The root of many professional mistakes is ignoring simple ideas that seem to experienced people too primitive to pay attention to them.
The Ability to Calmly Relate to Need
This is the most important of all investment principles. You can’t enjoy the sport without any discomfort, because if you are out of breath, your muscles hurt and you are tired — this is a sign that you have made enough effort to deserve a reward. It is the same thing with investing. Hoping that you make a profit without losing comfort is the same thing as expecting to grow a perfect press without getting up from the sofa. Profit doesn’t appear for free. It has its own price, for example, uncertainty, confusion, short-term losses, surprise, absurdity, periods of boredom, regret, anxiety and fear. And this bill you have to pay.
The Ability to Distinguish between “Temporarily out of Favor” and “Wrong”
It is very important to distinguish between two situations: “The investment looks unsuccessful because such is the situation in the market” and “The investment looks unsuccessful because it is in fact unsuccessful”. It is difficult to understand the difference between them in real time.
The ability to distinguish them depends on the ability to accurately calculate the chances of the appearance of something that will correct the situation and make the market or company shares grow, which so far look like an unsuccessful investment. Since these chances are always less than 100%, it may take time to understand how well you are able to carry out such calculations. Even if the chances are in your favor, the result may be worse than expected. It is difficult to carry out such calculations. But it is worse (and it is done more often) to forget that first of all it is necessary to distinguish one situation from another.
Readiness to Change the Views that You Would Like to Keep
The economy is growing because enterprises, consumers and technologies are changing and adapting. But oddly enough, many investors are trying to make a profit on this wave of change, keeping their beliefs unchanged. There is a set of really timeless investment ideas. However, most of the beliefs that we follow reflect our limited experience and our outlook on life. Even in cases where investors study history, they give more weight to stories that fit their own experience, because they are easier to understand and they confirm already existing beliefs.
It is painful to think about it, but many people’s ideas about investments are though true but only temporarily, or false, but look like convincing. If you don’t want to reconsider your views when the world changes, or be open enough to understand that some of your views are anecdotal on their own, you will be simply eaten on the market.
The Ability to Determine when Analytics vs. Psychology is Necessary
If everything in investing depended only on data, the best investors would be trading robots. In the same way, if everything depended on psychology, there would never be a single deal on the market, since every investor would have his own special goals. A good investor should own analytical tools and understand psychology. The secret is to distinguish when a skill is needed and how one affects the other. Some things are impossible to understand with the help of common sense — for example, the prevalence of volatility, marginal analysis or separation from competitors — and data are required to understand them. However, there are things that no data can help with. The data won’t help to learn something about fear or patience, and psychology won’t help to deal with interest rates.