Being right is very important to many.
Many are looking for the “right” answers — when to buy? what to buy?
We invest in a stock because we believe that it represents the best opportunity. And we can be very insistent on what we believe to be right.
Defining “right” and their biases
Everyone has their version of “right”. There are many right answers.
Each investor has their version of ‘right,’ based on different strategies, timeframes, expectations and goals. Rather than focusing on being right, it’s important to seek an understanding of diverse views.
We see the world, not as it is, but as we are or, as we are conditioned to see it. When we open our mouths to describe what we see, we in effect describe ourselves, our perceptions, our paradigms.
Stephen Covey
A related post: We are all different so will be our investments.
I am right versus I will be right.
We buy the stock because we believe we have a good probability of making money. At the point of buying, we cannot be 100% sure; it may not go as planned. We will only know whether we are right LATER.
- All investments have risks and we cannot be sure we are right.
- Only time will tell whether we are right.
- Companies themselves cannot be sure either. There are too many variables affecting their strategies and plans — competition and economic conditions.
- The longer the period, the greater the uncertainty and the more we cannot be sure.
What we expect can be different from what will happen. We cannot be sure we will be right.
Hence, when people pound on their investing ideas with convincing reasons, we cannot be certain whether they are right. We have to check back to validate.
I am right (and you are wrong).
Being right and insisting that “I am right” breeds complacency. We like to be smart and be right. For some, it is the bragging rights to tell others they are wrong to show that we are better than others. Some imply that there is one “right” answer. Others feel that their “right” represents the “best” investment available. Really?
We insist on our views and follow information that matches ours (confirmation bias). It is an efficient way to process information, promotes self-esteem, and eases stress by eliminating conflict and contradictions. We ignore the merits of counterarguments and how our thesis may be wrong. We need to remain open-minded and humble by seeking out different views and avoiding affirmative questions.
How can we be 100% sure we are right with every idea? Do we always make money with every investment? No! We can be wrong. So, why are we so insistent on being right?
No, I will be right!
Investors fall into the sunk cost trap because they do not want to lose the time or money they have already invested. This happens when the high-conviction stock has a very high portfolio allocation and/or we have mentioned it to many friends and on social media that we find it hard to admit the mistake.
At times, many are having the Dunning-Kruger effect. We think we know we are right based on our experience and knowledge. However, we may not as we may not understand the new and evolving topic as well as we believe it to be.
Your willingness to believe something is influenced by how much you want and need it to be true.
Morgan Housel
Investors keep holding on to losing stocks because they believe they are still right and will be profitable (one day)! However, the stocks may keep losing more and longer than expected, To say “I am wrong” is viewed as admitting failure. As a result, many investors tend to remain committed or even invest additional capital. It can create a stronger bias (such as identity bias or worse, a cult mentality). The investing thesis becomes more emotional and less rational.
Beware of our insistence to be right. Investing is about making money; leave ego, arrogance and the insistence to be right aside.
No one is 100% right.
Even legendary investors like Warren Buffett and Ray Dalio make mistakes. No one is right all the time, and being wrong is part of the investing process. In a lecture slide by Aswath Damodaran (see below), even the best analysts are wrong in about 30% of their calls.
Depending on the strategies and focus, we can be more wrong but that does not mean we are not profitable. Many of our investments can be wrong (low win-loss ratio) but the returns for some can be highly profitable (high average returns) and result in good overall profits.
Being right does not mean knowing everything especially being a retail investor. We may not have the time, resources and expertise. There will be information and data about the company and the operating sector that we miss or do not know. We have to know what is enough to conclude that the investment is good to invest.
I don’t know. I am not sure. I may be wrong.
Often, “I don’t know” is being scorned; it is not an acceptable answer. People look for confident investors with a convincing thesis and are “100% right”. This is not possible as a retail investor. We do not know all the issues and their specific impacts. We have to decide what is important that will influence the potential of the investments. We may move from being right to “I may be wrong”.
“I don’t know” “I am not sure” and “I am wrong” are important to acknowledge:
- the different views and questions being expressed which are a useful sounding board to counteract any biases we may have
- the possibility that important factors may have been missed
- the impossibility of knowing everything affecting the investment decision and this is normal
Depending on our strategies, many will find us wrong and we can have many wrongs but we can still be very profitable as a portfolio. Examples:
- For those contrarians who invest in obscure, hated, high-growth small-cap stocks, the probabilities of being right are lower but their upsides of the winners can be very good to compensate for many losers.
- For long-term investors who invest and hold great companies over the years and decades, some may not be so great and wrong. Only a few can keep doing well and their returns can easily outweigh the losses.
I am wrong. I can be wrong.
The ability to admit wrong and change course is an important skill in investing/trading. Knowing that we are fallible is important.
To insist that we are right and not admit we are wrong, there will be losses that we keep holding that can cause huge damage to our portfolio.
Being wrong is often viewed negatively but no one is always right.
- Things change and what we believe to be right may no longer be accurate. We have to keep validating to ensure we remain right (rather than insisting that we are right).
- Some invest in smaller growth companies believing that they will disrupt the status quo.
We can be wrong. It is delusional to keep insisting on being right.
I am not totally right.
What we invest in and how we allocate may not turn out to be the best investing opportunity and give us a better upside. While we may be making profits, we can make more — we are right but can be better. We need to improve to have a portfolio representative of the best opportunities.
We will only know who and what is right later.
The best investors are not ideologues but truth seekers (not validators). They look for alternative views they may have missed in their thesis. They are flexible to change their minds lest they lose all their money by being wrong, particularly when exploring non-consensus. Flexibility is an asset for the transcendent but a liability for the extremist where changing minds means losing power. The optimal investor mindset is to accept when markets are dangerous and when they are opportune. They aren’t always one or the other. Or, forget markets and just look for the contrarian company or idea where everyone will agree with you later.
The Pyramid of the Flexible Mind, Doug Clinton, Deepwater Asset Management, 15 August 2022
Our over-emphasis on being RIGHT
Don’t focus on being right.
Being right in investing differs from scoring an “A” in examinations where we focus on doing well with the syllabus and textbooks. We grow up in an education system that rewards being right. In many subjects, there is one right answer or a model answer.
Unlike examinations where an “A” represents the best score we can get, investing returns can be infinite returns (i.e. multi-bagger). Hence, having a “being right” mentality when investing represents a fixed mindset. Focus on getting better and more profitable.
We also want to be right in front of our bosses and the latter also want to be right. In many organisations, being right is important. Mistakes are bad. While many said to value failures and mistakes, many know it is better to be right than wrong. Hence, we strongly believe that being right is important; being wrong is bad.
A fixed mindset to be right may prevent us from exploring new investing opportunities and approaches. We stick to what is proven and safe; we will miss out on many possibilities.
Have a growth mindset, stay humble, keep learning, and improve. There is much to learn about investing from others and the opportunities available. There are many tools and information available online. Don’t stagnate!
We learn from our mistakes; we correct and improve to get better.
Focus on getting better — less wrong and more right
When we learn about investing and trading (or any new subjects), it is a continuous process of learning. We are always learning and improving to become less wrong and more right to be more profitable over time.
We should keep questioning ourselves; our investing thesis and our emotions:
- What if I am wrong?
Ask ourselves: Can I be wrong? - What would it mean if I were wrong?
What are the costs of being wrong financially and socially (we have shared with others)? - How can I be more right?
How can I keep improving?
We can be successful only at something we are willing to fail at. It is difficult to improve and succeed if we are less willing to fail. It is okay to start with being wrong and become less wrong and more profitable as we learn and improve.
As observed in the book, The Subtle Art of Not Giving a F*ck, the backward law is at work: The more we insist we are right, the more uncertain and insecure we will feel. Also, the more we embrace the possibility of being wrong, the more comfortable we will feel in knowing what we do not know. Stay open-minded.
Uncertainty is the root of all progress and all growth. As the old adage does, the man who believes he knows everything learns nothing. We cannot learn anything without first not knowing something. The more we admit we do not know, the more opportunities we gain to learn.
Extracted from the book, The Subtle Art of Not Giving a F*ck by Mark Manson
Focus on being less wrong and more right as a whole
We can lose in the following manners:
- Position size: Position size of profitable positions versus losing positions
This happens when we are unsure and sized with smaller allocations which turn out to be right and profitable. Unfortunately, we can be greedy where we leverage and/or size larger positions which turn wrongly into losses.
Start with small and equal position sizing. - Win-loss ratio: Number of winning positions versus losing positions
No one is always right; there will be losing positions. - Payoff ratio: Profit made versus loss incurred per position
It is a case where we sell our winners too fast earning a few percentages and holding losers too long losing a lot more percentages. Usually, together with a low/poor win-loss ratio (point 2), this is a major reason for losses in investments and trading.
Successful investors/traders may not have a high win-loss ratio. They can make up a good profit per position by having several multi-baggers and/or they have strict cut-loss discipline.
It is about how much we make or lose in each position (batting average versus slugging percentage) and more importantly, whether we are making money consistently at the portfolio level. They can be wrong in many positions and still be profitable.
When we first started investing/trading, we will have more losing positions and may have huge losses in each position while our profitable positions are fewer and each makes lesser profits. We have to improve our win-loss ratio, reduce our losses and improve our profits with each position to ensure an overall net profit.
The most important question: How much do you make?
Focus on improving the investing/trading processes
Every investing/trading strategy and decision we make is a prediction or a forecast. We aim to improve the probability of our prediction (increase the odds) to a level that we are comfortable with. We have limited time and resources to study and there are many assumptions, uncontrollable and a future that we may not envisage well.
What we do when we are wrong is more important.
Focus on the process and not on the outcome.
Studies have shown that many successful investors are often wrong. In the book, The Art of Execution: How the World’s Best Investors Get It Wrong and Still Make Millions by Lee Freeman-Shor, the author examined 1.866 investments representing 30,874 trades made by 45 of the world’s top investors made over seven years from 2006 to 2013.
My summary of the great book worth reading: The Art of Execution: How the World’s Best Investors Get It Wrong and Still Make Millions by Lee Freeman-Shor
The author was shocked that only 49% (920 investments) of the very best investment ideas made money. Even more shocking was that some of these legendary investors were only successful 30% of the time. It is fascinating that despite some of them only making money on one out of every three investments, almost all did not lose money. They still made a lot of it.
Successful stock market investing is not about being right per se — far from it. Success in investing is down to how great ideas are executed.
You do not have to worry about whether an investing idea works or not if you focus on how to invest in that idea: it is about how much money you allocate to each investing idea and what you will do when you find yourself in a losing or winning position.
To be successful is more than being right. It is more important to be less wrong (small losses). We make profits by being right. However, if we lose more by being wrong, we are in a net loss position. Hence, to be profitable in investments/trading, it is more than being right. It is about how much we make when being right and how much we lose when wrong so that the net result is consistently profitable.
This helps me significantly with my investing/trading: One thing I do that transforms my investment/trading journey
Develop our strategies with our meanings of being right
A trading/investing strategy is about answering these 6 questions:
- What to buy?
- What price to buy?
- How much to buy?
- What to sell?
- What price to sell?
- How much to sell?
The selling questions serve two purposes: (a) to achieve profitability and (b) what if the thesis is wrong.
Many investing/trading approaches, many meanings of “being right”
Everyone has different answers to the above 6 questions even among the great investors. There are many ways to be right. Everyone has their definitions of being right.
Everyone has a different investing/trading game. There are many ways to profit. There are no rules in investing/trading other than those we define ourselves or we use the rules of others. Investing is personal. What works for someone may not work or be preferred by another. Play our own game and make money.
The meaning of “right” is what we hold on to and everyone can be different. Seek to understand then be understood. Understand what others mean by being right and what it means to us (if it matters). Otherwise, we will be feeling confused and frustrated.
Check out this post: Everyone is different and needs to have their own investment strategy to succeed.
As retail investors, we may start investing/trading with the education, experience, knowledge, time and resources we have compared to the professionals. We need to find our circle of competence and develop our edge.
Abundance mindset versus scarcity mindset
Have an abundance mindset
- There is plenty of money to go around.
- There are lots of opportunities — lots of companies, investment instruments, sectors and countries to invest from. Information about these investments is easily available.
- There is a lot of knowledge and wisdom to learn about investing and trading.
The scarcity mindset views resources as finite and limited. However, the investing sector has evolved to a highly advanced level where opportunities, information and knowledge are easily available with just a laptop or mobile.
Also, our investing/trading strategy does not mean that it has to be the best, most profitable or the holy grail. Rather, being a retail investor, the strategy needs to be just right for me to feel comfortable and confident. We have to build our own investing/trading strategy with our independent thinking and conviction; not influenced and persuaded (easily) by others having different views and strategies.
There is no (universal) right or wrong, only right and wrong we believe them to be and make decisions with.
Live and let live.
Strong opinions, weakly (or loosely) held
Paradox of investing and trading
We need to be confident that we will be right to put our money at risk, and we need to persist with these views to ride winners. At the same time, we cannot be blinded and stubborn to these views; we need to be able to adapt and abandon our outlooks to limit losses.
Be ready to change our views
We must be prepared to change beliefs and opinions and accept and embrace new ones to adapt to the changes.
“Strong opinion, weakly held” is an expression describing a framework developed by technology forecaster and Stanford University professor Paul Saffo. He described the process as:
“Allow your intuition to guide you to a conclusion, no matter how imperfect — this is the ‘strong opinion’ part. Then –and this is the ‘weakly held’ part– prove yourself wrong. Engage in creative doubt. Look for information that doesn’t fit, or indicators that pointing in an entirely different direction. Eventually, your intuition will kick in and a new hypothesis will emerge out of the rubble, ready to be ruthlessly torn apart once again. You will be surprised by how quickly the sequence of faulty forecasts will deliver you to a useful result.”
It is a useful default perspective for investing. It is about the ability to embrace the power of definiteness and the power of openness concurrently. And when we act, we cannot be of two minds. We have to commit and proceed boldly. But to understand the world, we have to constantly learn with new information and data, adapt, and grow, which implies shifting direction.
The illiterate of the 21st century will not be those who cannot read or write, but those who cannot learn, unlearn and relearn.
Alvin Toffler
Marc Andreessen, the co-founder of Netscape and venture capital firm, Andreessen Horowitz, is often associated with the term. Being a venture capitalist, he is always looking for start-ups with great business ideas that oppose conventional wisdom. These can be very hard to execute and entrepreneurs must have strong convictions because of the very big bet of time or money or both. However, as the world changes, how will they react?
Be like water.
“Water is fluid, soft, and yielding. But water will wear away rock, which is rigid and cannot yield. As a rule, whatever is fluid, soft, and yielding will overcome whatever is rigid and hard. This is another paradox: what is soft is strong.”
Lao Tzu, Tao Te Ching
“You must be shapeless, formless, like water. When you pour water in a cup, it becomes the cup. When you pour water in a bottle, it becomes the bottle. When you pour water in a teapot, it becomes the teapot. Water can drip and it can crash. Become like water my friend.”
Bruce Lee
It is not about being right. It is about being consistently profitable.
Be prepared to improve, change and pivot when we are less right or wrong. Have conviction with flexibility.
A good book to read: Quit: The Power of Knowing When to Walk Away by Annie Duke
It focuses on quitting as an important skill to have. There is great insight into why people tend to persist too long and become irrational with biases.
