What’s the biggest determinant of investing success? Smarts, information, strategy, or skill are all worthy possibilities.
But one stands out above all the others:
The truly successful stock market investors of history have been no more intelligent than most less successful investors. In most instances — they have had no better sources of information than other investors. The qualities they have had in common have rather been qualities of temperament, which is why no one has ever found out how to get rich by taking courses or reading a book or reading articles (including this one). But those temperamental qualities are crucial and relate to the points I have been trying to make here: the road to success in investing is paved with independence of spirit, decisiveness, and the courage of one’s convictions. — Peter Bernstein
The market naturally triggers emotional responses that lead to mistakes. Those best equipped to handle those triggers are more likely to succeed.
That shouldn’t come as a surprise. Most things in life worth achieving require mental toughness to get through the obstacles that are certain to arise. And investing is full of obstacles.
For example, markets can trick people into thinking that investing is ridiculously easy. Raging bull markets, especially, create the illusion that you can earn returns without risk and get rich quick.
But once the bull market ends, as they all do, the bear market that follows presents investing as a certain money loser. And to add insult to injury, the market spreads bull and bear markets out far enough for investors to forget how the last one ended.
It’s at these opposite extremes, the major turning points in the market, where the right temperament is in short supply but needed most.
It’s where Peter Bernstein’s last sentence comes into play because anyone can sit back and ride a bull market to its peak…then right past it until panic sets in.
Successfully navigating major market turns requires a willingness to think and act against the crowd.
Stock prices reflect the obvious, not the obscure.
If the crowd believes a bull market will continue, then it’s obviously already priced in. Which means anything that might disrupt that trend is not. It’s not even an afterthought in the most enthusiastic bull markets. But you can’t wait for the disruption to surface because once the trend breaks, once the crowd realizes it, then the selling begins, and it’s too late.
So you have to be willing to be early. You have to be able to sell when prices are rising while the bull market seems endless. But you also must be willing to buy when prices are falling, while the bear market appears to only get worse.
Both are difficult. (If it were easy everyone would do it. And if everyone did, the market turns would just happen sooner.)
The final twist in this saga is that betting against the crowd usually fails. It’s only at the turning points where it succeeds. Except, bull markets and bear markets don’t come prepackaged with expiration dates.
Being invested during the length of a bull market is very profitable. Getting out early, while profits look good, is hard. Because betting against it, will certainly look wrong, but being wrong is costly. And few investors are willing to stomach that.
To be successful you have to be independent and decisive, with the courage to appear wrong but ultimately proved right. That’s why the greats stand out. That’s the uncomfortable truth.
- The Three Sides of Risk – M. Housel
- Buying During a Crisis – Of Dollars and Data
- Is Value a Value Trap? – The Acquirer’s Multiple
- Are Intangibles the Bane of Value Investors? – Klement on Investing
- The Best Source of Investment Income? – A Wealth of Common Sense
- The Big Cycles Over The Last 500 Years – R. Dalio
- Myth Busting, Popular Delusions, and the Variant Perception (pdf) – M. Mauboussin
- Not Even Wrong: Ways to Predict Tech – B. Evans
- Tulip Mania: Chris Bloomstran on Buffett and Berkshire – The Acquirers Podcast
- Mental Models For a Pandemic – Farnam Street
- Why Triggering Emotions Won’t Lead to Lasting Behavior Change – Behavioral Scientist
- Doordash and Pizza Arbitrage – Margins