Underappreciated Aspects of Investing
The investment world is a field littered with variance in opinion; that’s what makes a market. I’ve written in the past about the difficulties in capturing nuance; we can’t carry a placard on our foreheads that details our “what and why” so investors often talk over one another without appreciating how the other side’s perspective is formed. There are no “right” answers in this business, there is no single “best practice”, and the needs of one investor may differ entirely from another. Yet, much of the discourse between investors involves the projection of one narrow view of the world onto another’s narrow view. There are many things that go unsaid and as a result, come to be underappreciated.
I recently asked you all what aspects of investing you feel are the most underappreciated and have combined a few of them with my own. You may read some of these and think “Hey, I appreciate this every day”. That’s great. If any of these are obvious to you, then that’s probably a good sign. For brevity’s sake, I decided to omit things like “time” and “patience”. While there is a compelling argument for both, and they are arguably the most important, I felt they are too obvious and would take up valuable real estate.
Finding good ideas is not enough to generate a solid track record. What use is a great idea if you don’t have the emotional discipline to manage volatility or the capacity to critically assess whether it’s a bad quarter or the start of a more detrimental long-term trend?
You can’t get by on patience and behavioural advantages alone. In the same vein, having the patience of Gandhi will not serve you well if you exercise that patience on terrible ideas. You need to turn over a steady supply of rocks to find great ideas.
Comprehension is not critical analysis. Judgement is more important than intelligence; which is necessary but not sufficient. I borrow this from Krainois Capital’s presentation on how to pitch a stock, but; everyone can remember information, most can understand that information, some can interpret and analyse that information, and few can truly asses and critically judge that information through their own voice.
Theory is not the same as practice. Investors can sound terrifically smart putting pen to paper. Ideas make sense in theory. Forecasting valuations feels knowable and quantifiable in models. Unknowable variables mean none of this translates into the real world; where investors are judged on their returns.
We only truly “know” through hindsight. I don’t care what anyone says, nothing beyond the current moment in time is time is knowable. You can work hard to tilt the odds of success in your favour, but we are always at the mercy of luck and misfortune. Everything forward-looking is an educated guess at best. Investors like to believe future events are knowable as it diminishes the reality that it’s most certainly not.
The influence of luck in outcomes. People seldom like admitting their success was the result of luck as it lessens their perceived brilliance. We admit things like “I was lucky to meet my spouse, right place, right time” but won’t concede to luck as far as investments are concerned. Work hard to increase the opportunities to get lucky and recognise luck.
Learning the wrong lessons. In a similar manner, we can learn the wrong lessons from positive outcomes. Such as when something good happens, but not for the reasons you thought, or via the thesis you developed. Mistaking luck as brilliance is but one example. The problem with doing this is that it won’t hurt the first time. Rather, when you carry that lesson forward and repeat it. Luck is not an oddity to rely on.
Timing is everything. There is a minuscule sample of stocks that in hindsight (see point 5) were a “buy at any price” (see point 7). In the vast majority of cases, timing is everything, which extends to valuation work. The entry price is arguably the most influential knowable (in the sense entry price is known, forward returns are not) component to your total return. That said, read point 5 again; timing tops and bottoms is futile.
Having a large base of capital helps. It’s not my intention to discredit the idea that everyone starts small and you can invest with as little as $10. But the reality is having more money enhances the power of compounding (it also increases the amount of money you can lose too). An 8% return on a $10,000 portfolio is $800. On a $100,000 portfolio, it’s $8,000, and $80,000 on a $1 million portfolio, and so on. Investor behaviour tends to migrate from high-risk high-reward to modest-risk modest-reward as the dollar amount of exposure increases. They start quantifying how much they stand to lose. Especially in the early stages, adopt an abundance mindset; optimise for increasing the base of capital you are working with, not solely on maximising returns. Increase the % of salary that is saved and invested. Dare I say, attempt to increase your salary or income.
Viewing investing through a lens of downside. Too much emphasis is placed on returns, at the expense of risk. Both should factor into investment decisions. I will paraphrase Klarman; “How much can we lose and what is our probability of losing it”.
Inactivity is an activity. The stock market is like a town square for the paranoid to project their insecurities onto others; it’s a distraction from the act of investing. Stepping back from the public discourse can improve clarity and reaffirm that position attrition is not a necessary component to success. It’s okay to have intentional periods of inaction. Save intensity for when it matters. Silence and peace are underrated.
The market doesn’t care about your opinion. This one is going to shock a lot of people. The executive suite of the company you are ranting about is not gathered in a conference room refreshing your Twitter feed; waiting until the next epic opinion on how to run their business flows down the pipe.
Right when others are wrong. Howard Marks claims that it is not enough to be right; you must be right when others (i.e., the market consensus) are wrong. This is largely true if the intention is to beat the market return. But to say the market seldom rewards comfortable decisions is inaccurate and requires some nuance. Let’s say we have two investors, one owns the S&P 500 ETF and the other works 20 hours a week picking stocks. Over a 10-year stretch, one returns 8% compounded annually by just owning the ETF; a few basis points under the S&P 500. The other returns 9% compounded annually and beats the market. Investor one likely spent a day deciding to buy the ETF. Investor two spent ~10,428 hours picking stocks and managing their market-beating portfolio. I argue the ETF investor has been rewarded for a comfortable decision. Depending on the observer, one of these two investors is a loser.
Execution is king. That’s right, execution is the motor that powers a business over the long term. Who excecutes? Humans. Employees, management, stakeholders. Businesses are actually populated with thousands of human beings, they are not just numbers in an Excel spreadsheet. Hold for gasps.
Taxes, and fees. The reason the influence of fees and taxes are often exempt from discourse is nobody wants to be the “yea, but is this adjusted for taxes” guy. Taxes suck and fees suck, but are a huge component to “real” returns. Within reason, do whatever can be done to minimise their influence on your portfolio.
Underperformance drives selling. The mental gymnastics we go through to either buy or sell a stock is fascinating, and often differ dramatically. The truth is that a lot of sell decisions are given some form of justification when in reality they are coerced by underperformance. Whether a position is in the green or red will alter the way you perceive new information on that business; both reinforcing in nature. Watch out for this bias and stay objective.
Inflation is not actually a big deal for stocks. Controversial, I know, but there is this idea floating around that inflation is bad for stocks. In the short term, it can be sometimes. In the long run, stocks are one of the greatest hedges to inflation; businesses increase prices, and consumers’ wages increase; albeit not always at even rates. The fact of the matter is that stocks (and the businesses represented by those securities) tend to absorb inflation over time, which flows through their income statement, and eventually their valuation. There are other strands of conversation that can pulled at here; inflation-adjusted returns, and the pros and cons of holding cash across varying time intervals, but we’ll leave it at that.
There’s no time for nuance. I wrote an entire essay about the lack of nuance in investment-related discussion; check that out. The TLDR is this; what is a reality for one investor, is not for another. There are hundreds of ways to transform a potato into something edible.
Investing is about more than money. To round things off, investing is many things to many people; a means to an end, a vehicle to enhance retirement or build generational wealth, a sense of community, a way to learn and stay sharp, an alternative lens through which to view the world in an inquisitive light, a living breathing study of human behaviour and bias. To me, it’s all of these things; a discipline which spills over into everyday life.
Thanks for reading,
Conor
Honourable Mentions
Here is some other great stuff worthy of your time.
Richard Hamming was a scientist, but back in 1986, he gave a speech titled “You and your research” that had practical takeaways for all fields of study. It’s funny, a smidge dated, and hits home.
A handy tearsheet from Lindsell Train simply titled “Lynch Law”. A pertinent reminder that common sense never goes out of fashion.
Richard Zeckhauser wrote a paper in 2006 titled “Investing in the Unknown and Unknowable”. The paper is packed with case studies, methods of strategic thinking, and commentary on biases. It was a highly enjoyable read.
Phenomenal piece.
“The stock market is a distraction from the act of investing.” Great quote.
Great read, Conor. Thanks for sharing