The Classic Mistake Most Investors Make

Here is the latest issue of The Journal of Investing Wisdom, where I share insightful stuff on investing I am reading and thinking about. Let’s get started.

A Thought

One of the key, rarely noticed, skills of the best investors out there is that they often separate their hard work from their action. What this means is that the moment they identify as good business worth investing in may not be the moment they actually buy it. There is sometimes a pause, a wait, a re-reflection, and only then if it is warranted, an action.

This is unlike what we do most of the time, in life and in investing. We do the hard work, and we act on the conclusion. There is rarely a moment of pause and reflection.

I interviewed Vinod Sethi, ex-MD and CIO of Morgan Stanley India, in the second episode of The One Percent Show. Out of the many insights he shared over our 150 minutes of interaction, here is one that stood out for me that led me to appreciate even more the idea of pausing and waiting for the right time to invest in an idea I have worked upon.

Vinod said –

People have this natural urge that if I have spent 100 hours doing something, then I must act. Whereas my view is that act when prices are going to go up or down, not when you have completed your homework. The market is not waiting for you to complete your homework for the prices to go up or down. I would always urge a lot of my analysts, including myself, to delink analysis from decision-making. Because you have spent a hundred hours on something, you don’t need to act.

The key to being a good money manager is to not act, or not link your hard work to your action. Delink the two. Keep working, because the point of conviction and intuition comes when it comes. But at that time, your homework should be complete. That time you shouldn’t be running around doing homework, because that intuition point will happen when it happens. It is all sitting in your brain. But you act when your intuition wakes up. In a way, the market whispers in your ear.

At the end of the day, I’d say that’s what it is. Because there are 10,000 listed stocks and why would you zone in on something? You need to do a lot of work, but don’t believe or don’t live under the delusion that your work has got you this brilliant idea.

The work has given you the foundation for good seeds to grow. It’s like a garden, which has been well fertilized and watered for some roses to bloom. That’s your research on a daily basis. But the act of the rose coming is when there is a confluence of events, like when a stock is dirt cheap or forgotten or expensive. There’s the real world out there and you’re ready with your homework.

Let’s put it this way. It is like there’s a woolly mammoth coming at you and I give you a gun with a few bullets. There are two ways you can respond. I’ve given you a gun with bullets, so you can start firing. The other way to look at it is to just sit and fire when the woolly mammoth shows up. So, research is like loading the gun, having the bullets. The opportunity is the mammoth showing up. They’re not linked. Having a gun gives you the arrogance that I will fire and can hit the mammoth. That is a classic mistake of most analysts.

This has been one of the most wonderful insights I have received from anyone on The One Percent Show so far.

What Vinod suggested is that you must keep doing your work of identifying good investment opportunities, but if the prices are not right, and there is no margin of safety, don’t act. Least of it, don’t act just because you have done the hard work. Stocks do not bother about your hard work.

But when the time is right – and you are ready with your idea and capital – the market will whisper in your ear.

Wait for that whisper. And only when you hear it, act.

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A Super Text

When will come the next great speculative episode, and in what venue will it recur – real estate, securities markets, art, antique automobiles? To these there are no answers; no one knows, and anyone who presumes to answer does not know he doesn’t know. But one thing is certain: there will be another of these episodes and yet more beyond.

Fools, as it has long been said, are indeed separated, soon or eventually, from their money. So, alas, are those who, responding to a general mood of optimism, are captured by a sense of their own financial acumen. Thus it has been for centuries; thus in the long future it will also be.

~ John Kenneth Galbraith, A Short History of Financial Euphoria

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An Article

Escape Your Bubble – Nick Maggiulli

We all live in bubbles. Some of these bubbles are made of money. Some are made of power. Some of pride. Some of hate. Some of lust. Some of loss. The question isn’t whether you are in a bubble, but how often do you get out of it? How often do you escape your bubble to see the world in a different light?

Because failing to escape can lead to a rude awakening. You can chase money or power or beauty or some other idea that eventually leads you astray. You can win that game, but lose yourself in the process. Victorious in battle, but defeated in war. Because there is more to life than what is in your bubble. You just have to escape it once in a while to find out.

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A Quote

One can see the investment universe as full of certainties, or one can see it as replete with probabilities. Those who reflect and hesitate make far less in a bull market, but those who never question themselves get obliterated when the bear market comes. In investing, certainty can be a serious problem, because it causes one not to reassess flawed conclusions. Nobody can know all the facts. Instead, one must rely on shreds of evidence, kernels of truth, and what one suspects to be true but cannot prove.

~ Seth Klarman

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A Question

How would the investor you look up to the most act today?

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That’s about it from me for today.

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Stay safe.

Regards, Vishal