Personal Insights; Failing To Predict; Learning To Win

Fri 07 Jul 2023

By Brian Dennehy

Access Level | public

Portfolio building


blindFor better or worse investing exposes the strengths and weaknesses of your personality.  If you’re over-confident, that will be exposed.  Similarly if you are a procrastinator.  If you are overly cautious, that will become obvious.  Ditto if you tie yourself up in knots of pointless detail.  And if you are prone to making the same mistake time and again, this will be painfully obvious.

In each case you must recognise your one big weakness when it comes to investing, and figure out how your investment process will tackle this.  Yes I know the idea of a process sounds dull, but all top achievers, in all fields, have a process.

Alongside this introspection, you also have to learn some investment basics so that you can build your process.  We have written many blogs in this regard, but you could do worse than start with Investing Fundamentals, and then move on to Complex World, Simple Rules

The latter is just the knowledge. Next you then have to apply it.  Learning how to fail is vital, both for the over-confident (you stop kidding yourself that you have some special insight), and for the over-cautious (limiting the extent of failure with a Stop-Loss should give you more courage).

This is explained in greater detail in Embrace Your Mistakes, The Ultimate Measure Of Investment Success

A close cousin of learning to fail is understanding that you cannot impose your needs on the market.  For example, perhaps you have a plan that targets 8% a year capital growth, or 5% a year income. 

Sometimes the market is simply not going to deliver.  Such times are difficult for your psyche as well as your financial well-being – you rudely discover that investing is not a magic money machine designed around your life cycle.  You must adjust your thinking, ideally before you take a big hit or two.

In the last couple of years the media and financial industry has been more obsessed than ever about predicting, even though we know they are terrible at doing so, and that when they might (randomly?) be correct, the likelihood of it being relevant to your investing is limited.

Perhaps the worst investor combination is over-confidence combined with the belief that you have predictive abilities and special insights.  As the Farnham Street team put it recently:

“One way to restrain our tendency toward overconfidence is to habitually position ourselves in such a way that renders a prediction of the future unnecessary.

You might not know with certainty when the 100-year flood is coming, but you do know with certainty it will come. And that means you should leave yourself positioned accordingly.

The purpose of positioning is to make prediction unnecessary.

Overconfidence lulls you into a false sense of security about the future and ensures your position is weakest at the very moment you need it to be strongest. When the storm comes, it won’t give you a warning.”

Focus on the fact that you can be wrong, and have an objective way to recognise this point, and have a plan of action to limit the damage, such as a Stop-Loss.


From all of the above it is possible to build a clear process which suits you.  But equally, you can decide if it doesn’t suit you, in which case you are in a very informed position to judge those who might manage your investments on your behalf.  Learning to win at investing might possibly mean engaging someone else to take the strain – no shame in that.



Portfolio building


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