Investing Rule Misunderstandings: Birdless Bush

So far, we have tried to fix some investing rule misunderstandings. We have redefined and explained many investing terms like intrinsic value, the margin of safety, growth versus value, and others. Today we try to target one of the most used quotes in the stock market: “One bird in the hand is better than two birds in the bush”.

The Trader Concept That Brings Investing Rule Misunderstandings

Most traders or short-term players understand it like follows: It is better to take profit 10 pips or 2% instead of letting the investment run in the long period since we don’t know how the future holds. Seems very logical. Continuing the argument, “It is easier to predict tomorrow than the next 10 years”. In a conclusion, the 10 pips or 2% profit is the bird in the hand. While investing for 10 years is the bird in the bush, we don’t know how to get it.

Perfect.

Americans, or people in general, are creatures of habit. The food, the read, TV shows, place for work. Familiarity gives predictability. So, the bird in the hand comes from this.

Wrong.

The Root

The origin “bird in the hand” isn’t like that. As Warren Buffett ever said, the bird in the hand is investing in assets, cash flow, brand, balance sheet, and the most important: economic moat. Bird in the bush is investing in a company that popular, growing neck-breaking speed, has no sign of stop, but with no cash flow, low-quality assets, and the worst: weak durable competitive advantage.

The trader tries to blur the basic concept into their own understanding which is very wrong

Now let’s respond to the premise that predicting near tomorrow is easier than distant future.

Our answer is, do not to confuse the period with the probability. The solid argument is: it is easier to rely on something that is more predictable than relying on something questionable. Going to the office or watching certain T series tomorrow is indeed more predictable than becoming a CEO in the next 15 years.

So, once again, the solid truth is: it is easier to rely on something that is more predictable than relying on something questionable.

Then we have:

It is predictable that the American economy is bigger in the next 10 years. It is much easier than saying the American economy is better tomorrow, Same with, it’s more predictable that Apple will be bigger in the next 10 years than Apple stock price will be higher tomorrow or next week.

The Disruption Somehow Make Investing Rule Misunderstandings

We don’t know how people say that this time is different. Some of them back the argument on the phenomenon of The Big Tech. Apple disrupts the phone industry, Amazon kills the retail, Google eats the entire internet, and Microsoft getting more monopolistic in business. Also, Facebook with massive scale. Shortly speaking, disruption. So, next, we have Tesla, Lemonade, DoorDash, etc. Disruption is the theme.

The misconception is, Apple, Amazon, and Tech Gang have a solid business advantage that places competitors at bay. Disruption is one thing, competitive advantage is another thing.

And, disruption doesn’t move the bird in the bush into your hand.

Nothing changes it.

Steam engine revolution didn’t change it.

It doesn’t move the bird in the bush into your hand.

Fundamental Role in Fixing Investing Rule Misunderstandings

Could you do bicep curl today and get a bigger forearm tomorrow? Absolutely not. The problem with most people or investors is not about probability, but about patience. People love instant gratification. They want to do flutter kick today and get six-pack abs tomorrow.

But it is not surprising since human nature is to survive. In the glacial era, when human sapiens giants the predator, they need to think fast, very fast. Making an instant move and knowing the result. Their task is to survive against giant hyenas, saber-tooth cats, or other primates – not waiting for 10 years. In this situation, run or avoid the saber-tooth cat is bird in the hand.

Boring? Good. Now we bring you another boring topic, Margin of Safety. The Margin of Safety is the bird in the hand.

What’s Wrong?

Wait, what’s wrong with taking 5% profit tomorrow? Or 5 pips?

Problem is, could it deliver consistently in the long, long run? Getting 5% is easy, but getting 5%, let’s say, per month or week consistently for 7 years is almost impossible. It is easier to invest in a great business, do nothing and let the market do the rest than collecting 2% today, tomorrow, next week, etc at Infinitum.

Issue With Investing Psychology: Mathematical Induction

One root of this misconception is how our thought likes to overgeneralize everything. If investing in hot stock this year work, it will work also next year, next two year, and forever. Even we often overgeneralize it into some plausible scale, if it works for the year, why it doesn’t work in the 15 minutes Time frame?

This is a classic mathematical function if it is true for A, it will be also true for (A-1)

Tracking back this logical fallacy, we find that – as you have expected – rooted in our survival sense. For instance, you find some fruit with bight color. You eat it and feel good (imagine you are a Homo sapiens in the prehistoric era). Then, if you see any fruit like this, you will feel safe to eat it. This skill could be applied in dangerous situations. If you see a four-leg animal, big, with long and sharp fang, then you have to run. Since in the past, you saw it eat the other Homo sapiens.

Issue With Investing Psychology: Difficulty

People like something easy.

They hope for a magic pill for the weight loss solution, they hope for a holy grail indicator.

Investing is simple, but not easy.

The easier thing doesn’t mean that it will turn out to be real.

Analyzing cash flow, financial matrices, competitive advantage is more difficult than looking at the chart, the ticker, the making a decision.

Do ride the trade wrong? No, it just won’t work forever.