Words of wisdom from Morgan Housel:
One summer in college I interned at an investment bank. It was the worst job I ever had.
A co-worker and I survived our days by bonding over a mutual interest in the stock market.
My co-worker was brilliant. Scary brilliant. The kind of guy you feel bad hanging out with because he makes you realize how dumb you are. He could dissect a company’s balance sheet and analyze business strategies like no one else I knew or have known since. He was the smartest investor I ever met.
He went to an Ivy League school, and after college he landed a high-paying gig at an investment firm. He went on to produce some of the worst investment results you can imagine, with an uncanny ability to pile into whatever asset was about to lose half its value.
This guy is a genius on paper. But he didn’t have the disposition to be a successful investor. He had a gambling mentality and couldn’t grasp that his book intelligence didn’t translate into investing intelligence, which made him wildly overconfident. His textbook investing brilliance didn’t matter. His emotional faults led him to be a terrible investor.
He’s a great example of a powerful investing truth: You can be brilliant on one hand but still fail miserably because of what you lack on the other.
There is a hierarchy of investor needs, in other words. Some investing skills have to be mastered before any other skills matter at all.
Here’s a pyramid I made to show what I mean. The most important investing topic is at the bottom. Each topic has to be mastered before the one above it matters:
Every one of these topics is incredibly important. None should be belittled.
But you can be the best stock-picker in the world, yet if you buy high and sell low – the epitome of bad investing behavior – none of it will matter. You will fail as an investor.
Investor Behavior trumps all other factors. Our solution to this challenge was to embrace a systematic–or rules-based–investment process that seeks to capitalize on a proven investment factor (momentum) while keeping our emotions from messing things up. Some may try to develop the right disposition to be a successful investor on their own. I am skeptical of how much progress can actually be made on that front without the aid of a systematic model, but it is certainly a worthy endeavor.
The relative strength strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value.