We can point out the errors to be avoided much more successfully than we can lay out a course of positive action.
G.C. Selden wrote that line in 1912. It fits Munger’s idea of inversion: figure out the best ways to lose money, then avoid doing those things. It’s a common-sense way to improve returns.
I came across this idea twice this week (it happens every week, really) from century-old sources. Selden covered the usual suspects — over-optimism, enthusiasm, stubbornness, fear, anger, greed — before summarizing his book on investor psychology.
- Your main purpose must be to keep the mind clear and well balanced. Hence, do not act hastily on apparently sensational information; do not trade so heavily as to become anxious; and do not permit yourself to be influenced by your position in the market.
- Act on your own judgment, or else act absolutely and entirely on the judgment of another, regardless of your own opinion. “Too many cooks spoil the broth.”
- When in doubt, keep out of the market. Delays cost less than losses.
- Endeavor to catch the trend of sentiment. Even if this should be temporarily against fundamental conditions, it is nevertheless unprofitable to oppose it.
- The greatest fault of ninety-nine out of one hundred active traders is being bullish at high prices and bearish at low prices. Therefore, refuse to follow the market beyond what you consider a reasonable climax, no matter how large the possible profits that you may appear to be losing by inaction.
Edwin Lefevre did something similar in his first Reminiscences article by listing the speculators’ weaknesses:
Motive. The sucker wishes to get something for nothing. He is prompted by blind greed or by the excitement of gambling. But Livingston cared for winning, for being right. Money was merely proof of it. He sees. Then he seeks to verify his sight by actual operations. It was the hot passion of a chess master for chess, however cold-bloodedly he may play the game itself; the irresistible urge to find solutions to problems. And his were all stock market problems.
Trading In And Out Of Season. Livingston had lost too many millions and had learned to wait for the right time. Too soon is as bad as too late.
Hope. The average sucker does little more than hope, whatever official reason he may give to others or to himself. But Livingston doesn’t hope; he thinks. He makes mistakes, but never the same mistake twice, for he has toward the game the curiously personal as well as utterly impersonal attitude of the artist toward his work. One of his aphorisms is “I never argue with the tape.” He is right or he is wrong; hope has nothing to do with it. And even when accidents make him lose money they don’t prove he’s wrong. So his attitude is unchanged, his confidence in himself unshaken. And that makes the millions!
Lack Of Knowledge Of The Game. Lack of knowledge of market movements, of general trade conditions, of specific conditions affecting specific stocks, of values, of money conditions, contributes to make the public lose. But Livingston knows and studies all the time. He reads trade papers, and hires experts, and gets reports, and is forever on his own job.
Inexperience In The Stock Market. It is the one business Livingston knows. He has been in it since he was fourteen.
Temperamental Unfitness. That is back of many failures.
Investors only have a few edges to exploit. Charlie Ellis broke the edges into three buckets: intellectual, physical, and emotional. You can out-think, out-work, or out-behave the collective market. None are easy.
Yet, 100 years ago, the writers above — and other’s before them — knew that if you didn’t get behavior right, hard work or genius wouldn’t matter.
The lists above are just a few possibilities for a behavioral edge. A couple fit closer with trading than investing, but they all have merit. Here’s the best part. You don’t need genius, luck, or clairvoyance to follow it. And you don’t need to put in 12 hour days, 6 days a week either.
The confusing part is people will still discount behavior because its easier to accept poor returns are a portfolio problem, not a me problem. And that is why a behavioral edge is the most enduring.
- Unbreakable – MicroCapClub
- How’s Your Aim? – Above the Market
- The Greatest Asset Bubble of All Time – Of Dollars and Data
- Increasing Returns and the New World of Business – HBR
- The Curse of Popularity – Alpha Architect
- Why Credit Analysts Must Keep an Eye on the Market – S. Bakshi
- Chuck Akre: The Three-Legged Stool (podcast) – Invest Like the Best
- 32 Thoughts From a 32-Year-Old – R. Holiday
- Your Professional Decline Is Coming (Much) Sooner Than You Think – The Atlantic
- So, Gutenberg Didn’t Actually Invent the Printing Press – Literary Hub
- Buildings Can Be Designed to Withstand Earthquakes. Why Doesn’t the US Build More? – NY Times