Lessons from the world's greatest investors (that apply to your life too)
Is your decision-making costing you money and reputation?
I'm a fan of taking lessons from disparate fields and applying them in novel contexts. In this case, the decision-making processes and rigorous analysis required in investing are highly portable and functional.1
A few lessons from my time learning from some of the world's greatest investors and thinkers, with a sampling here:
Jack McDonald’s legendary investments course at Stanford GSB
Incredible investors at Wellington Management who were gracious enough to mentor and guide me
Books and investor letters from Warren Buffett, Charlie Munger, Phil Fisher, Seth Klarman, Nick Sleep, Mark Leonard, and countless incredible investors
The "gravity" of economics will reassert itself eventually, but you don't know when. Get out of speculative or non-fundamental schemes that you don't understand. Even if you do know what will eventually happen, you don't know when it's going to happen. As John Maynard Keynes famously said: "The market can remain irrational longer than you can remain solvent."
One of my favorite quotes is from Richard Feynman:
The first principle is that you must not fool yourself — and you are the easiest person to fool.
When we don't understand how something works, we open ourselves up to the tail risks of collapse. If you are going to involve yourself in something that you don't fully understand, run the following thought experiment: if this were to fail completely, would I be ok with that?
As Warren Buffett says:
More money has been lost reaching for yield than at the point of a gun.
Understand your edge — what is your comparative advantage? What separates you from other investors that will allow you to continue generating long-term differential returns? Are you just lucky, or are you skilled? And if you are skilled, are you good enough?
It's essential to have a rough approximation of your level of skill and competence in anything in life (see impostor syndrome or the Dunning-Kruger effect). It is important to know your absolute skill level, but you must also understand your relative skill level compared to your peers.
You might be a top tennis player in your home state, but what about at the national level? Or perhaps you've always considered yourself decent at mathematics, but you have been training against International Mathematical Olympiad-caliber talent your entire life. Understanding your edge requires understanding both absolute and relative skill.
Life is all about short-term sacrifices to reap long-term rewards. Humans are linear creatures and find it hard to understand the exponential nature of compounding and other aspects of long-term thinking.
The genesis of my musings began with a large section dedicated to compounding and long-term thinking. I stumbled upon this quote later, and I like it:
If persistence is attempting to solve some difficult problem with dogged determination and hammering until the break occurs, then plenty of people can be said to be persistent. But perseverance is something larger. It's the long game. It's about what happens not just in round one but in round two and every round after — and then the fight after that and the fight after that, until the end. The Germans have a word for it: Sitzfleisch. Staying power. Winning by sticking your ass to the seat and not leaving until after it's over.
— Ryan Holiday’s The Obstacle is the Way, p.131
It is impossible to eliminate error, but decisions must still be made. There is no way to eliminate the possibility of error, but you still have to decide — buy, sell, or hold. This uncertainty is why investors often have a "margin of safety," which is the room for error when purchasing a stock. It's also noteworthy to highlight how difficult investing is. The best public equity investors are generally correct around 60% of the time, nothing like 80% or 90% accuracy. And as long as you size your positions correctly, 60% accuracy is enough to generate huge returns!
While our knowledge is always imperfect, we still need to make decisions. There are some helpful frameworks for approaching knowledge that will help: known knowns, known unknowns, and unknown unknowns is particularly useful, and understanding your circle of competence is extremely helpful.
Learning is driven by the number of iterations, not the number of hours spent.2 Of course, the assumption here is that we're playing an infinite game so that you can continue making decisions (and mistakes) while progressing forwards. Therefore, it's vital to avoiding basic failure modes that take you out of the game: death, injury, sickness, loss of reputation (more on this below), etc.
There's a helpful distinction between different types of decisions here: Type 1 v. Type 2 decisions.3 Type 1 decisions are irreversible, whereas Type 2 decisions are like two-way doors. It's essential to identify what decisions are which since that determines the amount of speed and care you should move with.
Reputation can never be recovered once it’s lost. You can always make your money back, but you can never make your reputation back — protect it at all costs. I like what Jeff Bezos says about reputation:
Your brand is what other people say about you when you're not in the room.
As Buffett points out:
It takes twenty years to build a reputation and five minutes to ruin it.
If you enjoyed these ideas, you absolutely must read Morgan Housel's The Psychology of Money for a more in-depth treatment of many similar themes.
It's probably important to explain what I mean by investing. Roughly speaking, investing is buying something that you believe is underpriced relative to its current market value, and then selling it once there is no longer any mispricing (and therefore pocketing the gains). Said a different way, investing is buying assets that you believe have a higher intrinsic value relative to their market value. So no, YOLO-ing into meme stocks, while potentially profitable, doesn't fall into investing.
I'll keep repeating this until people start listening — that's how it works, right?
Jeff Bezos coined this in the 2015 Amazon shareholder letter.