Do you want to be right? Or do you want to make money? Do you want predictions? Or do you want profits?
If you want profits, then you’ll do well to spend more time thinking about how to manage your portfolio rather than focusing so much on what’s in your portfolio and where you think the markets are going.
“Embrace the chaos,” was the way that I summed it up last week when I called into question the wisdom of focusing too much on predicting market outcomes.
So much of what I’ve seen and learned the hard way as an investor is captured in the humorous saying:
It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.
Ironically, the quote is regularly attributed to Mark Twain, sometimes to Will Rogers and occasionally to the lesser known humorist Josh Billings.
In other words, no one knows who really said it but everyone insists that they do! Talk about life imitating art.
It illustrates better than anything I can think of, how the human mind just can’t take no for an answer. We’ve got to have an explanation for everything. We’ve got to have an attribution for everything. We have an insatiable appetite for making sense of our experience and then using that new found “sense” to try to predict and secure our future.
And it’s killing our ability to grow our wealth and achieve the security we ultimately seek.
I recently picked up what looks to be a very promising book – The Signal and the Noise by Nate Silver. Mr. Silver is a celebrity statistician. (Now there’s an adjective and a noun I never expected to see together.) He’s made a name for himself by effectively applying his art to popular fields like baseball and elections.
What’s got me excited about the book is a quote in the introduction:
The instinctual shortcut that we take when we have “too much information” is to engage with it selectively, picking out the parts we like and ignoring the remainder, making allies with those who have made the same choices and enemies of the rest.
Mr. Silver is referring to the political and social tensions (aka brutal wars) that followed the explosion of information brought on by the invention of the printing press in the fifteenth century.
The exact same thing can be said for how we go about trying to make sense of investing.
We choose one prediction over another. We choose one stock over another. We get attached to these choices and defend them against “competing” choices – sometimes all the way down to zero.
While such a decision making strategy may have worked ok for our ancestors when they had fewer options to choose between, it’s a disastrous strategy in the digital information age we find ourselves in today.
Don’t get me wrong, we do need to get to the bottom of our personal beliefs about what investments are best and what markets are likely to do. We need personal conviction. We just shouldn’t get attached to those beliefs. We should be able to easily shift if and when the unfolding evidence reveals cracks in their foundation.
Stick to your guns but don’t dig in your heels. Turn around and run if need be.
Last year I recorded a webinar that I called Ten Steps to Foolproof Investing. It’s a great place to start if you’re looking for your own path to profits. If you haven’t seen it yet, you can check it out for free here.
Stay alive and thrive,
Richard M. Smith, PhD