I ran across an interesting article in The Atlantic on the advantages of being a jerk versus being nice and how both fit into the business world. The author covers several case studies before boiling it down to what works best between the two.
But it got me thinking about how it relates to investing, like the prediction sideshow that drives financial media and why some people hang on every word.
Everyone has an opinion on the future direction of the markets, but most people never get on TV to broadcast it. Those that do fit into a specific category:
researchers have found that semi-obnoxious behavior not only can make a person seem more powerful, but can make them more powerful, period. The same goes for overconfidence. Act like you’re the smartest person in the room, a series of striking studies demonstrates, and you’ll up your chances of running the show.
…rule breakers were more likely to be put in charge.
But “to the extent that innovation and risk taking are in short supply in the corporate world”—an assertion few would contest—“narcissists are the ones who are going to step up to the plate.”
…the person with the most inflated sense of her own abilities tended to emerge as the group’s de facto leader.
The prognosticators and pundits go on TV, sound intelligent, well-spoken, self-assured, and toss out a few “facts” to back their predictions.
For all you know, they memorized a few big finance words and have some acting experience. Somewhere amid it all is an ulterior motive that never gets mentioned.
But people believe them anyway.
Despite everything we know about the future – not much – we still believe people who think they know more than the rest of us. We do it because we tend to believe people who are more confident than others, even if they’re wrong.
Or we believe them because the prediction agrees with the story we tell ourselves. In other words, the prediction somehow confirms we’re right. Whether the prediction is right is another story.
Funny enough, confidence is an important trait for investors. Imagine if you will, two investors. One is confident, self-assured, decisive, and slow to change course because of it despite everyone saying they’re wrong. The other is uncertain, unsure, indecisive, and quick to change course at the slightest hint of being wrong. Who do you think is the better investor?
Picking a side and sticking to it is better than constantly changing your mind.
It’s overconfidence that’s a killer. When the story, the prediction, no longer fits with the facts there are two options:
- ignore the facts and stick with the story, or
- review the facts and change the story.
The worst pundits double down on their story. They think they’re right, so they can’t be wrong.
The best investors always question their views, their mistakes, and change the story as the facts change. They tend to constantly look for ways they could be wrong.
- When to Care More About the Return OF Your Money – C. Richards
- Can Your Portfolio Survive Rising Interest Rates? – J. Brown
- How Should Investors Prepare for Rising Rates? – Irrelevant Investor
- Are You Devoting Too Much Time (and Money) to Niche Asset Classes? – Morningstar
- Is it Now Smart to be Dumb? – Investor Field Guide
- Risk-Managed Momentum Outperforms – L. Swedroe
- No Light at the End of the Tunnel: Investing in Bad Businesses – Musings on Markets
- I Passed on Berkshire Hathaway at $97 Per Share – MicroCap Club
- Market Crashes Haunt Investors for Decades – B. Ritholtz
- The Economist Who Realized How Crazy We Are – M. Lewis