Avoiding the Road to Losing Money: Four Tenets Worth Remembering | Denewiler Capital

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Avoiding the Road to Losing Money: Four Tenets Worth Remembering

Written by Greg Denewiler, CFA® // June 26, 2023

The Federal Reserve employs roughly 400 personnel with Ph.D.s in economics. You would think having that much brainpower on your team would give you an edge in predicting future economic events. Given the Fed’s track record… apparently, the answer is no (remember inflation was supposed to be transitory a few years ago). If they can’t even forecast the future with all their inside knowledge and resources, what chance do we have as individual investors? Fortunately, Morgan Housel comes to our rescue with some ideas that help lessen the need to forecast the future with: “Five Investing Powers,” an essay he wrote on March 24, 2021. We will look at four of them.



1) Have a low susceptibility to the fear of missing out. He suggests that if you have the urge to buy an investment solely because its price is moving up, you probably don’t know why it is moving up. This leads to you selling if the price starts to go down. It is the classic rule of knowing what you own, really understanding what the business does, and seeing why you think it has value. He notes that great investing is simply being willing to stick around for the longest time possible, through thick and thin. Ignore whatever is going up the most and worry less about what is going down. “Someone will always be getting richer than you. It’s okay.”



2) Understand your game, without being swayed by the game other people are playing. “We buy the same companies, read the same news, talk to the same people, and are quoted the same market prices – but we’re everything from day traders to endowments with century-long time horizons.” We all have different goals and risk tolerances. Therefore, success looks different for every investor, but we think everything should be the same. We, investors, should be convinced by what we are doing and content with other investors doing something different.



3) Recognizing the difference between patience and stubbornness. Here he makes two simple observations: a) Everything goes through a temporary out-of-favor period, and b) the world is always changing. Companies are disrupted — think Kodak with film and the arrival of digital media. Motorola and Blackberry mobile phones were disrupted by Apple and the iPhone. Sometimes it is just cyclical and sometimes it is permanent. As investors, we must be patient and have conviction, while at the same time being flexible. This is what makes investing so challenging and why no one bats 1,000. Patience allows your winners to offset your losers several times over. Investing is more of an art than a science, 400 Ph.D.s can attest to that.



4) Comfortable being miserable. Housel defines misery in several unique ways, some that are counterintuitive. Losing money can create misery for many investors. Misery can also take the form of admitting to yourself that you are not smart, just lucky. Realizing you don’t have the skill level you hoped you had can be miserable. Not being able to control our surroundings can lead to a level of feeling miserable at times. The ability to cope with misery is critical to being a successful investor. He describes a scene in the film Lawrence of Arabia where a man puts out a match between his two fingers without flinching. Another man tries to do the same and cries out: “It hurts! What’s the trick?” The first man responds: “The trick is not minding it hurts.” Being comfortable with misery is a great investor trait.



The new investing trend is AI (Artificial Intelligence). It is real and can already do some amazing things, however, all the above points remain relevant. No one knows who the winners will eventually be or even what the AI world ultimately looks like. It is clear it will help productivity and may help the economy continue to grow in ways 400 Ph.D.s can’t predict. It creates the ‘fear of missing out’, while at the same time, many people fear it is evil. AI has significantly impacted market returns this year, with most of the market’s 15% return coming from just seven companies. Most of these seven big winners have exposure to AI in some way. As Housel points out, everything falls out of favor occasionally… Just remember that in the California gold rush, it has been stated that most of the wealth was created from selling picks and shovels, not mining gold. There were over 1,000 car companies in the early 1900s, now there are around 10. AI appears to be the easy prediction to the road of quick money, history suggests otherwise. Housel helps us stay disciplined.


Observations On The Market No.384

About The Author:

Greg Denewiler, CFA®
Owner & Chief Investment Advisor at Denewiler Capital Management