Investing and the Paradox of Perfection

A lot of people I meet in the startup world and in investing are aiming for that perfect start when all their stars will align to take them off to the moon.

So, some keep waiting for their “best product” or “best design” before starting up their businesses, and others wait for the “perfect business to invest in” or “perfect price to invest at” before starting to invest their money.

The reason? They don’t want to be criticized for any mistake – like not getting business, or temporarily losing money in the stock market – they may make due to not being perfect at the start.

If you think about why we feel the need to be perfect in the first place, it all goes back to how we think about ourselves and our self-worth. If we have a strong desire to be perfect, then we may use the idea of perfection as a way to validate ourselves as worthy and valuable human beings.

If we were perfectly happy with who we are, why would we feel the need to be perfect in the first place? Or would we be perfectly happy, just the way we are?

What I’ve noticed is that people who constantly seek perfection – in business or investing – often worry about what others think of them. They’re actually seeking recognition – because if we’re perfect then surely no one can find fault in us, right?

And that’s why, most of such people keep aiming for perfecting, keep waiting endlessly for their perfect day, or perfect product, or perfect stock, or perfect price…which is a big fallacy.

The Investor Who’s Always Right
If you look back at the careers of the world’s most successful investors, a large majority of them have learned about successful investing in the best possible way – by making mistakes.

Warren Buffett did it with Berkshire Hathaway – the textile business. Charlie Munger admits he still makes mistakes even after many decades as a business person and investor. He has also said that it is important to “rub your nose” in your mistakes.

Peter Lynch said –

In this business, if you’re good, you’re right six times out of ten. You’re never going to be right nine times out of ten.

Doing wrong, or making mistakes (in investing, startup, or in life) is inevitable.

As Einstein once said, anyone who has never made a mistake (if there is such a person) has never tried anything new.

Munger, in fact, advises that people strive to make “new” mistakes (instead of repeating the old ones) and learn as a consequence. As he says…

There’s no way that you can live an adequate life without many mistakes. In fact, one trick in life is to get so you can handle mistakes. Failure to handle psychological denial is a common way for people to go broke.

Now, we have been brought up in a society where making mistakes or “being wrong” is seen as a stigma, and “being right” or “being perfect” is always looked upon.

“How could you make such mistakes?” my Math teacher in school would often tell me.

“Don’t dare to be wrong!” I would often tell myself before committing on to something new while in my job. After all, how could you dare to be wrong when your salary and reputation depended on being right, always?

That stigma vanished after I was on my own, and started reading Munger and the likes with greater attention. In fact, I proved the “dare-to-be-wrong” philosophy instantly with my analysis of Opto Circuits in 2013, despite some clear thinking about its business, but thanks to my fuzzy thinking about its intrinsic value.

Dare to Be Wrong
“Dare to be wrong,” Howard Marks wrote in one of his memos in 2014, very much like Charlie Munger told him, “It (investing) is not supposed to be easy. Anyone who finds it easy is stupid.”

Marks wrote…

You have to give yourself a chance to fail.” That’s what Kenny “The Jet” Smith said on TV the other night during the NCAA college basketball tournament, talking about a star player who started out cold and as a result attempted too few shots in a game his team lost. It’s a great way to make the point.

Failure isn’t anyone’s goal, of course, but rather an inescapable potential consequence of trying to do really well.

He then added…

Any attempt to compile superior investment results has to entail acceptance of the possibility of being wrong.

…since conventional behavior is sure to produce average performance, people who want to be above average can’t expect to get there by engaging in conventional behavior.

Their behavior has to be different. And in the course of trying to be different and better, they have to bear the risk of being different and worse. That truth is simply unarguable. There is no way to strive for the former that doesn’t require bearing the risk of the latter.

Of course, as Marks wrote, it’s important to play judiciously, to have more successes than failures, and to make more on your successes than you lose on your failures. But it’s crippling to have to avoid all failures, and insisting on doing so can’t be a winning strategy.

Such a strategy may guarantee you against losses, but it’s likely to guarantee you against gains as well.

I have seen so many people over the years who have sat on the stock market’s sidelines – either due to fear of losing money, or while waiting for a perfect opportunity to buy stocks – that they have paid huge opportunity costs of not being invested.

No one wants to look wrong now when everyone else is looking Mr. or Mrs. Right.

In his memo, Marks quoted Lou Brock, one of baseball’s best players of the late 1960s, as saying –

Show me a guy who’s afraid to look bad, and I’ll show you a guy you can beat every time.

The interesting part about the stock market is that wherever you look, you would find such guys aplenty – people who are afraid to look bad, and thus people who do things that everyone else is doing.

Anyways, here is how Marks ended his memo –

Unconventional behavior is the only road to superior investment results, but it isn’t for everyone. In addition to superior skill, successful investing requires the ability to look wrong for a while and survive some mistakes.

Thus each person has to assess whether he’s temperamentally equipped to do these things and whether his circumstances will allow it…when the chips are down and the early going makes him look wrong, as it invariably will.

Not everyone can answer these questions in the affirmative. It’s those who believe they can that should take a chance on being great.

Mark these words, and note them in your investment journal – Successful investing requires the ability to look wrong for a while and survive some mistakes.

But then, are you willing to bear the embarrassment of looking wrong when all others around you are looking right?

“Love all, trust a few, do wrong to none,” said William Shakespeare.

Vishal Khandelwal writes, “In the stock market, trust few (businesses), love even fewer, but don’t fear doing wrong.” 😉

Remember, you are born to be real, not perfect. And if you keep waiting for perfection in life and investing, you will be waiting for the rest of your life.

Now you decide.

P.S. We conducted our Value Investing Workshop in Pune yesterday, our biggest ever in the city so far. And here are the seemingly happy tribe members after the Workshop 🙂