How Easy Becomes Hard: When Logic and Psychology Collide

The more I think about investing (and I think about investing A LOT! 💭), the more I get to a simple punchline:

This stuff is really not that hard and this stuff is really, really hard.

Hard or not hard, though, it’s all too easy to get turned around.

Let's review a few things worth keeping straight.

Past Performance is No Indication of Future Performance

(Logic: Not Hard; Psychology: Hard)

This is more than a regulatory disclaimer that you’ve seen a million times.

This is just a simple reality based on the fact that:

• Human systems (including financial markets) are tuned up by competition and
• They are subject to external shocks, which makes the whole edifice constantly shifting.

As a result, the winners of yesterday may or may not be the winners of tomorrow.

Now there are good characteristics and bad characteristics that may set up certain countries, companies, or individuals for more or less potential success in the future.

That’s why the expression “I would buy stock in this kid if I could” exists.

Maybe it’s:

• A dogged work ethic (for a person)
• Creative problem solving (for a company)
• Adherence to the rule of law (for a country, so that everyone knows how the game is played and can be out there competing fairly)

Often all of these coming together.

And then you have to contend with the fact that asset valuations matter AND that it's a lot easier to sell something that's done well recently (and thus is newly expensive).

Long way around the block to say:

Next time someone uses the present tense after describing a historical fact about investing (as in “US equities outperform International equities”) to project it forward, you call me.

I have a few words for that person.

Projecting past results forward with unwarranted conviction is a cardinal sin in my world, even though people find near-term comfort in it. Extrapolate at your own risk.

Losing Stings a Lot More than Winning Tickles

(Not Hard)

This needs no explanation.

We’ve all lost, and we’ve all won.

Nearly universally, the sting from losing is unsettling and lasting. 😣

Winning is a quick high that only resets the bar higher. 🎯

This means that, along the way, we should keep an eye to the downside to avoid being surprised with the ways in which we can lose (there always are ways to lose).

Equally importantly, we should aim to avoid doing things that have a tendency to turn everyday losing into permanent self-defeat.

In other words, let’s not snatch defeat from the jaws of (eventual) victory.

Only you can do that for yourself.

This means avoiding what investors call “permanent loss of capital” which comes from selling at the wrong time or buying loads of things that can go to zero under reasonable scenarios. That’s permanent defeat.

Complexity Jockeys vs. Simplicity Nihilists

(Hard to Know What Motivates People - But Worth the Effort...)

At first approximation, you can place wealth management “practices” into one of two buckets, at the risk of slight caricature:

At one extreme, the Complexity Jockeys slowly complicate things under the guise of necessity and sophistication:

• Before you know it, you have ten accounts with the same firm, hundreds of holdings, and you don’t know what’s what.
• You end up with ‘strategic obfuscation,’ where the complexity is overwhelming, and surely you can’t do this without the guy who created this tangled web in the first place.

At the other extreme, you have the Simplicity Nihilists.

• They tell you that basically nothing matters. Close your eyes and blindly trust time.
• They say that markets are unknowable beasts that you can ride but should not dare explore further.
• These ‘minimalists’ argue that you should be auto-pilot and that the only frontier to conquer is your own psyche while you ride the wild beast.

The real world operates in the middle, the grey.

• Some complexity does nothing for you (except create a prison and produce higher fees)
• But there is such a thing as too much ‘minimalism.’

Striking the right balance is a challenging task, one that requires clear thinking and the right incentives. ⚖️

NOW THE BIG ONE...

Investing is a Means to an End

(Easy, But You Decide)

When you take the final tally on your life, I doubt “How did I do as an investor?” will rise very high up the list.

Even if you did better than everyone else at moving chips around the table, if the rest of your life sucked and your kids aren’t talking to you, I don’t think it’ll get you very far.

Imagine how crummy you’ll feel if, despite being obsessive about it, you did badly at investing too (which is easy to do).

This is a fundamental thing that both you and I know:

Get the big things right, get most of the small things right too, and accept the occasional rainstorm.

🌧️ That’s how rainbows are created. 🌈

Be well and talk again soon.

Jonathan

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Disclaimer: This is purely education, not financial advice. For more information about Treussard Capital Management and fuller disclaimers: www.treussard.com