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Fundamental Skills of All Investing

“When you first start to study a field, it seems like you have to memorize a zillion things. You don’t. What you need is to identify the core principles – generally three to twelve of them – that govern the field. The million things you thought you had to memorize are simply various combinations of the core principles.” – John Reed (in his book Succeeding)

  1. The ability to distinguish “temporarily out of favor” from “wrong”
    1. Two strongest forces in investing are “This investment looks broken because that’s how opportunity presents itself” and “This investment looks broken because it’s actually broken”
    2. Distinguishing between the two relies on accurately calculating the odds that something will eventually come along to heal or promote the market or company that looks broken
    3. Since the odds are always less than 100%, it can take a while to tell if you’re any good at it, because even when odds are in your favor the outcome can go the wrong way
    4. It’s hard to do. But worse, and more common, is forgetting that a distinction needs to be made in the first place
  2. The willingness to adapt views you wish were permanent
    1. Economies grow because businesses, consumers, and technology change and adapt
    2. It’s ironic how many investors attempt to ride this wave of change with rigid beliefs
    3. There are a set of truly timeless investing ideas. But most of what guides us are beliefs that reflect what we’ve happened to experience in the narrow view of our own lives
    4. It’s painful to contemplate, but a lot of what all of us believe about investing is either right but temporary, or wrong but convincing
    5. If you’re unwilling to update your views when the world changes, or be open-minded enough to realize that some of your views were anecdotal to begin with, you will be eaten alive in this field
  3. The ability to be comfortable being miserable
    1. You can’t enjoy the benefits of exercise without some sort of discomfort, because being out of breath, sore, or tired is the sign that you’ve put in enough effort to deserve a reward
    2. Returns do not come for free. They demand a price, and they accept payment in uncertainty, confusion, short-term loss, surprise, nonsense, stretches of boredom, regret, anxiety, and fear
    3. Most markets are efficient enough to not offer any coupons. You have to pay the bill
  4. The ability to distinguish when analytics vs. psychology is necessary
    1. If investing were only about numbers, no one would be good at it, because computers would arbitrage away all opportunities
    2. If it were only about psychology, no one would be good at it, because every investor has different, arbitrary, goals and markets would never coalesce around something objective
    3. Good investing is some part analytical and some part psychological. Trick is knowing when which skill is necessary, and how one affects the other
    4. Data doesn’t teach you about fear or patience, and psychology doesn’t teach you about discount rates and EBITDA
    5. One is rational and stable, the other makes no sense and changes all the time. One is numbers you can see, the other is emotions you can sort of feel, sometimes
    6. Attacking a problem with two conflicting skills can make you question what you’re doing. And even harder is the frustration that comes from attacking an analytical problem with psychology, or vice versa

Collaborative Fund: The Four Fundamental Skills of All Investing 

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