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Found in 2018... Michel Pireu     | Business Day Tuesday, December 18, 2018
…and worth retelling.

The most important thing.

Few people have what it takes to be a great investor. Some can be taught, but not everyone… and those who can be taught can’t be taught everything. Valid approached work some of the time but not all. And investing can’t be reduced to an algorithm and turned over to a computer. Even the best investors don’t get it right every time. The reasons are simple. No rule always works. The environment isn’t controllable, and circumstances rarely repeat exactly. Psychology plays a major role in markets, and because it’s highly variable, cause-and-effect relationships aren’t reliable. An investment approach may work for a while, but eventually the actions it calls for will change the environment, meaning a new approach is needed. And if others emulate an approach, that will blunt its effectiveness. Investing, like economics, is more art than science. And that means it gets a little messy. Because investing is at least as much art as it is science, I never want to suggest it can be routinized. In fact, one of the things I most want to emphasise is how essential it is that one’s investment approach be intuitive and adaptive rather than fixed and mechanistic. At bottom, it’s a matter of what you’re trying to accomplish. Anyone can achieve average performance – just invest in an index fund that buys a little of everything. That will give you what is known as “market returns” – merely matching whatever the market does. But successful investors want more. They want to beat the market. In my view, that’s the definition of successful investing: doing better than the market and other investors. To accomplish that, you need either good luck or superior insight. Counting on luck isn’t much of a plan. So you’d better concentrate on insight. [But] it’s hard to teach insight. As with any other art form, some people just understand investing better than others. They have – or manage to acquire – that necessary “trace of wisdom” – that Benjamin Graham so eloquently calls for… To be better than average, your thinking has to be better than that of others. You must find an edge they don’t have. You must think of something they haven’t thought of, see the things they miss. You have to react and behave differently. In short, being right may be a necessary condition for investment success, but it won’t be sufficient. You must be more right than others…

- Howard Marks, The Most Important Thing

It’s OK to make irrational investment decisions.

Rational is hard. Being reasonable is often the most practical goal. A few examples in investing: “Be greedy when others are fearful, and fearful when others are greedy,” is rational, but hard. Howard Lindzon gave it a makeover: “Be fearful before others are fearful and less greedy in general.” That’s more reasonable... Day trading and stock picking aren’t rational for most investors. But they’re reasonable in small amounts if they scratch an itch hard enough to keep you out of bigger trouble... Most forecasts are terrible, but making forecasts is reasonable. It’s hard to wake up in the morning telling yourself you have no clue what the future holds, even if it’s true. Acting on investment forecasts is dangerous, but I get why people try to predict what will happen next year. It’s human nature... My asset allocation doesn’t fit any financial advisors’ stock model. I’m an optimist who holds an amount of cash consistent with impending catastrophe. But it works for me. It’s reasonable for me. I can’t rationalize it on a spreadsheet, but I can explain it in the context of the kind of life I want for me and my family... You may think that regret is a foolish emotion. But if you know that you’re going to be susceptible to regret, it is not irrational to anticipate it and to act accordingly.

- Morgan Housel @ Collaborative Fund

Few things destroy long-term investment returns like short-term measurement.

The way in which we measure something can have a profound impact on our behaviour, and be of detriment to our ultimate objective. For active management the view seems to be that if it is a valid measure over the long-term then it can also be assessed over far more limited periods. If we can measure it over five years, why not three months, one month, one day? But if there is any skill in active management, it can only be identified over the long-term; short-term performance numbers are a sea of randomness searching for a narrative. To validate this point, let’s take Michael Mauboussin’s simple heuristic for judging whether an activity is more driven by luck or skill – can you fail deliberately? For active investment management, over the short-term, the answer is absolutely not; it would be impossible to confidently select a portfolio of securities that would underperform over a day, a few weeks or even months (it is entirely random), however, over the long-term it might just be possible. The problem with short-term performance analysis is not simply that it is a weak measure and rarely constitutes meaningful evidence, but that it has come to dominate investment thinking and decision making.

– Joe Wiggins @ Behavioural Investment

Never ask a barber if you need a haircut.

Auditors provide a good example of this self-serving bias. One hundred thirty-nine professional auditors were given five different auditing cases to examine… They were randomly assigned to either work for the company or work for an outside investor who was considering investing in the company in question. The auditors who were told they were working for the company were 31% more likely to accept various dubious accounting moves than those who were told they worked for the outside investor. So much for the concept of an impartial outsider. We see this kind of self-serving bias rear its head regularly when it comes to investing. For instance, stockbroker research generally conforms to three self-serving principles: Rule 1: All news is good news (if the news is bad, it can always get better). Rule 2: Everything is always cheap (even if you have to make up new valuation methodologies). Rule 3: Assertion trumps evidence (never let the facts get in the way of a good story)... The most recent financial crisis provides plenty of examples of self-serving bias at work, the most egregious of which is the behaviour of the ratings agencies. They pretty much perjured themselves in pursuit of profit. The conflicts of interest within such organizations are clear; after all, it is the issuer who pays for the rating, which, as with the auditors above, makes the ratings agency predisposed to favouring them.

– James Montier, The Little Book of Behavioural Investing.
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