Investing is a battle. A battle between the bulls and the bears, a battle between the longs and the shorts, a battle between those who are on your side of the market and those who aren’t. Kung-fu sparring can teach us much about investing. Kung-fu is more than a sport or a martial art; it’s a way of life. And that way of life can be used in the realm of investments.
- Kung-fu teaches us to keep a cool, clear head when investing.
- Kung-fu teaches us to know when to attack, and know when to wait for the right opportunity.
- Kung-fu teaches us about flexibility, and how important it is for investment success.
- Kung-fu teaches us that carelessness can be fatal. Carelessness should not be used as an excuse.
Kung-fu teaches us to restrain our emotions, and think clearly.
A real kung fu master always faces his enemies with a non-emotional, calculating face. He never shows his emotions. It doesn’t matter if the kung-fu master is facing 10 guys or 100 guys. It doesn’t matter if the kung-fu master is losing the duel. It doesn’t matter if the kung-fu master is winning the fight. He always keeps a calm face, keeps his emotions in check, and carefully observing the opponent, trying to find the opponent’s weakness.
So what does this have to do with investing (other than the fact that I like kung-fu)? As I mentioned, investing is the same as a kung-fu fighting match. A good investor always keeps his emotions in check. Uncontrollable emotions tend to distort one’s clear thinking, and without clear thinking, one is almost guaranteed of losing money in the financial markets. The cliché “anger blinds the mind” represents perfectly what a good investor shouldn’t do. People tend to get angry or scarred when their losing, whether it be a kung-fu fight or investing. And when people get angry or scarred, they think irrationally, and when they think irrationally, they’d better be prepared to meet the investment devil.
The same can be said for winning. The thrill of winning also blinds the mind. Look at all the great bubbles in the past. Investors were thrilled to be making 30% a year in the tech bubble! Those investors eventually let their success get to their heads, and got killed when the bubble popped. A good kung-fu master never lets his success get to his head. He is always in control of his emotions, that way he can avoid making a fatal mistake. Same goes for a good investor.
Kung-fu teaches us to know when to attack, and know when to wait for the right opportunity.
A good fighter choose his fights. The key to successful investing isn’t only to get good investment returns, but to survive another day. A good kung-fu master doesn’t throw attacks all the time during the kung-fu match. He waits for the opportune moment, when it becomes likely that his attack will defeat his opponent. Same goes for a good investor. One cannot simply invest in any opportunity. One must wait for an investment opportunity that is favourable. One must wait for an opportunity that has a high chance of profitability.
Many investors say that their goal in times of financial instability is simply to preserve capital. So they go out and buy what seems to be the safest investments/stocks. But I always wonder, why would they do that? If their goal is to preserve capital, why not just go 100% cash? It’s like a kung-fu master fighting a losing fight, and constantly throwing attacks, simply hoping that his attacks will prevent the enemy from hitting him. A smart kung-fu master in a losing fight would try to avoid the fight and stop throwing so many attacks to conserve energy.
My point? Pick your fights. Pick your investments. Carefully.
Kung-fu teaches you to be flexible, which is the key to survival in any game.
A good kung-fu master is flexible. He uses many fighting styles, because in each match, the opponent’s style is different, hence, his style must adjust to it (that is what I mean by being flexible). A good, experienced investor does the same. He (or she) knows that not all investment styles work all the time. For example, technical analysis doesn’t work when you have a big market player that’s severely manipulating the markets. Fundamental analysis doesn’t work when the markets begin to become irrational. Shorting stocks doesn’t work when a bubble is near its’ end. Short term trading doesn’t work when market volatility becomes insane (like recently).
A good investor doesn’t adhere to one or two investment strategies. He is comfortable with deploying multiple strategies, selecting the best ones to use depending on the current market condition.
Kung-fu teaches us that carelessness can be fatal.
How many times has your kid come home with a bad mark on his test, and he chalks up his failure to carelessness? Parents usually say, it’s ok, since it’s only carelessness. Truth is, not only in investing, but also in the game of life, carelessness can be fatal. In a kung-fu fight, a careless slip-up can cost you the match (or if it’s a kung-fu match like those of old, carelessness can cost you your life).
In the game of investing, carelessness often is fatal. Many investors, novice and professional, base their investment decisions on solid, numbers research. Let’s say you saw Company A’s P/E ratio as 80. Then you wrote that number down by accident as 8. Two days later, you come back to the number you wrote down and say “WOW! Company A’s P/E ratio is only 8!” You do a whole bunch of other mathematical calculations to perform your technical viewpoint of the stock (which coincidently, you make a few other calculation errors), and it comes out that Company A is a screaming buy. So you buy it. But if you hadn’t performed so many careless mistakes, you would have seen that Company A stock is in terrible condition.
Careless mistakes can be fatal. All it takes is one small, careless mistake to wipe out your investment portfolio (or destroy its value immensely).