The Sketchbook of Wisdom: A Hand-Crafted Manual on the Pursuit of Wealth and Good Life
Here is the latest issue of The Journal of Investing Wisdom, where I share insightful stuff on investing I am reading and thinking about. Let’s get started.
There are negative connotations attached to the word ‘loss.’ It’s considered as a synonym to failure. The words loss, wrong, bad, and failure are all regarded as same. So when someone loses money in the stock market, he or she invariably equates it to being wrong. Similarly, when someone makes a profit, it’s assumed that the person was right. But in the stock market, being right and making a profit aren’t necessarily the same thing. And being wrong and incurring a loss aren’t same either.
Jim Paul and Brendan Moynihan wrote in their book What I Learned Losing a Million Dollars –
Success can be built upon repeated failures when the failures aren’t taken personally; likewise, failure can be built upon repeated successes when the successes are taken personally…
Personalizing successes sets people up for disastrous failure. They begin to treat the successes totally as a personal reflection of their abilities rather than the result of capitalizing on a good opportunity, being at the right place at the right time, or even being just plain lucky. They think their mere involvement in an undertaking guarantees success. This phenomenon has been called many things: hubris, overconfidence, arrogance. But the way in which successes become personalized and the processes that precipitate the subsequent failure have never been clearly spelled out.
In other words, successes and failures get personalised when the ego gets involved. And bringing in the ego is the fastest way you can sabotage your investing.
The truth is that investment gains and losses are never a reflection of your intelligence or self-worth. In fact, investing is not about being right or wrong. It is about making decisions, after careful consideration. That is where you sow the seeds of future outcomes, good or bad.
But an outcome is, well, just an outcome, never to be taken personally.
When you decouple your ego from a bad outcome, it creates an opportunity for you to learn from it.
When you decouple your ego from a good outcome, it saves you from future disasters.
A Super Text
Warren Buffett likes to say that the first rule of investing is “Don’t lose money,” and the second rule is, “Never forget the first rule.”
I too believe that avoiding loss should be the primary goal of every investor. This does not mean that investors should never incur the risk of any loss at all. Rather “don’t lose money” means that over several years an investment portfolio should not be exposed to appreciable loss of principal.
While no one wishes to incur losses, you couldn’t prove it from an examination of the behavior of most investors and speculators. The speculative urge that lies within most of us is strong; the prospect of a free lunch can be compelling, especially when others have already seemingly partaken.
It can be hard to concentrate on potential losses while others are greedily reaching for gains and your broker is on the phone offering shares in the latest “hot” initial public offering. Yet the avoidance of loss is the surest way to ensure a profitable outcome.
~ Seth Klarman, Margin of Safety
The more I think about investing generally, the more it looks like a massive problem-solving exercise. To succeed at this, you need to manage a series of concepts that may appear to be incompatible. The paradox is that any of these ideas — either side of the argument — may be correct at different times.
The best investors are intellectually flexible but approach their craft as a discipline with a specific process. They understand Probability Theorem but view mistakes as learning opportunities. They use a variety of Mental Models, many of which may occasionally contradict each other or lead to different results. They engage in second-order thinking, use counterfactuals, are aware of information hygiene. They possess a high level of self-awareness regarding their own psychological states.
We never sit down, run the numbers out and discount them back to net present value. The decision should be obvious.
~ Charlie Munger
That’s about it from me for today.
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