The investor's mind; here be monsters.
People who are correct a lot of the time, are people who often change their mind.
As Richard Feynman put it, the first principle is that 'you must not fool yourself - and you are the easiest person to fool'. The esteemed physicist is not necessarily remembered as an astute investor - although he would need to have been pretty terrible to under-perform his intellectual predecessor, Sir Isaac Newton, who was famously inept - Feynman was an undisputed heavyweight when it came to scientific thought, learning and logic: the quintessential intellectual generalist. Feynman's famous quip about the difference between knowing the name of something, and knowing something, is perennially relevant for investors.
If we believe something to be true, naturally we assume that those who disagree have some sort of problem. Our beliefs reflect the objective facts because we think those facts are true. We know they are true. The act of reversing a long-held and ingrained viewpoint can sometimes be physically wrenching. We're not comforted at all by assurances of others having looked into their own hearts and minds and concluded they have been fair and objective.
This problem is even more acute when the answer is counter-intuitive. And good investing is frequently counter-intuitive. Selling before the top and buying before the bottom is inherently terrifying. At the very heart of it all lies our own personal suite of behavioural biases. The initial challenge of course: accepting these monsters of the mind even exist at all.
Here is a playbook for being less susceptible to cognitive and behavioural biases:
#1 In God We Trust, all other bring data.
Focus on the data. It's abstract. It's unemotive. But, it's difficult to do. Data-driven perspective and data-driven processes are unnatural; people prefer stories and narrative. We crave the herd and its mentality, we are all too willing to believe and concoct narratives of various sorts to support our own entrenched biases.
Data will set you free.
#2 Trust; but verify. Seek and find contrary and conflicting data and conclusions.
Our preexisting beliefs skew our thoughts and colour what we consider our most dispassionate and reasoned conclusions. The tendency toward motivated reasoning (the effect of people arriving at conclusions that they want to arrive at) partially explains why we find groups so polarised over matters about which the evidence seems so clear. Include behavioural biases (like confirmation bias, optimism bias, in-group bias and self-serving bias) and it is easy to see why we can get it so wrong so readily. Our tendency is to look for and consider only those views that correspond to our own.
To see things differently, seek out and consider sources that look at things differently.
#3 Those accountable to nobody, ought not to be trusted by anybody. Bake accountability in your thought process.
Objectivity is key to be successful in investing. Given we are masters of pinpointing what is wrong with everyone but ourselves, it stands to reason that a strong team is particularly important to surround oneself with. Fall in love with criticism. Use it to stress-test your ideas and improve your decisions. Surround yourself with the smartest people you can who disagree with you, and then try to understand their reasoning. The more success, the more power we achieve, the simpler it becomes to believe one's own internal hype.
Things don’t happen by themselves - they happen because specific people did or didn’t do specific things. Don’t undermine personal accountability with vagueness.
#4 Gamblers bet on possibilities. Pros bet on probabilities. Focus on process.
Investing outcomes are some part skill, and another part luck - the measures of which are never known. People have a tendency to attribute poor results to bad luck and good results for skill. You cannot tell the quality of an investment decision from the outcome alone - the decision-making process is what really counts in the long-run.
Build an investment process that minimizes the ingress of biases.