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Avoid The Overconfidence Trap: Conduct Your Own Stress Test

Avoid The Overconfidence Trap: Conduct Your Own Stress Test

When Willie Sutton, a famous bank robber, was asked why he robbed banks, he answered because that’s where the money is. And so it is with the stock market. Most people invest because they want to make as much money as possible. This simple act of buying a stock for dollar X, holding it for some amount of time, and selling at a profit, however, obscures a world of thought and action that is infrequently discussed. It is more seductive for analysts and financial media to focus on reasons why stock XYZ will make you a lot of money than to spend time on less salacious issues that might help investors actually become better investors.

Anyone who spends meaningful time in the markets eventually realizes that universes exist between, and around, the bids and offers, or prices at which securities are bought and sold. These universes contain philosophies, and art, and science, and mathematics. They are part of an ongoing inquiry into issues much larger than just buying and selling securities even though that is how they find expression. Though the approaches, or disciplines, all vary they tend to all include some recognition that there is a disconnect between what is known and unknown.

“Rather than thinking, ‘I’m right,’ Bridgewater’s Ray Dalio says, “I started to ask myself, ‘How do I know I’m right?’”

Dalio could simply look around his everyday life and conclude that he is right because he has been right so very often. He runs one of the world’s largest, most successful hedge funds, and thus his trappings of life are physical markers of his success.

Yet, Dalio, like many accomplished investors, is concerned with what he doesn’t know rather than trying to confirm that he does know. In this, he arguably has much in common with philosophers and poets and painters who find a system, and then spend a lifetime continually refining their beliefs to make them stronger and purer. Such views are not commonly discussed in public because they are not the usual transactional items, which by definition, is what is universally discussed by sell-side banks and financial media, and that is why these views are interesting. If this intrigues you, Dalio’s TED talk is a good place to start down the pathway:

Principles are ways of successfully dealing with reality to get what you want out of life.

We also want to recommend some of our favorite books. If you’ve read them, you’ll likely agree that they are timeless. If you haven’t read them, we encourage you to get acquainted, and share them with your clients. Also, please send us your favorite investment titles.

Reminiscences of a Stock Operator

The Indomitable Investor

The Art of Contrary Thinking

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