Not everyone is cut out to be a professional investor.
I don’t say that because it’s more difficult than other professions. I say it because it requires you to delight in absorbing vast amounts of information, it requires a willingness to have your conclusions challenged constantly (and to accept it happily when you’re wrong). It also requires a particular ability to assume the weighty responsibility of stewarding the life’s savings of those who have placed their trust in you.
Also, unlike a lot of occupations, there’s nowhere to hide when you get it wrong.
And believe me, even if you and your team are firing on all cylinders, you will sometimes get it wrong.
To be an effective investor, I need to be ruthless and uncompromising about the quality of the information I consume. Accomplishing this is as much about what I choose not to consume, as what I choose to consume.
This even extends to the entertainment I choose. My TV isn’t set up to be able to receive broadcast television. Ads are nothing more than pollution - and I can literally feel my neurons going *poof* whenever I’m exposed to reality TV. I do play video games, but these are not purely for entertainment; I’ve found that they’re a very effective way to unwind and they help to sharpen a variety of cognitive functions.
The human brain is, for now at least, the world’s most powerful pattern-recognition and extrapolation engine. It’s always trying to fill in the blanks, to find the connections between things – and to predict the future. The extent to which it can do these things well is strongly related to the quality of the information it is fed. In other words, if the information I’m consuming is garbage, the conclusions I reach and the decisions I make will also, unavoidably, be garbage. Garbage in = garbage out.
If I’m constantly consuming high quality information, I stand a good chance of understanding what’s going on in the world; accurately filling in those blanks, seeing the patterns as they unfold - and if I’m really lucky - getting a minor sense of what will happen next. Good information isn’t a guarantee that I’ll get things right, but it’s impossible to get there without it.
Accordingly, I dedicate a minimum of 6 hours every day to consuming the best information I can get my hands on. This typically includes topics like finance and economics, technology, geopolitics, military developments, general science, history, and social trends.
Consuming good information isn’t enough. One person can’t possibly consume enough of it to get the job done.
You need to be constantly triangulating the information you’ve consumed - and the conclusions you’ve reached - with smart people. This works best when the smart people you triangulate with are smarter than you – and are reading and concluding somewhat differently to you. They might know something which reveals a flaw in your conclusions. They might have a missing piece of information, or a useful perspective, which either completes, or materially alters, the direction of your thinking. The value of this is impossible to overstate.
I’m fortunate to have met a lot of very smart people in my travels. I’ve always cultivated these relationships and I still enjoy regular communication with most of them. This can be in a formal context (eg. Afinitiv LLC’s investment committee), or informally as a friendly chat over a cup of coffee. Access to smart people is invaluable in any decision-making process, but especially so when the number of variables is so vast.
Forming a comprehensive view of what’s going on isn't worth very much if you aren't acting on it.
When you know enough to act, you need to do so without hesitation. This can mean axing certain parts of your portfolio, adding new ones, or adjusting the percentage allocations to whatever you’re currently holding. Whatever the case, you’ll typically have a small window of opportunity in which to take optimal action – and if you miss it – you’ll probably never get it again.
Knowing when you know enough is by far the hardest part of this. The best place to start is by accepting that you’ll never have the complete picture. Years of study, countless hours of research, and triangulation ad nauseum with smart people will, at best, get you a rough approximation of everything you’d like to know. It’s therefore important to realize when you’ve captured the general essence of what you’re working on; to know, with some degree of certainty, that you are directionally correct. It’s much easier to be directionally correct, than to be proportionally correct. Directional correctness is usually enough.
If the previous sections of this post were enough to make you an amazing investor, there would be a LOT more billionaires on planet earth. Having great information, triangulating successfully with smart people – and executing immediately on your views won’t help you in the least when something big and unforeseen happens.
Humans and the systems we’ve built are great at dealing only with relatively gradual changes. When the rate of change is very high, or immediate, our systems and our thinking can fail us catastrophically. We’re just not naturally wired to deal with it. How many senior government, or private sector economists correctly called the Global Financial Crisis in 2008? Not a single one!
Sadly for the investment world, big surprises happen all the time. Wars can break out, pandemics can occur. Significant changes in the landscape, of practically any type, can occur at practically any time.
The best way I’ve found to deal with this is to begin with the understanding that I don’t know what will happen. Even the most prolific forecasters are usually wrong half the time, so I consider that to be a fool’s errand. The understanding that I don’t know – and that I can’t know – liberates me from trying to win that unwinnable game. It also forces me to think about how I can best protect my clients’ money from those unforeseeable events.
One approach which has worked very well for us is to take positions which are very profitable during major falls in the market, but aren’t too costly the rest of the time. These positions were remarkably effective in March, 2020, when the world was so caught off-guard by the COVID-19 pandemic. We’re still holding those positions at the time of writing…just in case.
Being a professional investor is no doddle. It’s stressful. It’s burdensome. It requires your full attention – and that of your colleagues. If living a quiet and easy life is your thing, I highly recommend that you don’t do this for a living.
I’ll say this for it though…I’m yet to come across something more rewarding than to see people hit their goals, or avoid major losses, because of something I did for them.
For me, it begins and ends with those outcomes.
If you would like our help with your investments, simply answer a few questions and open your account here.
Customer Relationship Summary
(c) Copyright Afinitiv LLC 2023