The Most Important Thing by Howard Marks
Combating Negative Influences
Universal factors that have a profound collective impact on most investors and markets:
- The desire for more
- The fear of missing out
- The tendency to compare against others
- The influence of the crowd
- The dream of the sure thing
These factors will lead to investing mistakes and provide opportunities for superior performance. Exploiting these is the only road to consistent outperformance.
Many people possess the intellect needed to analyze data, but far fewer are able to look more deeply into things and withstand the powerful influence of psychology.
The biggest investing errors come not from factors that are informational or analytical, but from those that are psychological.
The danger comes when the desire for money becomes greed.
Greed is strong enough to overcome common-sense, risk aversion, prudence, caution, logic, resolve, trepidation, and all the other elements that might keep investors out of trouble.
What weapons can you have on your side to increase your odds of combating psychological influences?
- A strongly held sense of intrinsic value.
- Insistence on acting as you should when price diverges from value.
- Enough conversance with past cycles, gained at first from reading and talking to veteran investors, and later through experience, to know that market-excesses are ultimately punished, not rewarded.
- A thorough understanding of the insidious effect of psychology on the investing process at market extremes.
- A promise to remember that when things seem too good to be true, they usually are.
- Willingness to look wrong while the market goes from miss-valued to more miss-valued as it invariably will.
- Like minded friends and colleagues from whom to gain support, and for you to support.