You’ve Got To Be In It To Win It

“Diversification is protection against ignorance” – Warren Buffett

Turkey or Tesla? Or Trump? Pick your poison. Every morning a new story hits the headlines causing short-term gyrations in the market. As information flow continues to become democratized and more easily accessible to everyone (thanks to the miracle of modern technology and the internet), the net effect degrades investor psychology and rationality as investment horizons contract. I’ll be the first to admit that I watch markets at all hours of the day. Call it an addiction, but if I’m not checking prices I’m scanning newsflow for anything that could potentially affect prices. The mentality is very short-term and damaging and I constantly have to check myself to not fall prey to irrational behavior.

Human beings are short-term by nature. They are controlled by emotion. And when they let emotions dictate their investment decisions, is when problems start to arise. Everyone wants to pick up the paper in the morning, read about the latest headline and invest in the latest sexy story that might make them money. That goes all the way from my dear old mother to even the highest ranks of Wall Street professionals. What’s the story of the day, and how can I make money off of it?

It’s FOMO at its best. It’s the same reason why people have such a hard time sitting on cash. If the markets are open, they think there should be something to trade, someway to make money or some quick win that can be capitalized off of.

Now don’t get me wrong…I’m all about being ambitious and opportunistic. You simply cannot be successful if you aren’t. But the problem is that most people are blinded by greed and fail to do the deep work that is necessary to make a proper investment decision. Maybe it’s because they are lazy, or maybe it’s because they’ve seen others make “easy” money and think they can do it as well. We’ve witnessed this first hand in the recent cryptocurrency explosion and subsequent implosion.

Well that didn’t take very long…(Jan 2018 vs, Aug 2018)

Sorry folks, life isn’t fair. But I guarantee you that making easy money cannot be replicated consistently over a long period of time. You can get lucky once or twice but you can’t get lucky consistently (and build a track record) for the rest of your life.

Seasoned investors know how to consume all the news and noise and learn to filter out what is relevant or not. But most importantly, they know how to avoid being in action mode all the time; they know when to do nothing. They know when to hold cash and when to wait patiently and focus on doing deep work to prepare for an opportunity as opposed to trading in an out of the market trying to make quick short-term gains.

The best way to “win it” when it comes to investing is to “not lose it”. And how exactly do you “not lose it”? By having a margin of safety of course! Everyone’s wrong at some point in their life. I would argue that most people have been wrong many more times than they have been right. I know I have. But the key is positioning yourself so when you are wrong you only lose a little. And when you are right, you win a lot.

The future is unpredictable which is why you must always consider your downside before salivating over your upside. Buffet says that all you need to do is come up with 10 good investments over a 40-year career and you will be extraordinarily rich. 10 chances. 10 at-bats so to speak. Think about your investment portfolio for a minute. If you only had 10 tries, would you have spent them on the existing holdings in your portfolio?  If you really only had 10 bullets, I bet you’ll probably have spent a lot more time learning everything about every single one of those 10 targets before you even came close to pulling the trigger. Deep work. Do it.

Deep work isn’t easy to do but the good news is once you’ve done it, the execution of the trade is simple. Human psychology has never changed. Investors love following fads and investors always get emotional and overreact.  When this happens greed and fear causes extreme price fluctuations which lead to asset prices that decouple from their intrinsic value.

To most investors, the intrinsic value of an asset in a bull market is markedly different from the intrinsic value of an asset in a bear market, which is why the greatest opportunities lie when there is “blood in the streets” (for those who have prepared ahead of time). And speaking of bull markets, today officially marks the longest bull run in stock market history. 3,453 days since March 2009.  

Have you started your deep work yet?