Contentment about our investments and money matters is determinant not of what is on the outside but of what happens inside of us.
The underlying motivation behind most of our investment endeavours is not just the money but the plethora of opportunities that money opens for us. The bigger house, faster cars, better neighbourhoods, and all those worldly experiences that otherwise, without money, would have remained a dream. We all want that because that’s what it means to have a worthwhile life.
We thus embark towards that wonderful (imaginary) life with all our energy willing to make the sacrifices and endure the pain and suffering that might come along the way. But only a very few are lucky enough to make a lot of money as the end of the journey nears. For others, it is still an aspiration, but their earlier enthusiasm has been replaced by a disgruntled feeling for not having lived a worthwhile life.
Coming to terms with the fact that all those years of hardships, pain, suffering, and sacrifices had all been for nothing is not an easy task. The disgruntled feeling morphs into resentment if they, by chance, had to encounter those who have made it. This is the usual case with the ‘unlucky’ ones, but what’s the story of the ‘lucky’ ones – those who have made a lot of money by the end of the journey and are living a worthwhile life, which is still an aspiration for a lot.
The biggest problem with leading an extrinsically driven life is that the feeling of ‘contentment’ is absent at every achievement or milestone. Hence, in search of that elusive feeling, the striving for new achievements and destinations never cede.
What we mean by a lot of money is ambiguous. For me, one crore rupees is a lot of money, but for some, even a hundred crore rupees doesn’t feel like a lot.
Suppose that one crore rupees is a lot of money for us, and we strive for it and, thanks to both luck and hard work, finally we have made it. But the problem is that now it doesn’t feel like a lot of money. But two crore rupees seems like a lot of money now, so we decided to strive towards it. But the same thing happens when we reach the two crore rupees milestone, it doesn’t feel like a lot of money, and the goalpost has already moved higher.
This striving for more within us never ceases, but our time on this earth is limited, and when we near its end, the nature of our strivings becomes more absurd and might seem insane to others – but not to us, we are oblivious to it.
Suddenly, out of nowhere, one day we have an epiphany, which is so confusing initially because we are so overwhelmed by the emotions brought on by it. Clarity soon emerges when we realise that what we truly aspire for is ‘contentment’ within, and striving for it extrinsically is a never-ending futile exercise.
Contentment about our investments and money matters is determinant not of what is on the outside but of what happens inside of us. It is not about how much we have or what we do, but how we feel about them.
A widely held belief among the investment community is that for successful investing one should prevent his emotions from interfering with his investment decisions. That might help achieve superior returns, but by separating emotions from the process, we are unlikely to be content with those returns. We are not free, if we are not content. We are enslaved by our constant striving for more.
Finding contentment in our investment situation demands that we first be aware of the emotional underpinnings behind each of our investment decisions and outcomes.
Yes! We invest in the stock market to make a lot of money. But there is more to it because you could be rich and miserable at the same time, which is undesirable. We want to be rich and content.
Process Over Outcome
A typical investment process consists of gathering information, interpreting it, and deciding on a strategy. Our interpretation of the information depends upon a series of beliefs about how the world (or financial markets) works. Therefore, our decision quality depends on how accurately those beliefs represent the actual world.
The biggest threat to lasting investment success lies in holding wrong beliefs about the market. As the default human approach is impulsive, how our beliefs are formed requires due consideration because we are inclined to form beliefs on whatever we hear or see without validation.
The truth is we are not even aware of the kind of beliefs we hold. Moreover, once a belief is formed it meshes with our identity, thus, insulating them from later validation. This makes it hard to let go of beliefs once they are formed, however counterproductive they might be.
As the financial and economic systems are complex, adaptive systems, however accurate our existing beliefs might be, their accuracies might deteriorate over time. Therefore, regular validation and updating of existing beliefs is imperative to make quality decisions.
Belief accuracy – how accurately our beliefs represent the real world – requires effort. Beliefs are formed based on past experiences, both of us and others. For accuracy, a belief must be formed only if it agrees on a series of outcomes, rather than on one or two outcomes. The belief must be formed consciously through a deliberate process and needs to be regularly validated for accuracy.
The quality of the information too significantly influences our decision quality. The larger and more diverse the information we gather, the better our decision quality will be. However, we are prone to discard information that disagrees with our existing beliefs, which could negatively impact our decision quality.
Hence, maintaining heterogeneity of information too requires diligence, or else, we gravitate towards homogeneity in information gathering – only information that agrees with our existing beliefs is considered – and that is counterproductive to quality decision-making.
Approaching and going about the process consciously and diligently is essential to cultivate heterogeneity in information gathering and accuracy in its interpretation. Every decision and its outcome should be reflected upon and scrutinized to gain insights that could later be incorporated into our decision-making process to make it more effective.
This is achievable but requires a little bit of effort. Without effort, our attention wanders off, and we are mostly unaware of what is happening. Paying attention to what is happening without any preconceived notions and judgements is essential for effective investment decision-making. But paying attention requires effort, otherwise, we might get into our head – planning, thinking, ruminating, making conclusions, and imagining.
Staying out of our heads and being present requires effort and patience. The investment outcome we all desire is achieving superior investment returns consistently. However, too much focus on outcomes could cause us to get into our heads, which is both stressful and counterproductive. Restricting such tendencies and paying attention to the investment process – information gathering, information interpretation, and decision making – is the path towards making quality decisions, and thus, achieving lasting investment success.
What It Takes
It is important to prioritise the investment decision-making process over the investment outcome to achieve superior returns consistently from the stock market. But it doesn’t come naturally to us as attention’s natural inclination is to wander around when left free. Therefore, maintaining sustained attention on the investment process requires effort; otherwise, attention will gravitate towards the investment outcome, which is inefficacious.
The process is a series of steps we do, and unless we love what we do, it is hard to adhere to the process for long, which is essential for success in the long run. This is why wise people advise us to choose something we love and stop worrying about the results. When it comes to the stock market, however, this advice might mislead because the stock market is a money game, there is a lot of money involved, and hence, some might confuse their greed for money with love of the game.
Anyway, it is nice if you love the game, only a very few are lucky enough to do something they love, but without the necessary aptitude, skills, or abilities for the game, it might turn out to be a losing game. In other words, how good you are at the game is more important than your love for the game. But how do we find out how good we are at the game?
Thinking that we are good at something has a shade of arrogance hiding underneath. So let us rephrase the question differently as ‘Do we have ‘what it takes’ to succeed at investing?’
There are psychological tests designed to discern qualities expected of an investment professional: qualities such as emotional maturity, analytical skills, critical thinking, probabilistic thinking, and understanding mass psychology, among others.
Two people – the big guy and the small guy – on becoming aware of the tests took them to determine their investment aptitude. The big guy’s test results revealed that he is among the top decile, which makes him believe that he has what it takes to win the investment game. But once he starts believing that he has it, he no longer has it.
As the psychological tests have proven to him that he has what it takes to succeed at investing, all his subsequent actions in the market were attempts to prove how good he is at the game. His investment record was pathetic: he failed to make meaningful returns even in the good years and lost a lot of money during the bad years.
Bringing your ego into the markets has its deleterious benefits, which is usually a trade-off between either losing all the money or losing most of the money.
The small guy, who also took the same psychological tests, unfortunately, had his results put him among the lowest of decile, but he, anyway, decided to go into the business. Surprisingly, even to himself, it worked out well for him: he outperformed in most of the years, lost less money in the bad years, and overall had an above-average investment record.
The first takeaway from the story is not to rely on such esoteric psychological tests to determine whether you are made for it or not.
Why did the small guy decide to go into the investment business despite failing at the psychological tests? Maybe he had a gut feeling and dared to go by his guts by overriding what the psychological test results said.
We all have gut feelings, but we neglect them because we are nurtured to go by rational and logical choices. But for some questions, our gut feelings might have the best answer – questions such as ‘Do we have ‘what it takes’?’ To hear the gut feelings, the logical mind needs to be silenced, and then, most importantly, we must harness the courage to follow our guts.
The small guy who went by his gut feelings made a remarkable investment record, in sharp contrast to what the psychological tests revealed. The psychological test made him aware of how much he didn’t know. Therefore, he was extra prudent and diligent with his decisions and actions. There was always a willingness to learn because he knew how much he didn’t know.
The big guy was never inquisitive because he believed he already had it, isn’t that what the psychological tests indicated; so, what is there to learn?
We are not sure whether it was the mindset or luck that was behind the divergent investment record of the big guy and the small guy… but if it is the mindset… then a little bit of humility could make an inordinate impact on your investment performance… is one of the most underrecognized facts of investing.
So, there is no need to be despondent if you sense that you don’t have what it takes for investment success. With a clear-cut awareness of the limitations of your knowledge and an inquisitive mind, anyone can do it.
An Intuitive Approach
It was a good market, most of your bets were working out well, and some of the bets have turned out to be very lucrative. Yes! You have made a lot of money from the market and are rich now, which has allowed a feeling of invincibility to creep into your mind.
However, when you are just about getting settled into that feeling, the market unexpectedly (it always is) turns for the bad. Still, you remain stubborn to the shift because you are invincible, but only until you have lost all the money. Once you have lost all your money, the reality slowly sets in, and the feeling of ‘invincibility’ is replaced by ‘humility’.
You don’t have to worry about your lack of humility, if any of the latest available ‘humility’ tests say so, because the stock market is the best place to learn it. Even if you don’t make any money in the markets, you never leave empty-handed: there would be a lot of humility to hold on to.
However, our goal is not to cultivate ‘humility’ by losing all our money in the stock market, rather it is to harness the power of ‘humility’ to serve our actual goal: investment success that is both perpetual and contentful. This is possible if we view every market experience as a learning experience, rather than a proving experience. The outcome gains prominence over the process when we embark on any activity to prove something to us or others.
Everyone aspires to succeed, whether in life or at investing, but many fall short of it, and the principal reason for that is ‘our idea about success’ itself. We know what will bring us success, and spend time and energy working towards it, but once we have achieved it, we feel discontented and then comes the realisation that what we achieved wasn’t what we wanted. There is a subtle difference between ‘what we think we want’ and ‘what we want’: most are unaware of the difference, but the few who are aware have come to it belatedly.
Choosing the right stock is the foremost task in investing. To perform that task effectively, we form in our mind an idea of what constitutes the right stock based on our limited understanding of the stock market, security analysis, economics, and business cycles; and then go on to prospect for stocks that meet those criteria. This approach has shortcomings, and the results aren’t satisfactory either.
One shortcoming is that however expansive it might be, the idea of ‘what constitutes a right stock’ is based on our limited understanding of markets, and we are largely unaware of the extent of that limitation. We habitually overestimate the extent of our knowledge and, at the same time, underestimate the extent of our ignorance.
The truth is what we don’t know far exceeds what we do know. It is just like viewing a 1000-piece jigsaw puzzle as a 10-piece puzzle because we only have 10 pieces in hand: deciphering the full picture with limited pieces only provides a distorted and misleading perspective.
Secondly, our idea about the right stock is formed based on past information, but financial and economic systems are adaptive systems. This implies that what worked in the past is unlikely to work in the future as the system quickly adapts to new changes and developments making the earlier models redundant.
It is essential to resist the tendency to form any systems or strategies that, one believes, once adhered to shall lead to perpetual investment success. Such mechanical approaches never work satisfactorily, and we are often left discontent and disgruntled.
An intuitive approach is the one most likely to provide perpetual investment success, the kind of success enjoyed by investors such as Warren Buffet, Charlie Munger, Howard Marks, and John Templeton. In an intuitive approach, we proceed with the process with no preconceived notions about what is right or wrong, good or bad.
Instead, approach the process with a learning mentality. Try to learn more about the stock with each bit of information, rather than judging or concluding. As you keep doing this, at a certain point, you have an intuitive feeling about the stock or market.
The logical mind then surely will find enough information that could refute the intuition, leading to self-doubt and inertia. You should go with your intuition, I suggest, but that doesn’t mean it will always lead to superior outcomes.
No, it won’t. You will make a lot of mistakes, but that’s the way it works because it is mistakes that hone your intuition. A thriving relationship with mistakes is essential for the intuitive approach to work effectively.
Reframing Mistakes
No mechanical approaches work at all times or in all kinds of markets, and some never work at all. The intuitive approach is our only hope for a perpetually satisfactory investment performance, but our intuitive system must be honed to keep it sharp-witted and alert.
Our intuitive system will remain underdeveloped if we carry a hostile attitude towards mistakes. We will have a hard time dealing with mistakes if are too worried about and focused on the outcome, which is why we have said earlier about the essentiality of prioritising process over outcome.
Mistakes are actions that have produced unintended outcomes. Those same actions won’t be considered a mistake if they have led to a desirable outcome. So, all the stigma associated with mistakes exists only when we view matters from an outcome perspective.
We must let go of the outcome to have a thriving relationship with mistakes. Also, we must reframe mistakes as a partner in our investment process rather than something to be avoided at all costs. We are more willing to take risks and challenges by getting out of our comfort zone once we have reframed mistakes, and that’s progressive.
But what we do after the mistakes is equally important. The most productive thing to do is to accept our mistakes and pay attention to what comes next rather than ruminating over its aftereffects. The mistakes conceal valuable information that can only be assessed once we accept and become comfortable with those mistakes.
Being a fundamental analyst, a prominent mistake I have made more than once is the failure to understand the market significance of changes in a stock’s fundamentals. ‘High earnings growth’ is a common feature among stocks that have delivered superior long-term returns in recent decades. But all high earnings growth would lead to superior stock returns is a false impression I made from this, which has led me to make some serious investment mistakes.
I bought a stock once, whose earnings grew at 30 per cent annually for the next two years, but its market price gained only less than 10 per cent annually during the two years. However, when its earnings growth moderated to 15 per cent over the subsequent two years, the stock price lost 50 per cent in value.
High earnings growth alone isn’t enough for a stock to deliver superior returns, but alongside that, the market must be willing to pay a higher price for those earnings’ growth, the answer to which lies more in the study of ‘mass psychology’ than ‘financial or economic analysis.’
But the insight itself is liberating, that there is more to investment performance than the stock’s business model and earnings growth. Mistakes open possibilities for inquisition that can lead to a better understanding of the world.
It isn’t mistakes that we must guard against but complacency. A series of good outcomes during easy times is likely to make us complacent. We might remain complacent even during harsh times by blaming bad outcomes on factors outside of us. But these are just psychological dramas played within us to circumvent change and stay within our comfort zone.
Complacency for too long gives rise to slackness and incompetence with a significant negative impact on long-term investment performance. It also makes change hard once we are ready to accept reality and change ourselves.
Continuous learning, adapting to changing situations, a steadfast commitment to the process instead of the outcome, and the ability to see things as they are however uncomfortable that may be, are a few ways to prevent falling into the complacency trap.
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