December 17, 2021

As a professional investor, people constantly ask for my take on the markets or particular investment moves. I can’t evaluate everybody’s ideas, but I can help people think more clearly.

My experience in business (and in life) tells me that humans are not built for objectivity. When things go well, we like to think we did something right. When they go badly, we’re great at coming up with reasons why it’s not our fault.

In regular daily life, this might not matter very much, although I’d argue that it matters more than people think. But when it comes to investing, it is vital that we draw the right lessons. Otherwise, we’re in danger of making big mistakes in the future.

For investment professionals, rigorous self-evaluation is baked in. When we raise funds for investment deals, we have to tell our investors exactly what we plan to do, lay out the anticipated risks and rewards of our approach, and identify a metric against which we will measure our success. This process forces us to draw the best lessons we can from past experience.

Without such a rigorous process, we’re all in danger of becoming the proverbial poker player chasing an inside straight. Too many players will chase the big payoff, even when the odds are unfavorable. Sometimes, that player will draw the winning card, but if that win makes him think he’s making good decisions, he is in for a rude awakening. Getting lucky is not a sustainable winning strategy.

We also need to beware of the reverse situation, when a good bet fails to pay off. There are always risks, and when things go wrong, that does not mean we should quit. You win some, you lose some. You can’t win if you quit the game in frustration, and the best investors (or poker players) will win more than they lose.

Everybody should remember that on the other side of any investment move, there is a skilled and experienced professional, with top notch tools, who is ready to make the opposite bet. This is what I think about when acquaintances ask me about their investment strategies. Did they apply a rigorous process? Do they understand the nature of the risk they’re taking? Does it fit a broader strategy?

The human mind is flawed, and it’s easy to draw bad conclusions. Our own psychology always threatens to trip us up. In investing, and in life, the ability to honestly self-assess is one of the most powerful skills a person can learn.

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