You can read Part 1 of this interview here.
Dev: As an investor, hardest thing about investing is to find a balance between 1) Riding out periods temporarily unfavorable to your views and 2) Realizing your views are wrong and moving on. How should an investor maintain that balance?
Morgan: There’s no simple answer. It’s a really complicated problem, and usually you only know the answer in hindsight.
The best solution is a combination of humility, and being totally open to opposing viewpoints. It’s natural to fight back against people who disagree with you, because you take their opinions as an attack on your intelligence. It’s a really dangerous mindset.
The best investors in the world pay close attention to opposing viewpoints, trying to find out how they’re wrong, rather than looking for information that confirms they’re right.
Charles Darwin spent most of his life trying to prove that evolution was wrong, obsessing over evidence that disconfirmed his own views. That made him an incredibly effective scientist. It seems counterintuitive, but it’s such a smart way to think.
Dev: It’s very easy to say that investors should only invest when value on offer is blindingly more than the price that needs to be paid. But how does one implement that in reality? Being greedy when others are not, is actually quite difficult to do.
Morgan: It’s way easier said than done. The mindset you need to have in investing (and this goes for most things in life) is “If things get really awful, will I be able to handle it and do OK?”
When you can answer yes, the odds fall in your favor because you’ll be able to endure a huge range of outcomes, both positive and negative.
It’s classic margin of safety, which many investors understand but few actually implement. Most people need their forecasts to be accurate in order to do OK, which is a really dangerous spot to be in.
Dev: In his book Thinking, Fast and Slow, Daniel Kahneman mentions about two approaches to thinking.
System-1 (which is fast, instinctive and emotional) and System-2 (which is slow, effortful and calculating). How can an investor make use of these two systems to invest?
At the face of it, System-2 seems like a better choice. But are there any market situations, where thinking in System-1 mode can work wonders for long term investors?
Morgan: I don’t think so. Investments are inherently long-term things and are distorted by emotion.
Anytime you’re forced to make a snap judgement about what to do with your money the odds of future regret are extremely high.
I’d actually recommend waiting at least a week before making any investment decision.
Dev: We as humans are not only very poor at predicting the future, but we’re not even good at remembering the past in certain situations. How does one correct atleast the 2nd part (Remembering the Past) and also, how not to fool oneself when one remembers the past?
Morgan: One thing I love doing is reading old news. I live in Washington DC and can visit the Library of Congress, which has every edition of the Wall Street Journal, NYT, and Washington Post going back to the mid-1800s.
I absolutely love reading old versions, seeing how people thought and what people predicted with the benefit of hindsight. There’s so much to learn.
Another thing I find helpful is keeping an investment journal, writing down your thoughts and how you feel about the market and different investments so you can recall them objectively later.
The only way to fight how tendency to rewrite the past in our minds is to actually write today down to revisit it tomorrow.
Dev: How do you think one should view markets through the long lens of history rather than the short-term news filter? Any mental tools you use to achieve it?
Morgan: Most people have a distant financial goal, like retirement or funding your kids’ education. A helpful lens when reading financial news is to ask, “Does this story have any impact on my ability to retire in X years?”
99% of the time the answer is “no” and you can happily move on.
Dev: Do you think lack of preparedness is what causes most investors to miss out on wealth creation opportunities in stock markets? (Both mental as well as financial preparedness)
Morgan: It’s a lack of understanding of what an opportunity looks like. There’s a fundamental irony in investing that all past bear markets look like opportunities, but all future bear markets look like risks.
So even if people prepare for bear markets, not realizing how beneficial they are for long-term investors is part of the tragedy.
Dev: In another of your interviews, you said: What’s really interesting about finance is that the more you learn the more you realize how little you know.
Can you elaborate on that? How can common investors, who are almost always short of time, realize the importance your quote?
Morgan: I think this is true for a lot of things in life. The deeper you dig, the more you realize how much randomness, chance, and luck plays a part in determining the specific path of individual outcomes.
What was the most important economic event of the last 20 years? Probably 9/11, and it’s so easy to see how it could have either been foiled, or way worse than it actually was. Same with WW2, the Cold War, fall of Soviet Union, etc.
There’s a long history of things that never happened and alternative outcomes that people discount more than they should.
Continued in Part 3.