Featured in the 3rd March edition of 3L&3S
Morgan Housel may not come up with radically original thinking in everything he writes but he does have a special skill in making lateral connections and bringing out the profundity in seemingly prosaic concepts. A timely piece – when there are so many moving parts in the world, when sources of distraction are aplenty, knowing to differentiate between the signal and noise becomes the only source of differentiation in our profession. Actually, more than just knowing, mustering the courage to act on your belief when everyone else around you says otherwise, is indeed the hardest thing in our profession. And because it is so hard, it becomes the most critical success factor. Morgan highlights the point that IQ or intelligence do not matter beyond a point as lucrativeness of the profession attracts enough smart people to it for it become an edge.
“Jiddu Krishnamurti was an Indian philosopher. His message became more candid as he aged. In one famous moment during a talk, he asked the audience if they wanted to know his secret. He leaned forward, and whispered: “You see, I don’t mind what happens.”
This is a unique and powerful skill if you can actually do it. Almost 600 people ace the SATs each year. Another 7,000 come within a handful of points. There are a lot of smart people. And they’re getting smarter. Average IQ scores have risen 10 points per generation for decades. A field as competitive as investing can only repeatedly reward skills that are truly unique. And any skill that others can be taught is not unique, because this industry is so lucrative that thousands of people will move mountains to learn it. The extreme tails of intelligence are rewarded. But merely high intelligence rarely is because there are many so smart people chasing the same thing – outperformance – with intelligence learned from the same schools and firms. Smart is not a unique skill. That’s why so many smart people don’t outperform.
What is unique?
One of the most unique and valuable skills in this industry is Jiddu’s secret: not minding what happens. Not in a flippant way. You have to care about eventual outcomes, the people you work with, etc. But if you can remain dispassionate about what people think of you while you’re trying to get that outcome, or about the noise around you during the process, you have an advantage that I doubt one in a hundred thousand has in this industry. There are two drivers of enduring investment performance: Doing something others don’t. Doing something others do but during a time they don’t want to. Every investor done well over a long period of time can put their success into one or both of those buckets. And both require some degree of not caring what happens.
A few things that help you get there.
1. Not caring about looking dumb when you’re confident others are being dumber. Peter Kaufman once told a story of a conversation he had with Warren Buffett. Kaufman told Buffett he had a theory about why he was the greatest investor in the world. It was 1999. “During the bubble, everybody said you’re an idiot, behind the times. You’ve lost it, you don’t understand technology.” Kaufman said…..
2. Not caring about having an imperfect portfolio.
Some problems can never be solved because the world they live in is always adapting and changing. Portfolio construction is one of them. Incredible amounts of effort are devoted to finding the optimal level of diversification and position sizing. There are critical elements to both. But some level of “good enough” can be ideal for most people. The factors that determine future returns are still out of your control no matter how many spreadsheet tabs your model uses, and when you let go of caring about having a perfect portfolio you have fewer knobs to fiddle with, which reduces the chances of regrettable decisions. A rule of thumb is to prefer the strategy that’s likely to get you closest to your goal with the fewest number of decisions needed along the way.
3. Not caring about the reputational hit that comes from changing your mind. If you’re right about one thing, people will pay attention to you. You’ll become an expert in that one thing, asked to make predictions about what it will do next. Then, if you change your mind about that thing, a wave of people who gave you attention because they wanted to believe in the thing will flee and discount your wisdom, since they can no longer use you to confirm their views. Not caring about that demotion is a gift. There are things that never change, but underneath them are trends, industries, companies, countries, and strategies that come and go. The ability to let go of past beliefs when they’re no longer valid, or you realize you were wrong to begin with, is indispensable in this field. The only thing more dangerous than a view that changes on a dime is a view that hasn’t changed in decades.
4. Not caring about not having no explanation for the majority of events. There’s two types of “I don’t know.” One is, “I don’t know, but I’m trying to figure it out.” The other is, “I don’t know and don’t care because it doesn’t matter to what I’m doing.”
The latter one is underrated and more important, because it forces you to acknowledge factors that do, and don’t, make a difference to your strategy. The thing about statements like “Stocks fell amid news of slower economic growth” is not just that we don’t know whether it’s correlation or causation. It’s that even if we did know it’s causation it may not matter. Would you do anything different if you knew exactly why stocks fell today? Would it change your strategy? Maybe not. Probably not. Hopefully not. A lot of events fit this category. Einstein’s alleged quip of “Not everything that can be counted counts” holds true for maybe 98% of what happens in financial markets. And if you can put that idea to use you free up time to focus on the 2% that does count. Figure out what you can control and obsess over it. Identify what doesn’t matter and ignore it. Determine what you’re incapable of and stay away from it.”
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Note: the above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India as a provider of Portfolio Management Services. Marcellus Investment Managers is also regulated in the United States as an Investment Advisor.
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