"The essence of success is that it is never necessary to think of a new idea oneself. It is far better to wait until somebody else does it, and then to copy him in every detail, except his mistakes." Aubrey Menen
Becoming a successful "intelligent investor" is not something one should expect to achieve in a very short period of time... Too many of the very smart, well educated and successful people out there believe that picking stocks is just as easy as running their own business or that one can create a mathematical model that will tell them exactly what the stock is worth. Unfortunately, it's not quite that easy. As we all know, most of the professional managers out there fail to beat the market year after year, and number of those who have been able to do so consistently is so limited that you probably know them most of them by name.
Just think about again- every year hundreds of newly minted MBAs leave Top business schools around the world and join the asset management industry in their quest to become the next Warren Buffet or George Soros. Most of them are more intelligent and driven than an average person out there- but still the vast majority fails measurably... I personally always wondered why does this happen and how could I possibly avoid their mistakes? Finding an answer to this question is not an easy, but as with everything else, I have my own skeptical opinion...
After one of the many rereads of my favorite books about investing psychology "Reminiscences of a Stock Operator" by Edwin Lefevre, I realized that a large portion of this question might have already been answered almost a 100 years ago -
"... The desire for constant action irrespective of underlying conditions is responsible for many losses on Wall Street even among the professionals, who feel that they must take home some money every day, as though they were working for regular wages..."
Too many of us approach investing just like we would anything else-with great passion and determination to make it work- we plunge wholeheartedly into the "mysterious world" of stocks, spend countless hours reading about "magic, bullet proof formulas", listen and watch to Bloomberg and CNBC and dream about the next "Berkshire size" investing opportunity out there. But unfortunately, there lies our biggest flaw- we become so devoted to our new passion- that we let emotions drive our decisions, we let our affection for a particular stock to overrule the common sense and we deviate from what at first seemed to be our well thought out, "iron clad" strategy.
As if our human nature wasn't enough, the continuous and never stopping media flow of new tips, "important" information and "expert" opinions lead us to sell winning stocks when we should be sitting tight or force us to "fall in love" with a money losing stock and ride it all the way down to zero. And this emotional urge is frequently so difficult to resist that many finally give up, pull whatever is left out of the market, put it in the money market or some other cash equivalent account, where inflation slowly takes care of whatever is left...We've seen it happen over and over again and it is very unlikely to stop anytime soon.
That's' precisely why I think learning the behavioral/psychological side of financial world is as or may be even more important than the traditional quantitative one. And I am not talking about the technical analysis (TA) driven world of "self fulfilling prophecies", I am talking about good-old boring fundamental ones- like herding, group-think, loss aversion, mental accounting etc... The list is simply too long and obviously can't be covered in serious detail within one article- if you want to learn more on your own- the good place to start would be Wikipedia...
Continued in Part 2...
