Unfortunate Investing Traits
Unfortunate Investing Traits
Feb 4, 2021 by Morgan Housel
Napoleon’s definition of a military genius was “The man who can do the average thing when everyone else around him is losing his mind.”
What he meant, I think, is that most wars are lost rather than won. The final outcome is driven more by one side’s blunder than the other’s brilliance. One screw up can overwhelm a dozen smart decisions that preceded it, so even if strategy is crucial the expert is rarely preoccupied asking, “How can I be great?” The obsession is, “How can I ensure I’m at least average and never a disaster during the most important moments?”
And isn’t investing the same?
Most of this industry is devoted to finding greatness, which is inevitable because it’s what captures attention. But an occasional great decision can quickly become irrelevant unless you consistently avoid the blunders that move the needle even more. It’s not exciting, but we should spend more effort on ensuring we’re capable of doing the average thing all the time before we spend a moment trying to do a great thing some of the time.
A few unfortunate traits that commonly prevent investors from doing the average thing:
1. Personalizing wins and externalizing losses.
If you write a piece of computer code and it works, you can take credit for it. It works because you did the right thing. If it doesn’t work, you did the wrong thing. Black and white.
Investing isn’t like that. So many forces collide at once – economics, politics, business, markets, psychology – that there’s more leeway to create a narrative about why something did or didn’t happen. The most common narrative is that wins are caused by your decisions and losses are the consequence of some external force, usually policymakers.
It’s the most comfortable mindset. But it’s a bonanza for overconfidence on one end and ignorance on the other. One reason the financial industry mints so many extraordinary egos is because it’s easy to take personal credit for what works and claim to be a victim of what doesn’t. Industrial engineers can’t simply be in the right place at the right time, or blame their failures on the Federal Reserve. But investors can, and do.
An iron rule of investing is that almost nothing is certain and the best we can do is put the odds of success in our favor. Since we’re working with odds – not certainties – it’s possible to make good decisions that don’t work, bad decisions that work beautifully, and random decisions that may go either way. Few industries are like that, so it’s easy to ignore. But it’s a central feature of markets.
Unless you’ve enjoyed a period of success that you realize you had nothing to do with, or can admit that a long period of loss was due to your own mistake, you’ll have a hard time grasping reality in a way that lets you do at least the average thing when everyone else is losing their minds.
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