The reasons against discretionary investing
0. A financial asset’s price represents its concensus of its future, not just its present.
Eg. If you think Amazon will become more dominant in the future, and you have no insider information in your possession, you can bet that many others think the same, and using its past to extrapolate in to the future.
Its potential is already priced in by hundreds of thousands of participants in the market.
1. As a retail investor (with fees against you, and being an outsider), it’ll be almost impossible to consistently find an information edge.
Everything that’s in the mainstream financial press is most probably baked into the price.
If something seems suspiciously under- or overpriced to you, you probably don’t have all the info, and the market is most probably right.
2. Even if your views are correct, there’s a huge amount of uncertainty in the future, that’s not connected to your original insight, which can result in a much larger impact on your bet / investment - aka your information edge may only play a very small role in your positive or negative returns.
If you think you can forecast inflation better than anyone else (which is the only reason to invest based on your own discretion!), we’re living in a probabilistic world, and “by how much” matters. Realistictly, you may be able to beat the concesus by a few percentage. Then a non-forseeable event comes with a 10-20% impact, and your edge have been wiped out immediately.
Check out this interesting video to get some idea how many of us are getting even basic forecasting wrong.
3. Even in hindsight, you’ll not be able to verify if the price risen or fall related to your original insight, or other factors. You can build up your ego in an up-market easily by seeing your assumptions frequently being validated, without benchmarking for total market returns or objectively evaluating the situation. The lack of reliable feedback leads to limited amount of learning, and stagnation (combined with inflated ego).
4. Mixing your personality (I like Crocs sandals - or I am smarter than the others in forecasting inflation) with your investment decisions (therefore I’ll buy Crocs stock - or gold) is dangerous, as you can get into a situation where your ego is conflicting with your financial well-being. We’re all humans though - good luck detaching your personality from the rest of your decisions!