By Robert Seawright, Proprietor, Above the Market
Being human, we want investing to be easy. We want formulas to plug-in, systems to follow and outcomes to be assured. Instead, successful investing requires hard work, mental acuity and the willingness to adapt when things (inevitably) don’t go as planned.
But how should we go about it?
Here’s my (very tentative) listing of lessons and guideposts, a baker’s dozen in total, that we would all do well to abide by and internalize as we try to navigate the investment process.
- Question everything (and especially yourself). When I was a kid in the 1960s, plenty of people were telling me to question everything, but the implicit (and erroneous) suggestion was that I reject everything. Instead, I suggest honoring the past without being bound by it. Consistent with Robert Hagstrom’s idea that investing is the last liberal art, we should always explore and learn, combine thoughts from multiple sources and disciplines, try to think nimbly because the need for new approaches is ongoing, and we should test and retest our ideas. Our psychological make-up as well as the behavioral biases and cognitive impairments caused thereby conspire against us and even when we recognize these problems generally, we typically miss them in ourselves. If we are going to succeed, we’re going to have to ask questions and keep asking questions. As my late father used to tell me, it’s what you learn after you think you know everything that really counts.
- K-I-S-S. I can’t say it any better than Oliver Wendell Holmes, Sr.: “For the simplicity on this side of complexity, I wouldn’t give you a fig. But for the simplicity on the other side of complexity, for that I would give you anything I have.” But perhaps Einstein did: “Everything should be as simple as possible, but no simpler.” Our world is complex and getting more so. The investment world is now exceedingly complex and going faster every nanosecond. If we’re going to succeed, we need to make things as simple as possible – but no simpler.
- Read widely. At best, most of us read for support and confirmation. Instead, we should read to ponder and explore. We should especially read those who disagree with us (and read them especially carefully). And we should read outside the investment world – a lot. It’s easy to get lost in the investment ghetto or even within our own ideological subcultures. Don’t. Read widely and read a lot.
- Be a keen observer. Being a keen observer takes a lot of work, but its fruits are worth it. Resist the temptation to try to stage manage everything. Look to be surprised. Otherwise, you’ll only see what you want to see or expect to see. When I was new to this business I learned a lot from a wily veteran nearing retirement — my first call every morning. He taught me to pay attention. He counted trucks crossing the GW Bridge every Friday. He read the Daily News to make sure he didn’t stay isolated from the “real world.” He was always asking how he might have gotten things wrong. He noticed everything and aggressively sought out evidence that hurt or even contradicted his views. I try to do the same.
- Focus on what works. We are ideological creatures through and through, but it’s very dangerous business indeed to lose sight of what works in order to massage our egos or score ideological points. Investing is hard enough without trying to foist an ideological overlay to it. Both markets and ideologies are unforgiving. You can readily lose at both, but you can’t win at both over the long-term. We should believe in and only focus upon what works.
- The world (and – perhaps especially – human behavior) is almost always stranger than we think (and perhaps stranger than we can think). Plan accordingly.
- Deal with risk first. We feel a loss two-to-two-and-a-half times more intensely than we feel a similar gain. Therefore, it makes practical and psychological sense to start with the risk of loss. It makes portfolio sense too. Only focus on return thereafter.
- Think more/talk less/turn off the noise. My late father put a sign up in my bedroom as a kid (without comment) that quoted Abraham Lincoln: “Better to remain silent and thought a fool than to speak up and remove all doubt.” Stop talking so much. CNBC can be fun. But how often does it ever really help? Turn it off. Listen, especially to those whose views you reject. Ponder. Think. Reflect. Reevaluate. Rinse. Repeat.
- Be accountable. Constant reassessment is required because of the cognitive and behavioral biases that beset us (especially confirmation bias, motivated reasoningand overconfidence) as well as our overall bias blindness. And if we’re really serious about it, we need other people to keep us accountable. Per Daniel Kahneman, the best advice is to “[s]low down, sleep on it, and ask your most brutal and least empathetic close friends for their advice.”
- Sin boldly. Martin Luther famously advised Philip Melanchthon to sin boldly andbravely. We are going to make a bunch of mistakes. That’s a given. But we shouldn’t be intimidated by that. If we’re to succeed, we can’t be intimidated by that. Once we have carefully figured out what to do in a given situation – we have to go for it — boldly (so long as we are prepared to make course corrections along the way).
- Think Small. In investing and in life, we tend to want to chase the “big score” – something enormous or even miraculous. Instead, we ought to concentrate on the mundane and the ordinary. We would do well to start with mistake elimination (which is, of course, much easier said than done). Swinging for the fences results in lots of strikeouts. We’d be better off just putting the ball in play.
- When you have reached your goal, stop playing the game. Investing can be addicting, especially when times are good. It is far too easy to think “just a bit longer” or “just a bit more” even after goals have been reached. Stay in touch with why you are playing so that, when you have won, you can take your ball and go home (before somebody else ends up owning the ball).
- Employ the scientific method. Galileo’s life and work was a scientific watershed. Most fundamentally, Galileo’s greatness was a function of his unwillingness to take anyone’s word for it. He checked others’ work, made it his work, and then checked his own work. As such, he is the key to experimental science, an expression that is now redundant, thanks in no small measure to him. When Galileo read Aristotle and his assertion that heavier objects fall faster than lighter objects, he checked it out himself (which, astonishingly, neither Aristotle nor anyone else to that point had apparently bothered to try). By the way, this approach is also in sharp contrast to the many money managers today who are more concerned with what others are doing and piling on than in doing the work themselves.
Our industry has way too many alleged experts who aren’t nearly as expert as they think. On the negative side, we have people who simply don’t know what they’re doing, people who know less than they think, and people who know a lot but aren’t able to discern what is important about it. On the positive side, we have those who get help when they need it (which should be all of us at various times) and all too few real experts. The key skill is knowing when and how we need help. I hope these signposts provide a decent starting point for trying to get there.