The Better Letter: Tentative Principles

Some principles for investing, many of which have much broader implications.

As a San Diego Padres fan, I’m used to meaningless final games of the season. This season’s meaningless final game was markedly different, however. The second-best record in the National League and the Padres’ playoff position were already locked down. Sunday’s result didn’t matter…to the Padres. It mattered a lot…to the San Francisco Giants. A Giants win over San Diego would put them in the postseason; a loss and they were out.

The Giants cut the Friars’ lead to 5-4 in the eighth inning and came to bat in the bottom of the ninth looking to stay alive against San Diego closer Trevor Rosenthal. Rosenthal struck out the first two Giant hitters and faced lead-off hitter Austin Slater with the season on the line for San Francisco. MVP-candidate Mike Yastrzemski, the grandson of Hall-of-Famer Carl, waited on deck.

It didn’t go well for the Giants.

Home plate umpire Rob Drake had an inconsistent strike zone all game long and rung up Slater on a 100 MPH fastball that should not have been called a strike.

Strike two should have been called a ball, too.

Austin Slater didn’t do anything wrong and his team’s season ended anyway. He simply was a victim of a bad call, bad timing, and very bad luck.

Baseball, like many things in life (including investing), involves both luck and skill. In such endeavors, outcomes can’t be controlled. The variance in outcomes due to luck is enormous, even when you think it shouldn’t be. That’s why your process matters more than the outcome. 

That’s one of my investing principles. Those principles are the focus of this week’s TBL.

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Tentative Principles

Evidence-based investing is the relentless focus on what works, what doesn’t, and why. Like science, it evaluates all the evidence in order to try to ascertain the best available approximation of the truth. However, its conclusions are tentative, always subject to reevaluation and correction on account of new or better evidence.

Over the years, I have developed a series of tentative principles that I believe accurately reflect the reality of investing. I am going to lay them out here, en masse and without explication, for your review and consideration. They appear in no particular order. 

It is a working list. Therefore, if you disagree or have other suggestions, I’d love to hear it. As usual, Jason Zweig nailed it: “Historical returns often paint a distorted picture, rigid rules have unintended consequences and the market loves to make monkeys out of people who think they’ve solved it.” This monkey wants to keep getting better.

Oh, and most of these principles apply much more broadly than just to investing.

Let’s go.

We don’t live in the long-term, so we can be easily distracted by the here-and-now. The best investors are those who can maintain their focus on the longer-term.

Because we don’t know everything and make many mistakes, diversify.

Past performance is not indicative of future results (correlation is not causation).

Beware unintended consequences. And there are always unintended consequences.

Costs matter. A lot.

You can’t predict the future – there are way too many variables.

Be patient and stay invested. 

Mean reversion is a thing.

Don’t chase returns.

We humans are often wrong but never in doubt. We’re biased and not nearly as smart as we think. 

We like to think we’re like judges, dispassionately evaluating the evidence for the best available approximation of the truth when, in reality, we’re much more like lawyers grasping for any purported fact or argument that we think might support what we already think.

We are highly loss averse. We innately prefer safe to sorry and choose secure over sensational, leaving us both sorry and safe.

Luck and genius are often confused. Luck and competence are often confused. Luck is far more instrumental to success than we’d like to think.

Not being stupid matters demonstrably more than being smart when, as in investing, a combination of luck and skill determines success. Smart gets neutralized by other smart people. Stupid does not. Therefore, work to eliminate mistakes. 

Expect corrections and adversity. Don’t fear them. Plan for them.

Your savings rate is significantly more important than your investment returns and also more controllable. Plan accordingly.

The perfect is the enemy of the good (it’s better to be roughly right than precisely wrong).

Focus on process over outcome.

What you keep matters more than what you make.

Be flexible.

Make and follow a careful plan with consistent discipline. 

It’s not different this time (but it’s always different every time).

Wealth, like wisdom, compounds, but so does bias.

Markets are driven by fear, greed, and ego.

Carefully balance risk and reward.

Be wary of shortcuts and sure things (if it looks too good to be true, it probably is).

Active management is required (at least of your portfolio and your life). 

Investing is hard.

Truth and certainty are exceedingly rare and precious. Be skeptical. Look for evidence. Think twice and think again.

Bet on the future.

The world changes quickly and in big ways. Human nature doesn’t. 

Simpler is better.

Invest in yourself.

Totally Worth It

The year’s edition of the San Diego Padres achieved the best winning percentage in team history. However, luck increases in importance over the shorter-series format of the postseason and increases further in this year’s expanded format. “My job is to get us to the playoffs,” Oakland Athletics GM and Moneyball star Billy Beane famously explained. “What happens after that is f***ing luck.”

They know that emus can’t read, right? The most helpful thing I saw this week. The funniest, unless it was this. The most uplifting. The most beautiful. The most ridiculous. The saddest. The most important, unless it’s this. The most perceptive. The scariest. The most significant. The stupidest, unless it was this or this. The most remarkable. The most terrifying. The most tragicRide ’em, cowboy. Funny but painful. It makes perfect sense. The fastest route is not always a straight line.

The dreaded Dodgers have the best team in baseball but have only a 30 percent shot at winning the World Series. Postseason baseball has huge variance.

Source: The New Yorker


If you need a little hope today (who doesn’t?), listen to these amazing kids, the best fifth-grade performers I know (their story is here), sing with Christina Perri on her hit song, A Thousand Years

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Issue 32 (October 2, 2020)