The Collab Fund is known for its brilliant blog posts from the prolific Morgan Housel. Every once in a while, they feature an equally insightful guest post from Ted Lamade. This one is about the seemingly impossible trade-off in investing between conviction and humility, as the blog’s title suggests ‘The Thin Line’.

Lamade begins with the decisive moment in the American Civil War being defined by the overconfidence of an incredibly capable and successful general of the Confederates – General Robert E. Lee.

“Simply put, success breeds confidence. The longer this success lasts, the more a leader’s confidence grows.

The tricky part is that this increase in confidence is initially a positive because it is what enables a leader to take risks, expand, and grow. However, if success is sustained for long enough, an increase in confidence can morph from an advantage into a significant disadvantage.

The fact is confidence operates on a thin line. Possess too little and you will never take enough risk. Possess too much and you will inevitably take imprudent risks. This is why, as with most things in life, having the right balance is critical.”

He then relates this to the current exuberant state of the markets:
“…investors face an important risk management decision today. Sure, the consensus may be right. This bull market may continue. The hottest segments of the market could march higher. Things that have worked in the past decade could continue into the next. The most confident managers could overcome the odds once again.

…However, the trouble is that if these things do not happen, the consequences could be material given the current level of valuations and a lack of liquidity in many portfolios.”

So what should investors do?
“…investing can be characterized as an act of survival and that success is often contingent on an investor’s ability to simply persist and endure through cycles. As a result, making sure a portfolio is positioned to do so should always be a priority.

Personally, I have found that confidence in investing is an endless struggle to find your balance. At some points, the markets will make you feel like a genius, while at other points they will make you feel anything but. However, one thing I know for sure is that every time I have crossed that thin line into the realm of overconfidence, I have been humbled shortly thereafter. As a result, the longer I do this, the more I realize that these are the moments when I need steer myself back towards that thin line and find my balance.”

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