“Investing isn’t complicated. You just buy stocks when they sell for less than they’re worth.”
“How do you know what they’re worth?”
Einstein said everything should be made as simple as possible, but no simpler. I’ve learned the latter part the hard way, realizing that it’s often hard to tell the difference between two simple but opposite views.
For example …
It’s hard to know the difference between “I was wrong” and “The odds were in my favor but it just didn’t work out.” You can’t learn from a mistake unless you can accurately identify a mistake. But doing so is easier said than done. An investment that soured could have been a mistake, or it could have had a 90% chance of success with great return prospects, but unfortunately stumbled upon the 10% chance of things going wrong. The problem is we rarely know the exact odds of success of our decisions; we can only make educated guesses, and those guesses are influenced by how we want the event to turn out. This creates two challenges: Sometimes we make terrible bets and think we just got unlucky, and sometimes we make excellent bets whose unfortunate outcomes discourage us from pursuing them again.
It’s hard to know the difference between “Be patient” and “Change your mind when the facts change.” All worthwhile investments are cyclical, so capturing long-term returns requires patience through difficult times. Then again: Ninety-six percent of companies go out of business within 10 years, and even about 40% of established public companies at some point lose most of their value and never recover. Blindly saying “Be patient” isn’t safe in a world where most stuff eventually breaks for good. You should change your mind when the facts change. But by the time we can tell whether something is a changed fact or just a cyclical downturn, it’s often too late. The same people who are lauded for holding firm on Amazon during its dark days could be criticized for being patient with General Motors during its fall. The solution is diversification and an acceptance of some degree of loss, but along the way you’ll constantly question whether you’re dealing with a normal cycle or the beginning of the end.
It’s hard to know the difference between contrarian and cynical. Getting ahead can mean doing things different than the masses. But the masses aren’t always wrong. They’re often right. The idea that you should always bet against what’s popular is not contrarianism; it’s cynicism. The trick is realizing the rate occasion when the masses delude themselves into believing something that isn’t true. This is easier said than done, because for every unsustainable bubble there are at least ten instances of things legitimately being different this time. I suspect many people, in an attempt to become wisely contrarian, accidentally stumble into cynicism. And that’s often more dangerous than going along with the crowd.
It’s hard to know the difference between your viewpoint and the complete viewpoint. Someone once described Donald Trump’s personality as, “Unable to distinguish between what happened and what he thinks should have happened.” I think all of us suffer from this to some degree. Everyone needs to tell themselves a story about how the world works, and the path of least resistance is to tell yourself a simple, logical story based on what you’ve personally experienced in life. But since all of us have only seen a tiny fraction of the world, we fill in the gaps of what’s unfamiliar with what we know. “The recession occurred because [this specific thing I’m familiar with].” “The company failed because [this specific interaction I had].” Trying to accurately explain 100% of something you’ve only experienced 0.0001% of is as difficult as it is prevalent.
It’s hard to know the difference between incentives and motivations. Here’s the simple difference: Mark Zuckerberg in the early days of Facebook was motivated. The Wells Fargo employees who opened fake accounts to meet their targets were incentivized. Both worked on a system of, “If I do X, I’ll be rewarded with Y.” But one wanted to earn the reward – it was like an emotional mission for a cause larger than himself – while the other only wanted (or needed) to get the reward. Without hindsight it can be hard to tell which is which.
It’s hard to know the difference between data and data mining. I want my decisions to be driven by data, not my gut. But if my gut can’t logically explain why the data says what it does, maybe the data is wrong, incomplete, biased, or I’ve found a spurious correlation. Following data without asking, “Is this really true? Am I missing something” is dangerous. But once you let yourself start questioning data, you open up the door to seeing what you want to see and explaining things how you want them explained. This is why equally smart people can look at the same data and persuasively draw opposite conclusions. And it’s why we have more data than ever before but are still highly susceptible to making terrible decisions.