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How An Investing Approach Is Similar To Cooking An Egg


Talk about a good breakfast and the first thing that comes to mind is the image of an egg cooked sunny side up. This method of cooking requires a fair bit of skill and experience. Not everyone can do it and, dare we say, most do not cook it perfectly on their first attempt.

The approach toward cooking the perfect sunny side up shares some similarities toward our own investing approach. Anyone with an egg (i.e. some money) can take a frying pan (i.e. investing instruments like stocks) and start cooking – but not everyone will succeed. There will certainly be some failures along the way.

So how can you ensure that your approach toward investing will not land you in multiple unsuccessful attempts?

The Go-By-Feel “chef”

Is cooking an art or a science? The go-by-feel chef would argue that it is an art.

Without hesitation, he goes on to fry his egg as if he has done this numerous times before – even if it was indeed his first attempt at it.

He vividly remembers catching a show on the best way to cook the perfect sunny side up egg, and is now trying to imitate the steps based on what he remembers.

There really isn’t any plan or process in his head. He does not knows how long to cook the egg, nor the optimum temperature for cooking a perfect sunny side, prior to cracking that egg into the pan. He simply relies on his gut feel.

I once knew of someone who invested SG$20,000 into Forex trading despite having no knowledge about the fundamentals behind it. He quoted “ beginner’s luck” as the reason he thinks he might profit in his trades.

Reckless “chefs” who exhibits traits like this usually ends up with anything but a sunny side up for breakfast in the end.

The “chef” who has done this ample times

This chef possesses better knowledge of how to cook a perfect sunny up. He has done this many times before and learns from past experiences.

Investors like this learn the hard way; having failed ample times previously and learning from these mistakes to better understand how to go about their investments.

From experience, they know the indicators to look out for before entering and exiting the market. When something unforeseen happens, they know when not to overreact or underreact, and make their decisions wisely.

Their strength lies in the fact that they can whip up an edible egg, at any kitchen, using different types of pan and eggs. While their sunny side up may not be perfect, it is edible.

The scientist “chef”

Before cooking his egg, he spends an hour on Google searching for the science behind the cooking of the perfect sunny side up. Based on instructions, he transforms his entire kitchen into a science chemistry laboratory.

He learns that upon heating an egg, the proteins gain energy and literally shake apart the bonds between the parts of the amino-acid strings, thereby causing proteins to unfold. As the temperature increases, the proteins gain enough energy to form new, stronger covalent bonds with other protein molecules etc. He also discovers that 65 degree Celsius is the optinum temperature for his perfect sunny side up. After doing his research, he returns to his kitchen to whip out that perfect sunny side up.

However, these “chefs” rely heavily on the equipment and information available in their own kitchens. They may not be able to react and whip out the same sunny side up in a different kitchen (situation). More likely than not, they will choose not to do any cooking at all unless they have all their equipment with them.

Such investors spend long periods of time researching on a certain product before buying it. They try their best to understand the mechanism behind the product as well as underlying risks. They will enter only one market when they are fully confident that they understand it. However, they may not be prepared for unexpected turn of events.

Which type of “Chef” are you?

The reckless go-by-feel type of “chef” has an approach that we definitely do not want to emulate when it comes to investing our hard earned money. Sadly, due to a lack of effort in wanting to learn coupled with the “hunger” of wanting to make money quickly, some people fall into this category.

The best approach will be to have the mentality of the “Scientist” alongside ample past experience to help you adapt to changes in the market. Fully understanding the market you are investing in is important. Having the experience via prior attempts, or simply talking to more experience investors will also help you avoid common pitfalls made.

Go cook the perfect sunny side up!

 

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