The Elusive Search for Goat Number 3

This article was originally published in LiveMint. Click here to read it.

It all started one lazy Sunday afternoon in a small town near Toronto in Canada. Two school-going kids had a crazy idea.

They rounded up three goats from the neighbourhood and painted the number 1, 2 and 4 on their sides. That night they let the goats loose inside their school building.

The next morning, when the authorities entered the school, they could smell something was wrong. They soon saw goat droppings on the stairs and near the entrance and realized that some goats had entered the building.

A search was immediately launched and very soon, the three goats were found.

But the authorities were worried, where was Goat Number 3?

They spent the rest of the day looking for Goat Number 3.

Gradually there was panic and frustration. The school declared classes off for the students for the rest of the day.

The teachers, helpers, guards, canteen staff and boys were all busy looking for Goat Number 3, which of course, was never found.

Simply because it did not exist.

Interesting Lessons

While at the outset this seems to be a deceptively simple and funny story, there are some interesting lessons for us.

Just like the folks in the school, when it comes to investing, we seem to have our own version of ‘Goat Number 3’—the perennial attempt to predict the market in the short run.

Given the recent volatility, all of us want to know if this is the start of a large correction. If yes, we can peacefully sell our holdings and enter back close to the market bottom.

This question obviously makes perfect sense as the answer can get us significant returns without enduring the painful declines.

The best way to find the answer is to find out the best investors who have done this consistently and learn from them.

But, here is where there seems to be a small issue.

Can you name five investors who have ‘consistently’ identified bear markets, stepped out before the fall, and entered back at the bottom?

You can take all the time you want. If you are finding it difficult to find even one name, no worries.

You already have your answer.

Similar Conclusion

The legendary investors also seem to have come to the same conclusion.

“The idea that a bell rings to signal when investors should get into or out of the market is simply not credible. After nearly 50 years in this business, I do not know of anybody who has done it successfully and consistently.”

—Jack Bogle

“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”

—Peter Lynch

“The years ahead will occasionally deliver major market declines—even panics—that will affect virtually all stocks. No one can tell you when these traumas will occur.”

—Warren Buffett

Inevitably over the years, I have realized that the mistakes done trying to avoid a market decline is actually more damaging than enduring the actual market decline.

If 2020 has taught us all one thing, it’s that no one – NO ONE – knows what markets will do in the short run.

In Our Control

While our inevitable search for ‘Goat Number 3’ continues, we unfortunately forget to take advantage of the three existing goats completely under our control.

1. Optimism: Belief in entrepreneurs and human ingenuity
2. Long-time horizon: Patience to let compounding do its magic
3. Capacity to suffer: Ability to endure temporary declines

Despite the overwhelming evidence against market predictions, most of us would rather fail trying to find the elusive, missing, non-existent ‘Goat Number 3’ than succeed by focusing on the three existing boring goats that are completely under our control.

Are you still in search of ‘Goat Number 3’?