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The Most Important Analysis: Yourself

Investing skillfully requires paying attention to yourself and how you make decisions.

January 25, 2023

Investing skillfully requires paying attention to yourself and how you make decisions.

My No Limit #8 conversation with Luke reminded me of how essential the behavior-psychology part of investing truly is, and yet how most people focus only and entirely on the literal stock picking itself, while ignoring their own internal process by which they pick. If a blind man on roller skates was about to perform your brain surgery, you’d be skeptical of the outcome, yes? No matter how confident he appeared? And how many fancy tools were at his disposal?


Investors are always swimming in a pond in the rain — can you make sense of all the competing narratives and distractions?

Diving In: Investing Without Drowning

I read my first book of the year, A Swim in a Pond in the Rain by George Saunders, in which the stunningly great and wildly imaginative contemporary author analyzes short stories by the old Russian masters Chekhov, Turgenev, Gogol, and Tolstoy to better understand how they work, and why they mean what they do.

Notice the word analyze in there: it’s what we attempt to do when picking stocks — we examine the evidence and attempt to draw conclusions that are implied but not yet made explicit. The art of understanding that which is implied but not yet explicit is the art of connecting dots which are as yet unconnected — and those who do this best are those that get rich from investing. It’s a long varying process, though, not an objective and easy-to-follow recipe or algorithm.

Saunders’s book is exceptional — five ⭐️⭐️⭐️⭐️⭐️!! — for many reasons, but one of them is pertinent to our context of investing — if you don’t pay attention to your own mind as a reader, you won’t know what stories mean and why. Extrapolated to investing, this means that if you don’t pay attention to your psychological qualities as an investor, you won’t know why you invested in certain businesses instead of others, and you’ll be yanked around by a company’s stock price rather than its fundamentals; and as no doubt you already know, in the short term, the price movements are often arbitrary or too complex to understand; but in the long term, they follow the business fundamentals. Do you as an investor know the difference? How confident are you in your ability to discern in equanimity the fundamentals from the chaos, and apply your own clear thinking to the decisions you make or refrain from making?

Here’s George Saunders’s philosophical justification for his book about how learning to read short stories translates to a higher quality of life :

“To study the way we read is to study the way the mind works: the way it evaluates a statement of truth, the way it behaves in relation to another mind i.e the writer’s across space and time. What we’re going to be doing here, essentially, is watching ourselves read (trying to reconstruct how we felt as we were, just now, reading) Why would we want to do this? Well, part of the mind that reads a story is also the part that reads the world; it can deceive us, but it can also be trained to accuracy; it can fall into disuse and make us more susceptible to lazy, violent, materialistic forces, but it can also be urged back to life, transforming us into more active, curious, alert readers of reality.”

The Stock-Picker’s Brain: Big or Small?

To study the way we pick stocks is to study the way our stock-picking mind works; our stock-picking results — whether they’re atrocious or magnificent — can always deceive us in the short-term (5 years or fewer) regarding how smart or dumb we are. We often think we’re way smarter and way dumber than we think. But in the longer-term, positive outcomes follow a rigorous process of analysis rather than a random, chaotic and emotionally unstable one.

To be grounded, well-reasoned, and purposeful investors, you just absolutely have to pay attention to your own mind’s inner comings and goings. You just have to, you hear?

“Big thematic decisions are going to be made naturally by way of the thousands of accreting micro-decisions at the line level.”

This gem of insight reminds us that writers who say “I’m going to write a story about Greed” end up writing something that’s dogmatic and pedestrian and which no reader wants to actually read because there’s no delight in going to a sermon when you kick up your legs and want to explore the unknown world of a story.

Likewise, investors who pick their stocks using some hammer-like external tool, Big and Dogmatic, but who ignore the “thousands of accreting micro-decisions” on the internal level, will end up making thousands of preventable mistakes out of panic and fear and anxiety, or overconfidence or excessive risk-aversion, or whatever particular flavor of inner turmoil is special to you. Pay attention to all the difficulties that come with investing and how you react to them, and ask: is the way you instinctively react to investing quandaries an ally to a strong process or a gremlin in the system?

Transform How You Look at Stocks

I’ll leave you with one last kernel of wisdom from George: “Transformations need to be reasonable rather than idealistic.”

Ask yourself again: are you a reasonable investor or an idealistic one? If you’re reasonable, you’re reasonable because you can introspect about your own process and measure it against the realities of the world and how the market is objectively behaving. If you’re idealistic, you fail to look inwards toward your own established sets of biases and neuroses, and they end up governing you for better or, much more likely, for worse.

Make 2023 the year in which you examine, decision by micro decision, the way you invest. What matters is not the conclusions you come to, as much as the way you proceeded to make those conclusions. If you pay deliberate and careful attention to your process, the reasons for becoming an owner of the businesses you buy won’t be arbitrary but founded on fundamental understanding. And when it becomes time to buy more or sell, you’ll know why you’re taking that path and you won’t think twice. The rest is up to the fates.

As for the stories by the old Russian masters, “Gooseberries” by Chekhov, and the insights Saunders helped me glean from it are two of the best things I’ve read in years. Sometimes a swim in a pond in the rain makes all the difference.

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