The Biggest Variable is Never Considered

I was reading something on the prospects of the Airline industry and its ills and wondering what it is that makes people continue to go into that industry? I was in Bangalore last weekend and visited the UB City which is one fine property. Superb mall, high quality restaurants, great ambience etc. And all that out of misery associated with Mallya’s foray into airlines? Was that all worth it? Was it Kingfisher’s fault alone? Isn’t his alter-ego, Richard Branson, running Virgin Atlantic successfully? Were there too many variables that were not looked at? What went wrong will be a study that will probably make it to Business School curriculum in India but that set me thinking in another direction- of some simple arithmetic of market approaches.

if there are 5 variables and each of them has a probability of success at 90% then the collective probability of success drops to near 59% only. So every enterprise’s success really depends on the number of variables and the probabilities of those variables. In the market there are two basic approaches – the fundamental and the technical. The former is well entrenched while the latter is gaining slow traction. If we apply the above metric to these two approaches, we get very different outputs. Fundamentals have unendingnumber of variables while technicals have just two (price and volume)! Would that mean that technical analysis has a much greater probability of success? It would certainly seem that way, wouldn’t it? With two variables only, the probability of success, assuming the same 90% success for each variable, would be just over 80%. Before someone takes umbrage at this possible oversimplification of matters, let me hasten to add that the point of this blog is entirely something else.

The fact is that people are not really succeeding with fundamentals nor with technicals- not in the way they should be if numbers only did the trick! The crux, according to me, is that these statistics don’t take into account the biggest variable of them all- the individual investor or trader himself! Theoretically, we can set the probability of success to any variable and expect that to stick, given the proper conditions continue to prevail. However, the behaviour of an individual is completely unpredictable and one thing that is for sure is that the probability of the behaviour of the individual remaining consistent even thru ideal conditions is very, very questionable. We are all creatures of habit that get recreated almost continuously and are moulded by our emotions and experiences. Thus we are never the same with every passing moment. And all of us are engaging with the market thru a lifetime! Imagine how many personality changes we undergo thru that time continuum!

The more we start paying attention to the Vital Variable which is YOU, the more our success ratio will veer towards the statistical model. Else they will just remain numbers on a spreadsheet, good for presentations, report writing and seminars but of little value in the real world. Most people don’t recognise that one of the biggest learning they need to get is personal awareness. Trading psychology courses (Growth Avenues offers them), meditation, spiritual studies etc., are the routes to this learning. Sooner you begin, faster could be the route to success.