Short Investing Lesson from a Confused Donkey

I was listening to Tim Ferriss’s recent podcast where he interviewed Derek Sivers. In a response to the question “What advice you would give to your 20-year-old self?”, Sivers told the story of Buridan’s donkey.

It’s a tale about a donkey that’s standing exactly halfway between a bucket of water and a pile of hay. The donkey is confused for the poor animal can’t decide where to go first. He just keeps looking to the left to the hay and right to the water. Unable to come out of the deadlock, the donkey eventually falls over and dies from hunger and thirst.

It’s actually a thought experiment that illustrates a paradox in philosophy. The paradox is named after the 14th-century French philosopher Jean Buridan.

Are you wondering, what’s a philosophical angle about a donkey’s personal problem got to do with investing? Please bear with me for few more lines. I’ll come to it.

Let’s first understand how this paradox is connected to Siver’s advice for younger self.

Sivers argues that a donkey, unlike a human, can’t think of the future. If it did, it was an easy decision because it could easily drink the water first and then later go to the pile of hay or vice versa.

But a lot of young people behave like Buridan’s donkey. They’re trying to pursue many different things at once but not making progress in any. The problem isn’t that they are running after many things. The real problem is that they are thinking very short term. They act as if they don’t do all these things this week, they won’t happen.

However, they don’t understand that they can always pick up one thing, focus on it for few years and then take up another activity after that. With this strategy, they’ll end up having achieved multiple things over a decade’s time.

That brings me to a personal experience which testifies that your truly is probably the reincarnated avatar of Buridan’s donkey.

I remember joining a gym (for the third time) in 2011. I stuck to the gym instructor’s workout plan for few weeks but soon became impatient. I wanted results bigger, better and faster. Around the same time, I watched few youtube videos which claimed that I didn’t need to sweat out so much in the gym. With intermittent fasting and simple exercise, they claimed, I could build strength faster. So I quit the gym and started following the new health recipe. And when that didn’t yield better results in 2 months I moved on to something else.

Mr. Buridan was probably smiling from heaven on seeing his donkey in human form.

This reminds me of the advice that Bill Gates supposedly gave to a bunch of college graduates. He said –

People overestimate what they can achieve in one month and underestimate what they could achieve in one year.

I wish someone told me this when I was 20. But it’s never too late.

Anyways, I found this idea especially applicable in the context of investing. A lot of times new investors start chasing multiple ideas at the same time. Which means they don’t get to spend sufficient time and effort on one idea. And this leads to decision paralysis. Half baked research on an idea leads to low confidence and possibly to over-diversification.

Low confidence means with the first sign of troubles in the broader market, the investor will get jittery because he doesn’t know if the business he owns has the resilience to weather the temporary storm.

Low confidence is usually compensated with diversification. But what happens when every stock in the portfolio is a low confidence stock? People take the refuge of diversification to mitigate the risk of loss. As a strategy, diversification is pretty powerful. However, if used as an excuse to avoid hard work, diversification is a bad idea.

“There are so many stocks in the market. I just don’t know which stock to begin with.” This is usually the first dilemma every new investor faces. The enormity of task paralyzes him like the Buridan’s donkey and keeps him from taking the first step.

If you don’t know where to begin, just pick up the first stock from you current portfolio. Or pick up the first stock from any index like Sensex or Nifty. The idea is to break the deadlock and get the ball rolling.

But hang on. That’s not the complete solution. It’s just the beginning. It would only get you out of the frozen state of decision paralysis.

A few years back, when I first got started in the stock market, I would start with one stock and before I was even done reading the first few pages of the annual report, another stock name would catch my fancy.

Slowly, over the period of next few years I understood that investing is not a race. It’s not a competition to analyze the maximum number of stocks or know about every industry and sector. No matter how many sleepless nights you spend studying businesses, there will always be few names (which you would hear from friends or financial media) that will remain untouched by you.

Our circle of competence, says Warren Buffett, doesn’t necessarily need to be very big. It just needs to be clearly demarcated, even if it’s small.

So stay committed to your circle of competence. Don’t be sucked into the temptation of finding too many multi-bagger ideas in a single day or even a single year. According to Charlie Munger, you don’t need more than 3-4 great ideas to have a very profitable investing record.

So listen to Derek’s advice and remind yourself that you’re in this game for long term. Short term is for Mr. Buridan and his domesticated animals.