The Law of Wasted Effort while Investing

The Law of Wasted Effort!

Posted By: Admin

Do you know that lions only succeed in a quarter of their hunting attempts? This means, they fail in 75% of their attempts and succeed in only 25%. Despite this small percentage, they don't despair in their pursuit

The main reason for this is not because of hunger as some might think, but it is the understanding of the “Law of Wasted Efforts” that have been instinctively built into animals, a law in which nature is governed.

Only humans think that the lack of success in a few attempts is failure but the truth is that: we only fail when we "stop trying".

Success is not to have a life free of pitfalls but success is to walk over your mistakes and go beyond every stage where your efforts were wasted, looking forward to the next stage. ( Excerpts from tweets by @Ronnie Screwvala).

In the investment world this Law of wasted effort has huge implications as to how we humans make investment decisions.

In our attempt to avoid making an error, we take sub optimal risks. If stock markets appear risky, we would rather stick with bank FDs irrespective of its low returns as the risk of capital erosion a feature of stock market is too difficult for us to stomach; or
We only attempt to make investments that have some level of certainty of outcomes and therefore the returns therefrom, are a lot less than ones where the risk is higher. Since risk and return are two sides of the same coin, if one wants to reduce risk, then he is in fact working to reduce his return too. You can’t have the cake and eat it too.
The three quarters time when the lion is unsuccessful, it has learnt some valuable lesson in hunting which it imbibes to become a superior hunter. If as an investor, you never fail, then you never have a learning and therefore you remain a poor investor not a wise one. No investor, not even Warren Buffett arguably the world’s greatest investor gets all his bets right, all he hopes for is

That the number of bets he gets right are more than the wrong ones ; and
That the losses of the wrong ones are more than made up by the profits of the right ones.

So go forth and take the risk, do some deep contemplation but do take the plunge. An inch of effort is more valuable than a mile of Analysis.

By Babu Krishnamoorthy, Chief Sherpa, Finsherpa