Step 1 of 7: Awareness and understanding the challenge of long term investment success.
“I’m a dumb shit who doesn’t know much relative to what I need to know” Ray Dalio writes at the beginning of his new book, Principles. Ray Dalio founded and has run one of the world’s biggest hedge funds, Bridgewater, for decades.
“On Wall Street everybody says he’s a contrarian, and nobody is.“ Michael Lewis
“Man is a gregarious pack mammal. We don’t do well alone. Consider, solitary confinement is one of our worst punishments. Now, apply this to what it takes to be a successful active investor. This is one of the many reasons so few succeed. Our very DNA aligns against us.” Jim O’Shaughnessy
“The real problem of humanity … we have Palaeolithic emotions; medieval institutions; and godlike technology.” E. O. Wilson
“Money ranks with love as man’s greatest joy. And it ranks with death as his greatest source of anxiety.” John Kenneth Galbraith
It’s all too easy to assume we already know it all. However, this is just the first and most dangerous pitfall amongst many. What the quotes above tells us is that no matter how experienced and successful you believe you are as an investor you never “already know it all”.
Don’t fall at the first and most vital hurdle!
Often what we think we know are really just investment myths, which are commonly quoted like mantras, as if they are absolute truths. However, on examination they turn out to be half-truths at best, and very often dangerous misdirection.
It is important to be well grounded in what you believe are the key elements for investment success. This is why it is worth challenging everything you think you know, and rethinking everything from first principles.
This can lead to a very different set of priorities, metrics, and behaviors, which transforms investment prospects.
Whether we are investors ourselves or defer to investment managers, it is crucially important to understand what is involved to get on a genuine path for high probability long term investment success.
What we believe and how we think is where it all starts.
Awareness and understanding the challenge of long term investment success.
Awareness of the challenges of becoming a successful investor is the starting point. A challenge because this starts with understanding why it is that we are not naturally designed to be consistently successful investors!
“First the bad news: Your greatest obstacle to investing success is … you.
And the good news: The solution to overcoming your “greatest obstacle” is within reach.
What does that mean, to say the greatest obstacle to investing success is you?
It means that when it comes to investing successfully, finding great stocks is not the hardest thing. And dealing with volatility is not the hardest thing.
The hardest thing for any investor — and this includes everyone from Warren Buffett on down — is overcoming the natural pitfalls and challenges within their own brains.”
Understand Complexity to avoid being “Fooled By Randomness”
One of Nassim Taleb’s great investment books, “Fooled By Randomness”, goes into detail just on the subject of how we interpret investment results. How can we be sure that we are assessing even the past appropriately?
It is all too easy to rush into linear and overly simple conclusions about investment. For example, if an investor doubled his money because he bought a biotech stock a day before a positive FDA trial result was announced, was that skill or dumb luck resulting from an inappropriate risk? It could be either depending on the circumstances, but your assessment of which it is matters. The return is very different, but it tells you very little.
“The quality of a choice cannot be judged just by the result. (I first learned this in baseball. Just because a pitch you call or play you call doesn’t work out doesn’t make it a poor choice. It could have been the right call, but bad luck. Or vice versa.)”
This leads to a very important point, not just in understanding investment results, but also in analyzing anything in the investment arena.
Investing is a multi-factor, multi-duration, non-linear process. Rushing to simplistic linear conclusions is usually misleading.
“As much as we want to “keep it simple, stupid” … It is precisely the simplification of issues that are actually very complex, which can be dangerous.”
That is not to say that there is nothing we can learn. Just that care needs to be taken about what we can conclude.
Important point: “it’s more random than we think, not it is all random.” Chance favors preparedness, but it is not caused by preparedness (same for hard work, skills, etc.)
Now we understand the investment challenge better, in Step 2 we can make ourselves better investors almost immediately. The next step is “How psychology and technology can improve your investing”.