How It Matters in Investing
I am the only child. Growing up, this meant that I was the sole attention of my parents, which usually can either be good or bad on a child’s development depending on the parents’ skill-sets and understanding of parenthood. This also means that I was more absorbed and involved in everything that my parents do. Not just the typical thing that parents teach their children such as morals and/or their views of life, but also their work and financial condition. Looking back, I’m grateful by how transparent they were about our financials, which I think is a bit unique for Asian families, who are usually more withdrawn from the topic.
My dad once said:
“Do you want to sound (or look) smart, or do you want to make money?”
At first, some people might be taken aback by this statement because it seems to infer that the two things are uncorrelated. This is obviously not what he meant. His statement came from a good place — a place that wanted to remind me of the importance of financial freedom. In short, he meant to say that it is no use for one to be smart if one can’t provide for oneself and one’s family (of course, “provide” is relative, it can be inferred as “excess wealth” too, but I digress). This statement also made so much more sense for those who grew up in developing countries. Unlike in the US or other developed countries, not all conventionally high IQ individuals can live comfortable lives by pursuing “smart” jobs. Professors are often underpaid; investment bankers earn less than mid-size gross clothing sellers; and so on.
Started from nothing, my dad took the pure entrepreneurial route, without the current prestige/glorification that’s associated with the word, nor the VC fundings or flocks of Ivy graduates that want to take this new “trend”. GaryVee once made a point that if he asked the career aspirations of a classroom full of Stanford’s soon-to-be MBA graduates 10–15 years ago, the answer would’ve been management consulting or investment banking; these days, it would’ve been the startup industry.
With almost two years out of college, I began to understand more and more about the meaning of my dad’s statement. When we were in college, we competed with one another in the classroom for grades; after college, we competed with each other in the corporate world, trying our best to get into the most well-known institutions/corporations to bolster our resume and extrapolate those achievements into future professional goals. I have friends who are MBB consultants, FAANG software engineers, and bulge bracket investment bankers. I also have friends who made $30k/month from his real-estate lead generation business, a friend who started a niche e-commerce business during his college years grossing $1 million in sales revenue, and a friend who made a killing from being brave (or lucky) enough to buy TSLA calls and SPY puts at the right time. Society often sees the former category to be “successful”, often without properly discussing that there is no “better path” and there are pros-cons to both.
In this piece, I want to correlate my dad’s aforementioned statement with investing. From my own experience and a bunch of readings/learnings that I’ve done, I want to share my observations on how most successful investors are not conventionally smart individuals (professionals who work in the investment space might be). They’re more similar to the latter category of my friends; the risk-takers, the “think outside the box” individuals who want to pursue success by their own means.
The Dunning-Kruger Effect & Linear Thinking
The Dunning-Kruger effect is a type of cognitive bias that made people believe they are smarter than they actually are. This is usually caused by prior successes. For example, Masayoshi Son made one of the world’s single best investments of all time in Alibaba, which then made him think that he can manage $100 billion just as well; and… look at SoftBank right now. A person’s prior success whether it be in a completely different field, often made him/herself think that they’re just as capable in another field.
Extremely intelligent people tend to be wired to make sub-optimal choices in areas that are outside of their expertise, and this is partly caused by linear thinking. In most technical areas, such as engineering, every single calculation and decision are based on rules and logic. Every step must have specific reasons that can clearly justify it. Obviously, systematic investing strategies exist, but it is not possible to implement these without taking any feedback inputs from the markets, which are also driven by non-systematic elements. Even quantitative hedge funds utilized sentiment analysis, technical analysis, and other metrics that can’t always be rationally justified why they work — they simply look at the statistical probability and market dynamics.
My old boss who managed more than $1 billion used to say that he spoke with a lot of his smart investor friends, and they would always complain about how the current US market is rigged, and stocks should be going down. They might be logically correct, but the market can be irrational longer than you’re solvent. If you don’t have the flexibility to alter your systematic thinking, you might be out of business even if you’re right. It is good to have a system to approach your investment decisions, but one needs to be aware that investing consists of two parts, it is part science and part art.
Fear of Failure
Perfect is relative. Conventionally intelligent people tend to be afraid of not executing everything perfectly — especially that one friend who we all have; the guy who has never failed at anything when he grew up; who always got good grades, was part of a sports club, had an extracurricular, and also somehow writes a freaking food blog. Individuals that rarely fail or have never had the need to deal with one will usually become extremely risk-averse in their investment decisions, seeking a “perfect” way to invest. But there’s no such thing as a “perfect” investment. Relating to the previous topic about linear thinking, there’s no such thing as a foolproof investment. No matter how much research and due diligence that you put into an investment product, there will always be inherent risks and uncertainties. If everything about an investment is certain and known to the public, it also means that the market already priced in all of the information.
Humans are more sensitive to the pain of losing than the joy of achievements. We’re so heartbroken when we break up with a significant other who we have only dated for a month, but we’re nowhere as joyful when we look back and see how much our lives have improved in the past year. We feel it more when our money decreases by 10% compared to when it increases by 10%. Alas, such individuals also become more concerned about their probability to lose money, playing it safe in every single investment decision without understanding proper risk-reward and market dynamics.
Status Quo Bias
For younger people, this is usually a case of sticking to the status quo no matter what’s out there. If this is what my parents have told me; if this is what most people have done; if this is what my college advisor told me — see the pattern here? Don’t get me wrong, a lot of people that think this way are extremely smart and usually have great careers. The problem arises when they bring forth this way of thinking into their investment decision.
It becomes even more apparent for older intelligent people, those who have managed to achieved success in life sticking to what they know. They are fixated on their expertise and are no longer comfortable having an open mind against change if it’s even somewhat revolutionary. We see this time and time again in the investing industry. People used to be skeptical of VC investing, then against tech companies especially social media; and now, we can see the same form of skepticism being repeated again on relatively “riskier” industries such as gaming and blockchain.
It is just naturally difficult for the human brain to picture and adapt our thinking to the future if we’re not used to it. Evolution designed us to survive for the next day, not the next 25 years. We need to constantly train our minds to adapt and to be open to new developments, even as we grow older.
My dad jokingly said:
“Do you want to be less smart but make more money, or vice-versa? Would you rather work at a prestigious consulting firm making $300k/year or distribute soy sauce for $750k/year?”
I replied: “If I make more money, does it still mean that I’m less smart?”