“Any time I hear an argument that’s black and white I can almost automatically assume that it’s wrong. Sometimes reality is black and white but that happens so rarely. The majority of the time it’s complex.” – Dan Carlin via The Waiters Pad
Investing is complex. One could even say that investing is hard. Even so, we still need to navigate our way through the world if we want to earn some kind of return on our capital. That is why the idea of “strong opinions, weakly held” is a great way to approach your investments (and the world at-large). I first came across this idea via Barry Ritholtz at the Big Picture. Ritholtz writes:
“Being a successful investor often requires you to hold numerous internally conflicting concepts simultaneously — something many the average psyche has difficulty with. One must think through the best possible analysis for your positions, and expend time and effort to thoroughly test them. You need to be able to strongly argue your position — bullish, bearish or cash — but at the same time, be ready to admit error and change views.”
We are today awash in what can best be described as ‘investment talk.’ Chatter about all manner of investment ephemera. The problem is this talk is rarely transformed in testable hypotheses, i.e. investment strategies. Mark Rzepczynski at Disciplined Systematic Global Investing writes:
“How many investment policy meetings include lots of discussion and limited action? Most participants will say something like “I feel” or “I think” but few will say, “The evidence I see says we should do X, prove me wrong, otherwise we should act.” Put a line in the sand and ask to be proved wrong. If new evidence is presented, change your mind. Perhaps the true power of quant investing is a strong opinion. If those opinions prove consistently false upon testing, a quant will accept that there has to be change.”
It’s the admitting error part where we run into trouble. We humans so love to think we are right. When are proven incorrect we become defensive because our ego, or self-image, is threatened. Investing is one of the fields where even the best investors will be proven wrong on a frequent basis. Jack Forehand at Validea writes:
“There are some areas of life where you can never have all the answers – no matter how much you know, how smart you are, or how good the school was you got from your degree from. Investing is one of those areas. As humans, we want to believe we can know everything. We want to believe if we work harder or read more, we can finally get to a place of having all the answers. That belief, when coupled with unpredictable things where no absolute answer exists, can lead to very dangerous consequences.”
If we think about our mistakes as opportunities to learn, or useful information, then it provides us a different frame to think about our decision making. We really only learn when incoming information differs from our prior working model. Ephrat Livni at Quartz on research showing how uncertainty boosts learning. Livni writes:
“What all this monkey business means for the human mind is that we learn more in situations where we’re not sure. The uncertainty activates our brain and makes us more intent on signals about previous information, and causes us to listen to the most relevant of this messaging in an effort to predict the best future outcome.”
We are all going to faced from time to time with uncertainty, failed decisions and the attendant anxiety. The challenge is being mindful enough to recognize when we need to change our thinking. at Safal Niveahak puts it well:
“Problems arise all the time in life and in investing, and you can try to keep your rigid shape, smashing into the problems until you break. Or you can be like water and slip through the cracks.”
This is easier said than done. The financial markets are always evolving and ever changing. This provides you with a rich environment because it will give you plenty of opportunities to ‘be like water.’
