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The "Random Effect" in the Stock Market
Learning to accept chance
As the great Friedrich von Schiller said, “Fate gives us the random – for purpose, man must shape it.” Yet, implementing this intention is sometimes challenging for us. Giving space to chance and accepting it? That contradicts our nature. However, if we do not accept the fact that planning is only half of life, we may struggle with doubts without the prospect of improvement. Not everything is predictable.
Unforeseeable influences:
“Random Effect” refers to unpredictable but often significant factors that can be considered random. Who wants to make a pact with chance? No one, but you must if you want to be successful in the stock market. Chance will always play a role, and those who are unable to accept this fact will continually change their strategy and tactics, with no positive impact on returns.
Streaks in the casino:
Please imagine a roulette table. Red or black, even or odd – over time, the ball will land approximately equally on the simple chances. Yet, chance can drive the compulsive gambler to ruin in the short term. The record streak in casinos is often over 20 times the same color in a row. However, by the end of the month, the ratio is back to normal. On an hourly basis, a professional gambler should not exclude any scenario, no matter how unlikely. It is similar in the stock market.
Temporary losses are part of it:
No matter how conscientious you work, regardless of your ambition and motivation, and certainly irrespective of your intellectual abilities, you must factor in that some of your trades will not yield the desired results. Unlike the compulsive gambler, you always retain control in the form of money and risk management. You do not put everything on one card but understand that only adequate diversification can bring the desired success, if you do not want to risk your assets.
The facts:
- Due to the multitude of variables, complete control in the stock market is never guaranteed.
- Despite careful preparation, certain influences, even of significant nature, remain unpredictable.
- The shorter the time period considered, the more sensitive we are to perceiving random events.
- Trust in long-term statistics and diversify your investments.
Our Conclusion:
Even though it is sometimes difficult, try to maintain a certain level of composure when it comes to investing. Total control is an illusion, this applies in the stock market as well as in life. When individual events are given too much weight, there is a risk that a continuous optimization process will lead to poorer results. For example, if you exchange the securities in your portfolio too frequently, your long-term returns will not increase but decrease. Periods of loss or suboptimal entries are part of the business and must be accepted.
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