Tenets of Investing

Many years ago (2019), I had read the blog version of this book when Morgan Housel had put it out. I didn't think twice about reading it again when I saw the book was out. That time I did write some thoughts around it. LINK

Along with reading the compiled book, I also read Richer, Wiser, Happier. It’s a little broad and talks about the psychology of investing.

In my view, Behavioral Finance has a very large and important role to play in Personal Finance and Investing. Following is a distillation of both books around that -

Setting the baseline - 

• Good investors don’t get tempted by get-rich-quick schemes/sweet talkers
• Good investors think in probabilities.
• Efficient Market Hypothesis is unable to explain the swings in the market.
• Simplicity is the ultimate sophistication.
• There are so many complex financial products available and it’s always hard to figure out how to pick some to put your money in.
• Using the philosophical model of Occam’s Razor - all things being equal, the simplest solution tends to be the best one; the best answer often is Index Funds even as per Warren Buffet.
• For individual stock picks - the idea is Stocks follow earnings i.e if the earnings double in 5 years, very likely the stock doubles too.
• Few things account for most results There is very little correlation between investment effort and investment results. Because the world is driven by tails.
• Tails means rare events drive mostly everything. 
• Think what the world would look like without Great Depression, WWII, 9/11, Vaccines
• The secret of success is - every day should be slightly better than the day before.
• You have to be directionally correct. 
• I.e the graph moves to the up and right at least. Doesn’t matter how much or how little as long as it moves in that trend.
• Sensible habits which are directionally correct and sustained over time - give us a marginal advantage.

Risk Taking/Position sizing -

• There is no reason to risk what you have & need for what you don’t have & don’t need.
• Ability to stick around for a long time, without getting wiped out is the difference maker.
• You don’t need tremendous forces to create tremendous wealth - just consistent progress (compounding).
• Good investing is all about consistently not making big mistakes. (big as in so big it takes you out of the game).
• Give yourself room for error.
• Even the best investors are right only 6 out of 10 times

Equanimity/Stoic - mental calmness, composure, and evenness of temper, especially in a difficult situation.

• The mind is its own place, and in itself can make a heaven of Hell, or a hell of Heaven. 

  - John Milton
• Modern capitalism is good at generating wealth and generating envy.
• Thus, it is very important not to compete with anyone and not get swept by passing fads.
• Art of being wise is to know what to overlook.
• Future filled with unknowns is everyone’s reality.
• Everything changes. Do not position yourselves in such a way that you are dependent on things remaining the same.
• Attitude of -
• Optimism about future ;
• Paranoid about what can prevent you from that future is vital.
• Avoid these pre-conditions of poor decision making -
• Hunger
• Anger
• Loneliness
• Tiredness
• Pain
• Stress
  
  
  
  
  Put the above things under a checklist HALT-PS.
  Whenever, you suspect you are feeling one of the above - PAUSE before making the decision

• The ability to be more focused as others become distracted is priceless.

Other choices - 

• It is funny that many people think it is insane to try to beat the market but encourage their kids to reach for the stars and try to become pro-athletes.
• Life is about playing the odds, and everyone thinks about odds differently. (Thus different choices.)
• Impossible to produce superior returns if you follow every fad and every trend.
• Be a non-tribal free thinker.
• Real Wealth is hidden i.e Income not spent.
• Financial Independence is living below your means. And be owner of your own time.
• Have a big savings cushion - for both expected and unexpected expenses.
• While it is true that studying about events is not all the same as experiencing them. Because to see it for oneself is totally different.
• At the same time, having experienced it before doesn’t also guarantee good decision making. Because experience can lead to overconfidence.
• Accept that the future might not look like the past.
• The world is surprising.
• Things that never happened before happen all the time.
• Have a NO SUNK Costs mindset.
• Have patience, as progress happens too slowly to notice but setbacks happen too quickly to ignore.
• Compounding only works if you give an asset years & years to grow. [BUY & HOLD].
• Sometimes stocks (Companies) with poor performance can turn around and improve if you hold them long enough.
• There is also an element of luck. 
• Roughly ~10% of the U.S population served in WWII. When they came back to create abundant opportunities, the govt, launched a very generous and ambitious GI Bill for the returning soldiers and the Federal Reserve lowered the interest rates. It made borrowing to buy homes/cars/gadgets very cheap. At that time a citizen at 99%ile lived exactly the same way as a person at the 50%ile of population sorted on income.
  On the other hand, some generations didn't enjoy such favorable economic conditions. And infact now the lifestyles of people within the same country are vastly different.