never behave like this cat to avoid the market even if it is to his advantage.