The Sketchbook of Wisdom: Did you get your copy?
I met a 26-year-old investment analyst yesterday, who sought my single biggest advice to, well, a 26-year-old investment analyst, on what she should be doing to do well in her career as an analyst and an investor.
Despite being involved in this work for the past 11 years of offering advice even when I am not asked for, her question led me to think, and so I sought some time to get back to her with my response.
There are, after all, so many things I can advise to a young investor or analyst, based on what I have learned in the past 17 years, that is, since I was 26 myself –
- Invest with an inner scorecard – Don’t change who you are to fit in.
- Have courage, even in the face of adversity – and there are a lot of adversities you would face in investing.
- Accept whatever outcome you attain, for what’s in your control is how you react to the outcome, and never the outcome itself – you can either rue over a bad outcome or take it as a lesson and move on.
- Keep learning, for nothing builds an investor’s career better than continuous learning. Learn from your own experiences and mistakes but more importantly from the experiences and mistakes of others.
- Avoid predictions, because you are rarely going to make a correct one. Also work with the intellectual humility that you know nothing, even if you are the smartest person around.
- Be patient, like a grasshopper, for that is how wealth is created.
All this is very useful advice. But since I have to offer just one advice as requested by that young investment analyst, it would be something that I learned from Charlie Munger and Warren Buffett many years ago –
Play games that you can win.
What this advice simply means is that you want to stick to your circle of competence – games you know you can win at – for that is where you have a great chance of doing well as an investor, and rarely outside of it.
Like Warren asked many years back – “How do you beat (chess champion) Bobby Fischer?”
And then answered – “You play him at any game but chess.”
And then offered some advice – “I try to stay in games where I have an edge.”
The idea behind “playing games that you can win” or sticking to your circle of competence is so simple that it is embarrassing to advice to anyone, least to a young analyst or investor who may not yet understand the huge importance of simplicity in investing.
After all, what could be simpler than the fact that when you do not know what you are doing, it is riskier than when you do know what you are doing. Even for such simplicity, or maybe because of it, the idea of sticking to your circle of competence does not come easy to us.
Humans, by nature, are over-confident beings. We are also enterprising. And when you combine enterprise with overconfidence, and especially in fields involving large and asymmetric payoffs like investing, you find people venturing out into areas they have no competence in and play games they know nothing about.
In investing, specifically, this involves investing in stocks you know nothing about, but just because you see your friends and other people making money on it. Or indulging in derivatives where the probability of losing big time is very high. Or borrowing money to buy stocks because you see them moving just one way, up.
Investors who indulge in all this often set themselves up for large losses in future. If you don’t understand banking or chemical or pharma stocks, don’t invest in them. If you don’t understand derivatives, or cryptocurrencies, avoid them by far. If you don’t know with certainty where your stocks will go (nobody knows that), don’t borrow to invest. Also, if you cannot analyze businesses, don’t pick stocks at all.
But we all love adventure, and sometime or the other, would play one or more of such games where the probability of winning is too low, and end up losing our wealth, our sleep, our mind, and sometimes our career.
Being a research analyst myself in my twenties, I learned this lesson of playing games where I could win, late. That’s because I started learning from Munger and Buffett late. But, luckily for me, that lesson came before I could start making serious mistakes with my money.
Looking back, I realize I have never ventured outside my circle of competence, and that has helped me survive the last almost 20 years of being a stock market investor.
I have never done derivatives (still don’t understand a bit of that), I have avoided businesses that are complex and that I do not understand, and I have never borrowed money to invest, however bright an investment opportunity I may have come across.
Essentially, I have simply tried to play in the games or within the circle where I can win. And that has helped me immensely.
In the latest episode of The One Percent Show, where I interviewed William Green, the author of Richer, Wiser, Happier (one of the best books I have read in the last one year), William said this when I asked him about how he invests his own money –
I’m smart enough to know that I need to outsource it. I can see the difference between them (wise and experienced investors) and me. And so, one of the practical revelations that I got from working on the book was just to say, I’m not them, and I don’t have their wiring, I don’t have their temperament. I’m not as obsessed with this stuff as they are. And so, I should give my money to people who are better wired for this game. Actually, that’s been incredibly helpful to. I own a couple of index funds that I’ve owned forever. I own Berkshire. And I have probably three funds that are run by other people. That’s an acceptance of my own limitation. I think that’s part of what I’ve learned about investing through this process of working on the book. One of the great teachings from Munger is you want to play games that you can win.
I don’t have the temperament. I’m not unemotional, I’m not super rational. So, it’s better for me to give the money to people who are wired for this game. I don’t think Munger wants to sit around reading 850-page Russian novels that I’m reading at the moment. That’s not the game he was built to win.
To think if there’s a practical takeaway for any of your listeners, it’s really to think carefully about what game you’re built for. Why would someone be as maniacal as I was about writing this book? That’s a game I was built for. As Mohnish said, “You were born to synthesize this material.” To some extent, he was buttering me up and encouraging me. And to some extent, I think that’s actually true.
Figure out what you’re interested in, that’s almost totally illogical. What you would do, regardless of whether you were paid for it or not, because it’s just profoundly interesting. And then, figure out what you’re good at. Then, really focus intensely on getting better at that.
So, you’re building your circle of competence by learning other stuff and, at the same time, building other skills. But I think having that somewhat narrow focus on what you’re really good at, and really passionate, like most truths, this sounds like a total platitude…
This was among the most important lessons I have learned, or let me say re-learned, from all my episodes of The One Percent Show so far. And so, that is also my single biggest advice to all 26, or 27, or even 40-year-old investors and analysts, if they are willing to listen and believe.
Trying to play the game you can win is a sign of humility, which is one of the most important character traits of a sound investor.
The stock market, Ken Fisher says, is a “great humiliator.” And the best way to deal well with it is to play the game with complete humility, because that is the way you will help yourself from not getting humiliated too badly or too often.
So, in totality, my advice to the 26-year-old investment analyst who asked me the question yesterday, and if she is reading, is this –
Winning is never easy, in investing or outside of it. And there is little room at the top. But that does not mean you cannot be at the top of ‘your’ game.
And the way to be at the top of your game is simple – Pick a game you understand, love to play, and can win at, and just work intensely on getting a little, maybe just one percent, better at that day after day.
Over time, you will get what you deserve (and, maybe, also offer the same advice to a 26-year-old, when you are 43).
All the best!