One of the most important aspects of becoming a successful investor is creating a model of the world around you. To do this, you must have good decision-making skills and the ability to make sense of incomplete and sometimes contradictory information.
It is not easy.
Indeed, it is often counter-intuitive. What seems like an obvious data point or news in the market is very often Already in the price. This requires what Howard Marks calls second-level thinking. If I know about this thing – because I found it through public sources –
does everyone know this thing? For how long? Is it already well known and well understood, and therefore priced?
This is the main difference between investing and other activities, like politics, sports or religion: the feedback loop in the markets is so much faster than everything else. If your core belief system is wrong, if you rely on “facts” that turn out to be wrong, you will usually find out sooner rather than later.
It is certain that bull markets tend to last longer and longer than most people realize; this is true for individual companies, sectors and the market as a whole. But even those cases ultimately mean going backwards, and if your core beliefs are wrong, it will show up in your portfolio P&L.
I bring this up this morning because of two new ones I came across while preparing my daily reading list. One involves pizza, the other involves COVID, both are classic examples of how easily we can be misled if our thought process is not accurate and our sources of information are not not “hygienic”.
Let’s start with this story in The Guardian About New York Za:
The right says ‘pink-haired liberals’ are killing pizza in New York.
“Here’s what’s really going on: It’s the lie fueling the latest cycle of right-wing outrage, in a twisted account of a common-sense clean air rule passed in New York City ago. In fact, the rule, which will soon come into effect, requires a handful of pizzerias to reduce exhaust fumes that could harm neighbors, using a small air filter like those required at other New York restaurants. York, which have been used by pizzerias in Italy for decades.”
I love this example: a mundane restaurant regulation, relatively modest in scope, is blown up by the manufacturing industry outrage into something that has nothing to do with reality. The cost of believing this nonsense is simply an increased possibility of voting for someone incompetent, instead of making a substantial financial mistake. Yet it’s emblematic of a poor decision-making process to believe in this madness – and it could lead to costly mistakes.
Next, where did Covid SARS-19 come from, via MSNBC:
Those who insist the pandemic is man-made ignore the known facts
“In May 2021, a group of more than a dozen scientists – including evolutionary biologist Michael Worobey – published a peer-reviewed letter in Science calling for more investigations into the origin of Covid-19 and arguing that Both a natural origin and an accidental lab leak remained viable theories. But this is where it gets interesting. The same scientists who initially found a plausible lab leak scenario – Kristian Anderson and Michael Worobey – came to the opposite conclusion after studying the virus. »
I tweeted this news this morning, and while there was some rational answers, many (most?) raised serious questions about the thought process behind the answers.
My thoughts on this study (which I haven’t read yet) and the MSNBC article (which I skimmed): “Hmmm, seems to make sense. The wet lab is more likely than a man-made weaponized virus escaping the lab. But what do I know?”
Here’s the thing: I am agnostic about this, having no expertise in this area. As someone who is neither a virologist nor an intelligence officer, I don’t have the tools to make an expert judgment on the origins of Covid. Also, I tend not to believe the ability of conspiracy theorists to keep most big secrets that long.
What interests me is the human decision-making process that surrounds these issues. And that leads to obvious questions about what is likely and/or probable.
But that’s just the base case. I find it fascinating to see where people’s decision-making goes off the rails. Ask yourself these questions:
Who is SURE to know what happened?
What sources do these people rely on?
Do they use a specific process to make macro decisions?
To what extent do they consider the possibility that they are wrong?
How confident are they in their own decisions?
Who influenced their conclusions?
What could convince them that they are wrong?
Are there other factors driving this particular decision?
These questions matter a lot, and not just to Covid skeptics. All of this is so obviously applicable to the thought process that goes into investing.
Any good investor must regularly – even constantly! – ask yourself these questions: What do I believe in and why? How do I know when I’m wrong? What will I do? I’m constantly trying to refine my thinking about investing, slowly evolving over the decades. One of my favorite aspects of hosting Masters in Business is that I can ask some of the most successful investors in history about their thought processes. It is often deeply revealing and informative.
All the major public debates of recent years are instructive on how to think about thought: vaccine skepticism, the January 6 attacks, inflation, the debt ceiling, etc. All of this revealed the thought processes of many people. Too many of them have not stood up to scrutiny.
What if Dunning Kruger explained everything? (February 27, 2023)
Judgment in uncertainty (March 25, 2022)
Investing is a problem-solving exercise (January 31, 2022)