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Investment heresy

Wealth-diminishing investment ideas and actions that result from acting on the wrong ideas, represented by the wrong words or phrases.

Human language is almost infinitely malleable, able to express the deepest of human affects with the deftest of literary touches or scaling the heights of human joy with flourishes of poetic imagination.

Conversely, words or phrases are some of the most effective weapons of psychological mass destruction known to man. Utter the wrong word or phrase in the wrong part of town, and issues of getting your pronunciation pitch perfect will be the least of your concerns. For example, in Cape Town, the Cape Flats in particular, you will often hear some of the most colourful maternal-describing adjectives anywhere. In the Northern Cape, among the Griqwua people, you will be treated to arguably the most endearing rendering of the Lord’s prayer to be found where people pray.

Investors similarly have phrases and words that will lead to successful action more often than not and others that could lead to substantial wealth destruction.

Investors are not in danger of grievous bodily harm when they utter certain phrases, perhaps those running the money of the mob are an exception, but all investors are in danger of falling under the spell of words such as “hope” or “fear”. Investment anywhere, at anytime, is about action, about making decisions, but action rarely exists in isolation from ideas that motivate their instantiation. This short essay is about the wealth diminishing investment ideas and actions that result from acting on the wrong ideas represented by the wrong words or phrases. 

Hope is a powerful word, and describes a state of mind surely nobody can live without. But please invest without it! There is NO room for hope in investment decision-making. The successful investor should deal in the present, and approach the future like an emotionally dead calculating machine, speaking the language of probability-weighted expected value and preaching the gospel of thorough, disinterested, confirmation bias free, research. The great investor is not without emotion, she cannot be for she is human, but she disinterestedly observes the market for opportunities to take advantage of the misplaced or deflated hopes of others. I do not hope that the shares in my portfolio will rise in value, I expect, given the information at hand that the shares will appreciate with a probability of such and such. And then I update my expectations as I become aware of and interpret the information I am exposed to or unearth. Never deal in hope, deal in probabilities. 

Fear is as natural, and naturally uncomfortable, as any affect affecting human life. Somebody without fear, any fear, is somebody in great danger. Imagine not being afraid of anything? Climbing into the boxing ring in the presence of a Tyson without a care in the world, traversing the Kruger national park at night without a flashlight, swimming the amazon river with a few cuts and bruises for good measure. Such a person will find TV shows such as Fear Factor downright boring, even as a contestant! Investors, who make decisions unduly influenced by fear, often sell their shares when events of great emotional salience, but often of marginal economic effect, flood the collective consciousness of the market. Successful investors feel the same fear, but they respond by noting that fear is very often a false positive. Fear is good for survival, but the emotion of fear works as a tool for survival exactly because it is safe rather than sorry in its mechanism. Better to run from a fake lion than not running from the real kitty.

Many investors worry way too much about the past. For example, investors often boast, “I bought this share at R3 and it is now R50” or are deflated in their silence when they bought at R50 and the share is at R3. All of us tend to run mental accounts where we continually compare the purchase price of an asset to what the asset trades for in the present. While this may provide some psychological pleasure and a good barbeque story when you are “in the money”, it is not relevant to what fundamentally matters in investment. The only thing that matters for investment success is to have a firm grasp of the intrinsic value of the assets that you own and to have a reasoned expectation of how these values will evolve. To put it very simply, investment is NEVER about the past, but always about the FUTURE and PRESENT cash flows expected from the asset that you hold. You ought to study the past to be informed about the way the future might go, but never look in the mirror after you have acquired an asset. 

Human beings sometimes express emotion using words sometimes better left unsaid -in other words, un-acted upon. In the same way, many investors’ make investment decisions based on emotions such as “fear” and “hope”. These decisions are also best left undone, especially if your aim is sustainable wealth creation. The only thing that matters in investments is having a firm grasp of the intrinsic values of the assets that you own and how these values are expected to change. Only the present and the future cash flows expected from an asset matters in matters of asset value, everything else is unnecessary intellectual distraction or damaging emotional affect.


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