Everything in life, absolutely everything at all: decision making, investing, trading, business, parenting, working, studying, betting, would be much more easy if we have the benefit of hindsight. But unfortunately (or actually fortunately) nobody has that power, and this what makes life interesting and fair. Nobody knows what happen next. So, how to make hindsight your friend, churn it and then having a foresight to get the most of it?
If you see some stock chart already, don’t worry this article is not about share trading.
Hindsight vs Foresight
According to Merriam-Webster Dictionary, hind·sight is perception of the nature of an event after it has happened. On the other hand: fore·sight is an act of looking forward. For easy example let see what happen here:
(I intentionally hide both axis to make it as anonymous as possible-but the span is 2 years) Say, point “B” is now. Then your investment of $10,000 made on point A 2 years ago, worth around $13,000 now. (33% from “90” to “120”). This is the hindsight: the investment made 30% profit in 2 years.
Now, you are in point B will you take your investment or let it run for another 2 years ? Well, if the next 2 years the investment will be still going up, of course then you will let it run or even put some more money in, but if it’s going to be down you will take it out. But how do you know? Nobody knows. So, how you see the future is the make the decision. Take a pick, now!
Now, let fast forward another 2 years
The next 2 years, the investment go up for another 16% (“120” to “140” :point “C”). So, if you decided above that you will let it run, you have another $2000 profit. If you took it out, you “miss” this $2000.
So, if you “guess” right, now your investment worth around $15,000. Then the same question will arise. What to do now? Let it run? or Took it out? Take a pick !
Now, let fast forward for another 2 years
Well, as you can see, should you hold the investment for another 2 years, you have burn all the profit as the investment go back to “90” level (point “E”). But if you exit just in point “D” (“150” level) then your $10,000 6 years ago is now around $16,000. But who knows ? That’s the benefit of hindsight.
With hindsight, you can easily say that we should sell on point “D” to get the maximum profit. But as you can see above, it is impossible to know it exactly before it’s happen. (What you should actually do in this case, well tune in to http://sharetradingbyme.com and you will know the answer.)
(BTW, the chart is the famous S&P500 index from 2003 to 2009 – the complete chart is below)
Make Hindsight Your Friend
I hope at this point you understand fully why you see all those disclaimer “Past performance will not guarantee future performance” on any investment / manage fund ads, because it does not. But on the other side, do not underestimate the hindsight for the fact that it has happened already.
Classic example: There is another recent news that say the property in Sydney has doubled again for the last decade. And people will murmur. “I wish I had that property 10 years ago, it was only $150,000, now it’s $300,000!” Well, that’s the hindsight isn’t it ? You don’t know at that time.
OK, let’s do it the other way. A friend tell you “Hey, you should buy that $500,000 in the corner there, by the time your baby 10 years, it will worth $1 million dollar.” The typical response will be “No way it’s going to be worth $1million” See, that’s the problem you know that within 10 years it can double $150,000 to $300,000, right ? Then what does prevent $500,000 become $1million within the same time span?
What we can do is to make “hindsight” a history lesson. Make hindsight as “something that might happen” or possibility and hindsight will become your best friend.
So from above example the history lesson will be: investment can go up and down, 30% return for 2 year is possible, but 60% loss in a year is also possible. So with this knowledge, what should you do ?
Make Up Your ForeSight
Based on whatever knowledge you have, make a decision what will more likely to happen. Nobody will really know, but you need to decide one. Without decision there will be no action. But once you make up your foresight, i.e: pick or guess what you think will happen, stick on it and act on it.
Then take responsibility. if it goes wrong, it is your own fault because it’s your decision – not somebody else. At least it is your own decision based on the knowledge that you have.
On the other side, if it turns right, it’s because of you and you only – not anyone else. You will be proud of yourself.
In all aspect of your life
The discussion above is not only about investment and share market, it’s about everything in your life. Wants example?
- Should I buy petrol today with price $1.1 /liter today ? or should I buy it tomorrow, maybe it’s going down. Yes, but what if tomorrow the price go up? Go undecided? you cannot afford to, your car will need refill some how. If you think (guess) that tomorrow it’s going to be more expensive, then assume that and buy now. If not, then buy tomorrow.
- Is my boyfriend/girlfriend good enough? What if tomorrow I will meet the right one ? Yes, but what if he/she is the best available already. See no body knows, hence made up your mind. If you think (guess) that he/she is the one marry him/her and stick with it.
- Should I accept this job-offer or wait another month ?
- I should cancel that trip so that accident will never happen – Duh, who can tell?
- If I know I will get diarrhea, I should not eat that meal…
- etc…etc…. you can go on forever
So, without the benefit of the hindsight, you just need to make a decision right here right now, based on the knowledge and “gut feel” that you will adopt. Commit to it then act on it. In severals you will make it wrong, but on others you will make it right. That’s life!