A trick to learning a complicated topic is realizing how many complex details are a cousin of something simple. John Reed writes in his book Succeeding:
When you first start to study a field, it seems like you have to memorize a zillion things. You don’t. What you need is to identify the core principles – generally three to twelve of them – that govern the field. The million things you thought you had to memorize are simply various combinations of the core principles.
Most fields are a hierarchy of truths with big ideas at the top and laws, rules, and finer details branching off below them. Viewing ideas in isolation, without recognizing the family tree of where they came from, gives a distorted view of how a field works and can overcomplicate what are often simple answers.
Beliefs are the same. How many business and investing beliefs do I have – opinions, ideas, models, etc? I don’t know, thousands probably. It’s a complex topic. But most of them derive from a few core beliefs.
A few big things I believe:
The inability to forecast the past has no impact on our desire to forecast the future. Certainty is so valuable that we’ll never give up the quest for it, and most people couldn’t get out of bed in the morning if they were honest about how uncertain the future is.
No one’s success is proven until they’ve survived a calamity. Serendipity often masquerades as skill, and the only way to distinguish the two is to see who’s still standing after a storm.
It takes less effort to increase confidence than it does ability. Confidence gives the impression of removing uncertainty, which we desperately want and are quick to embrace, while ability is constantly under attack from competition and an evolving economy.
Incentives are the strongest force in the world. They explain why good people do awful things, why smart people do stupid things, and why ordinary people do amazing things. Nearly everyone underestimates how much their own beliefs and actions are influenced by their incentives, many of which are designed to fulfill someone else’s goals.
Sitting still feels reckless in a fast-moving world, even in situations where it offers the best odds of long-term compounding. It’s like being told that you should play dead if a grizzly charges you – running for your life just feels more practical. The bias towards action is one of the strongest forces in business investing for three reasons: It can be the only signal to yourself and others that you’re not oblivious to risks. It can be the only signal to others that you’re worth your salary. And it can provide the illusion of control in a world where so much is out of your hands.
It’s hard to determine what is dumb luck and what is unfortunate risk. Investing is a game of probabilities, and almost all probabilities are less than 100%. You can make a good bet with the odds in your favor and still lose, and a reckless bet and still win. It makes it difficult to judge others’ performance – lots of good decisions end up on the unfortunate side of risk and vice versa.
Calm plants the seeds of crazy. If markets never crashed they wouldn’t be risky. If they weren’t risky they would get expensive. When they’re expensive they crash. Same for recessions. When the economy is stable people become optimistic. When they get optimistic they go into debt. When they go into debt the economy becomes unstable. Crazy times aren’t an accident – they’re an inevitability. The same cycle works in reverse, as depressed times create opportunities that plant the seeds of the next boom. One way to summarize it: Nothing too good or too bad lasts indefinitely.
Stories are more powerful than statistics, because they’re easier to understand and contextualize to your own life. The person who tells the most compelling story wins. Not who has the best idea, or the right answer. Just whoever tells a story that catches people’s attention and gets them to nod their heads.
As Aldous Huxley writes, “Man has an almost infinite capacity for taking things for granted.” The goalposts of success constantly shift. A new innovation can go from unfathomable luxury to baseline necessity in a few months. So progress is always a step ahead of contentment. That fuels the need to keep innovating, which is great. But it creates a world where people who are exponentially better off than their ancestors have little added happiness to show for it.
Most people are blind to their own faults. As Ben Franklin wrote, “Vice knows she’s ugly, so she hides behind a mask.”