Only a few of us

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Investment Philosophy for the Select Few

“Mason, how many times do I need to tell you? It’s time to learn how to make your bed in the morning! Even your 13-year-old sister has figured it out, but you haven’t. You’re almost done with school, yet you can’t do this simple thing!”

Mason is going to be a good engineer, accountant, or businessman. But he won’t be the best in his field. His sister won’t be at the top of hers either. She’s good at making her bed every day, but she’s missing other important things. Only a few of us have what it takes to be the best.

For a lot of you who invest in stocks, you’re okay with just a small profit. This message isn’t for you. You can stop reading now and go back to your day. You put your money in very safe places and think that’s the only way to go. And you spend a lot of time trying to convince others the same thing. You’re mostly right. But not always. Only a few of us can think differently and succeed more.

Reflecting on Excellence

It’s 1989, the quality of the VHS video tape, I got my hands on, is bad. The same voice is dubbing all actors — men and women. I am, 10 and “Top Gun” becomes my favorite movie. Some new questions start forming in my head.

• How do you become part of the elite?
• How do you rise to be the best of the best?
• Are elite achievers touched by God, propelled by their own efforts, or is it a combination of the two?

Only a few of us have the necessary discipline.

Making your bed each morning might seem like a trivial, even tedious task, yet it’s not merely about the task itself. It reflects deeper qualities about a person. Undertaking tasks you may not enjoy, simply because you’ve set rules for yourself, demonstrates inner strength and a particular mindset towards life. When a child makes their bed daily, not out of obligation but from personal choice, it’s a remarkable display of self-discipline, which often indicates future success.

This kind of discipline is equally crucial in investing. If you are disciplined enough to make your bed every day, you likely possess the self-control needed for successful investing. Discipline in investing means adhering to your strategy, resisting impulsive decisions based on fleeting emotions, and maintaining persistence, even to the point of stubbornness.

Discipline acts as the cornerstone of success in any endeavor, whether it’s maintaining physical fitness, learning a musical instrument, or achieving financial goals. Without discipline, chaos reigns; decisions become inconsistent and erratic, and nothing is as organized as it should be. This often leads to mediocre outcomes. To reach the elite levels celebrated in settings like the ‘Top Gun’ academy, discipline is not just beneficial—it is essential.

Only a few of us remain open to outside ideas and keep changing ourselves.

Not many of us consistently welcome new ideas and choose to change voluntarily for our own benefit.

Believing we possess the ultimate truth and lacking the flexibility to reconsider can lead to significant mistakes in investing. For instance, “The Intelligent Investor” by Benjamin Graham, a fundamental for investors, has undergone numerous revisions. Graham recognized that some sections were outdated, no longer accurate and required updates.

Similarly, Stephen Hawking, famous for his work on black holes, publicly revised his theories, acknowledging errors and demonstrating that black holes emit radiation, thus reshaping our understanding.

If these intellectual giants could reassess their beliefs, it’s presumptuous for us to claim we have all the answers. Growth stagnates without openness to new perspectives. In the realm of finance and investment, which is ever-evolving, the ability to adapt and acknowledge errors is not merely beneficial; it’s essential for continuous improvement.

Maintaining this openness is challenging as ego often obstructs our learning path, fooling us into believing we’ve mastered the secrets to successful investing. However, true progress involves a perpetual cycle of learning, adapting, and refining our strategies, recognizing that there is always more to discover.

Only a few of us take the time to read, and even fewer make it to the end.

Many investors begin their journey without a solid foundation in economics or finance. They dive into trading based on a recommendation, without having first educated themselves through fundamental investment books. Often, they encounter difficulties and only then start to learn the basics of investing. Understanding the underlying principles through reading can help investors identify their mistakes and grasp how the markets function. However, those who quit after initial losses, attributing their failure to bad luck or temporary setbacks, miss out on valuable lessons.

Acquiring knowledge through books, articles, podcasts, conferences, and other educational resources is crucial. Success is unlikely without a willingness to build upon the discoveries and insights of others.

Consistent reading and learning are key to finishing what one starts, a discipline many lack. We often begin with enthusiasm but fail to follow through to complete understanding. Plans are made, goals set, but without consistency and commitment, these efforts stumble.

In today’s fast-paced world, the desire for immediate results can lead to impatience, even in areas where a deeper understanding is essential. Just as delayed Amazon delivery can frustrate us, rushing through critical learning processes can be detrimental. Skimming through important content, rather than engaging deeply, can prevent us from achieving true competence and success.

Only a few of us have a proper understanding of emotions.

Investors frequently focus on numerical data: statistics, probabilities, risks, and charts. They delve into technical analysis, financial statements, and market trends, behaving as though starting their computers transforms them into unemotional machines. However, the truth is that investing is less about stripping away emotions and more about navigating an emotional battlefield.

When you introduce the idea to a novice investor that psychology is as crucial as fundamental analysis, you may be met with skepticism or outright dismissal. Suggesting that their own reactions and emotions will surprise them often provokes disbelief. If you mention philosophy in the context of investing, some might even think there is something wrong with your head. Few recognize that emotions and behaviors are the real drivers behind our actions, influencing everything from our personal relationships to our careers and investment decisions.

The influence of emotions in investing is often underestimated because the fields of psychology and behavioral studies are relatively young. We are only beginning to understand behaviors formed over millions of years, which were designed to help us navigate a hostile environment. These primal instincts are better suited for running away from an angry mastodon than trading stocks like Apple or Tesla, where calm, reasoned decision-making is required, not quick, survival-based reactions.

We primarily come to understand the impact of emotions on investing in two ways. The first is through difficult, personal experience, where unexpected feelings confront us directly. The second is through education, by reading and learning about behavioral investing from authors such as James Montier, Morgan Housel, Daniel Kahneman, and Jason Zweig. Their work emphasizes the necessity of overcoming our instinctual responses and choosing the more challenging route of logical thinking over the simplicity of emotional shortcuts.

Only a few of us are truly individualistic. As it takes a lot of guts.

We are inherently social beings, molded by evolution to thrive in groups, whether for survival, support, or celebration. The comfort of the herd mentality not only eases our minds but also reinforces our sense of security and belonging. However, adopting an individualist stance challenges this natural inclination, presenting a daunting and at times unnatural path that demands exceptional bravery and resolve.

In investment forums, the common questions about whether to buy or sell a stock reveal an underlying dependency often unrecognized by the participants. Successful investing counts on identifying opportunities that others overlook, leveraging unique perspectives that deviate from the mainstream.

The Еfficient Market Hypothesis

The Efficient Market Hypothesis suggests that all asset prices reflect their true value, theoretically leaving no room for profit from mispriced assets. If all knowledge and expectations were shared universally, market actions would be perfectly aligned, nullifying any potential for unique opportunities. Fortunately, market inefficiencies exist due to delays in spreading information, as well as human imperfections, offering advantages to those willing to challenge conventional wisdom.

Contrarian investing represents individualistic investing—it involves making bold decisions that defy the market consensus, based on careful and detailed research and personal conviction. Such investors take full responsibility for their outcomes, drawing strength from their independence to resist market pressures and avoid the dangers of groupthink.

However, it is crucial to distinguish between contrarianism that stems from well-informed decisions and mere opposition for the sake of difference. True individualism in investing means relying on one’s own analysis and judgments, rather than conforming to popular opinion.

Only a few of us are lucky.

Dismissing the role of luck in success oversimplifies reality. Consider the case of Hristo Stoichkov, a legendary Bulgarian soccer player. Imagine his mother encountering a flat tire on the way to his first soccer practice, or Ognyan Atanasov, the scout who first recognized Stoichkov’s potential, steps outside for a smoke just as Stoichkov scores an extraordinary goal. Such coincidental timing suggests that without a stroke of luck, Stoichkov’s talents might have remained undiscovered.

Bad luck can be as consequential as a zero in mathematics, nullifying all efforts, whereas good luck can provide a crucial opportunity to demonstrate one’s abilities. However, possessing talent is essential because even the most fortunate opportunities cannot substitute for skill.

In the realm of investing, the influence of luck can be mitigated over time through experience and skill development. Yet, distinguishing between being merely lucky and genuinely skilled remains a challenge for many. Understanding this distinction is crucial for making informed investment decisions and achieving long-term success.

Let’s wrap up and summarize

Here’s what you need for real, lasting success in investing:

• Be disciplined.
• Stay flexible and open to new ideas and viewpoints.
• Keep learning.
• Manage emotions.
• Think independently.
• Respect luck’s role.

To those who made it to the end, here is my favorite part from “Danger Zone”. One of the songs of the “Top Gun” soundtrack.

…Out along the edges
Always where I burn to be
The further on the edge
The hotter the intensity…

“Danger zone” by Kenny Loggins
Top Gun Soundtrack, 1986