Objective judgment, at this very moment.
Unselfish action, now at this very moment.
Willing acceptance – now at this very moment – of all external events.
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That’s all you need
– Marcus Aurelius
One common investment catch phrase is this: “You need to think differently, think independently, if you want to gain an advantage over other investors.”
And it’s true, but how do we apply it?
Warren Buffett gave us an insight when he advised, “Don’t fall in love with a stock. It won’t love you back.”
What Buffett was referring to is the fact that no matter how much you like a stock, no matter how excited you are about its upside potential, the stock price movement is outside of your control.
The stock price could drop 20% tomorrow, due a unrelated world event, or due to a market crash, dragging you down with it.
Very few investors can move a stock price. Carl Icahn sent out a tweet about Apple a few years ago, and as a result Apple’s market capitalization increased by about $8.4 billion.
But we individual investors don’t have this influence. Even Warren Buffett is reluctant to use his massive influence to move stocks, but both Icahn and Buffett started out with no influence, just like us.
Here’s the thing, we are better off not being able to, even if it was possible.
“The Chief task in life is simply this: to identify and separate matters so that I can say clearly to myself which are externals not under my control, and which have to do with the choices I actually control.”
Some people are not naturally suited to investing. They know they cannot help but get emotionally carried along with the crowd or just don’t like the fact that luck plays a role in generating short-term returns.
Tim Ferriss, who is a four-tme New York Times bestselling author, has written about how he recognized that not being able to control the outcome of investment results is one of the reasons why he self-selected out of active investing on the share market.
That was a very rational decision on Ferris’ part.
But, if you are going to continue to play this share market game, what to do then?
Here is a clue:
“By controlling our perceptions, the Stoics tell us, we can find mental clarity. In directing our actions properly and justly, we’ll be effective. In utilizing and aligning our will, we will find the wisdom and perspective to deal with anything the world puts before us.”
– Ryan Holiday
Sitting on a mountain top with a bunch of Buddhist monks meditating and chanting is not going to help us if we are going to achieve a breakthrough new thought process to outsmart the crowd of investors.
Don’t get me wrong. I too meditate in the mornings, but not for the dubious reasons often present in the media or by meditating gurus (I do it for these reasons).
The more than 2000-year-old philosophy I’m referring to — that has been used by a number of U.S. presidents throughout history — is Stoicism.
Four-time New York Times bestselling author Ryan Holiday refers to it as, “A tool in the pursuit of self-mastery, perseverance, and wisdom: something one uses to live a great life, rather than some esoteric field of academic inquiry.”
The well-known Stoics — Marcus Aurelius, Seneca, and Epictetus — would focus on a series of questions: “How do I handle my anger” “Why am I afraid of death?” “How can I deal with the difficult situations I face?” “What is the best way to live?” “How should I handle the success and power I hold?”
In their writings and teachings, the Stoics struggled to answer these questions in a practical way.
They framed their work in three critical disciplines:
The Discipline of Perception: how you see and perceive the world around us.
The Discipline of Action: The decisions and actions we take – and to what end.
The Discipline of Will: How we deal with the things we cannot change, attain clear and convincing judgment, and come to a true understanding of our place in the world.
Control your perception
In Robert G. Hagstrom’s excellent book, “Investing: The last liberal Art,” he tells the story of how most investment analysts perceived Amazon back in 2002 to be a bricks-and-mortar book retailer:
“Amazon appears to be massively overpriced relative to the brick and mortar bookstores.” “Conversely, the bulls looked at Amazon and saw something different. To them, Amazon didn’t look like a Barnes & Noble or Walmart but resembled Dell Computer.”
How can two people looking at the same thing see two different comparisons?
This is where things get interesting: at the intersections of philosophy, language, psychology and biology, Hagstrom explains how words give meaning. “[Ludwig Josef Johann] Wittgenstein… argued that the world we see it is defined and given meaning by the words we choose. In short, the world is what we make of it,” he said.
“Take as an example the aspects of a triangle. This triangle can be seen as a triangular hole, as a solid, as a geometrical drawing, as standing on its base, as hanging from its apex; as a mountain, as a wedge, as an arrow or pointer, as an overturned object, which is meant to stand on the shorter side of the right angle, as a half parallelogram, and as various other things…You can think now of this now of this as you look at it, can regard it now as this now as this, and then you will see it now this way, now this.”
How two individuals can come to such a different conclusion analysing the same inputs is also influenced by our neural connections. Peter Bevelin, author of the book, Seeking Wisdom: From Darwin to Munger, explains, “The brain is composed of at least 100 billion nerve cells or neurons. Since it is the connections between the neurons that cause our mental capacities, it is not the number of cells that is important but the number of potential connections between them.”
Bevelin further concludes:
“The brain continually changes as a result of our experiences. Experiences produce physical changes in the brain either through new neuron connections or through the generation of new neurons….This means that the anatomy of the brain varies from individual to individual.”
When American Express become embroiled in the soybean scandal in 1963, it caused $150 million dollars’ worth of losses (approximately $1.1 billion in 2008 dollars) to not only American Express but also to Bank of America and Bank Leumi.
American Express was one of the biggest casualties. Its stock dropped more than 50% as a result of the scandal, which cost the company nearly $58 million, and the general perception among investors and the media was that American Express would not recover from the scandal.
But Buffett’s perception of the incident was different. He saw that the financial trouble American Express got into was limited, but the 50% fall in the stock price was reflecting the unjustified fear in the market, the uncertianty surrounding Amrican Express.
Buffett made millions and the rest is history.
“Our life is what our thoughts make it.”
For the parents with young children, the Importance of language on a rainy day, from Josh Waizkin:
“One of the biggest mistakes that I observed in the first year of Jack’s life was parents who have unproductive language around weather being good or bad. Whenever it was, you’d hear mom’s, babysitters, dads say, ‘It’s bad weather. We can’t go out,’ or if it wasn’t, it’s good weather. We can go out.’ That means that, somehow, we’re externally reliant on conditions being perfect in order to be able to go out and have a good time. So, Jack and I never missed a single storm, rain or snow, to go outside and romp in it….we developed this language around how beautiful it is. Now, whenever it’s a rainy day, Jack say’s, ‘Look, Dada, it’s such a beautiful rainy day,’ and we go out and we play in it. I wanted him to have this internal locus of control – to not be reliant on external conditions being just so.”
Excerpt from “Tools of Titans” by Tim Ferriss.
The Right Action
“As a discipline, it’s not any kind of action that will do, but directed action….Action requires courage, not brashness. Our movements and decisions define us: We must be sure to act with deliberation, boldness and persistence.”
Focus on the process.
Ryan Holiday, in his book, “The Obstacle Is the Way,” describes how head coach Nick Saban, of the University of Alabama football team, teaches his players to focus on the process. (Emphasis mine.)
“Don’t think about winning the SEC Championship. Don’t think about the national championships. Think about what you needed to do in this drill, on this play, in this moment. That’s the process: Let’s think about what we can do today, the task at hand.”
In the chaos of investing, as in life, the process provides us a way. This process will resonate with the successful long-term investors.
“If you took our top 15 decisions out, we’d have a pretty average record. It wasn’t hyperactivity, but a hell of a lot of patience.”
“You stuck to your principles and when opportunities came along, you pounced on them with vigour.”
Here, Munger is speaking about directed action, an action requiring courage, not brashness. Consider Warren Buffett (Trades, Portfolio)’s purchases of the Washington Post, American Express and Coca-Cola. Did he not act with deliberation, boldness and persistence when prices were below his evaluation of intrinsic value?
“The chief task in life is simply this: to identify and separate matters so that I can say clearly to myself which are externals not under my control, and which have to do with the choices I actually control. Where then do I look for good and evil? Not to uncontrollable externals, but within myself to the choices that are my own …”
— EPICTETUS, DISCOURSES, 2.5.4– 5
Ryan Holiday describes will by saying: “If perception and action were disciplines of the mind, will is the discipline of the heart and the soul. The will is the only thing we control completely, always.”
Stoics believe in accepting events that occur to you that are outside of your control, whether positive or negative and that you have the power (applying perception, action and will) to control how you interpret that experience and your reaction to it.
When Buffett speaks to students he tells them to develop their own inner scorecard and not worry about their outer scorecard. The inner scorecard is the set of criteria and standards by which a person judges themselves. The outer scorecard is a picture of self-worth predicated upon the judgments of others. Why? Because temperament is vital to not only being a successful investor but also to life itself.
Jason Zweig, author and writer of the “Intelligent Investor” column in The Wall Street Journal, intelligently included this quote by Marcus Aurelius at the start of chapter 8 in the book “The Intelligent Investor” by Benjamin Graham.
“The happiness of those want to be popular depends on others; the happiness of those who seek pleasure fluctuates with moods outside their control, but the happiness of the wise grows out of their own free acts.”
– Marcus Aurelius
Euthymia is a Greek word. Seneca defined it as:
“Believing in yourself and trusting that you are on the right path, and not being in doubt by following the myriad footpaths of those wandering in every direction.”
“Tranquility can’t be grasped except by those who have reached an unwavering and firm power of judgment— the rest constantly fall and rise in their decisions, wavering in a state of alternately rejecting and accepting things. What is the cause of this back and forth? It’s because nothing is clear and they rely on the most uncertain guide— common opinion.”
Keep this word euthymia and its meaning close by in times of euphoria, in times when the market continues to reach new highs and every financial news publication is trumpeting the end of value investing. And remember it’s during bear markets, not bull markets, where the big money is made (source).
You’re Coach in Investing
Adam C. Parris
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