Our pursuit of effective strategies for successful investing covers a wide range of disciplines. Economics and mathematics are obviously needed, but history and psychology play surprisingly large roles.
As contrarian investors, avoiding stampedes is a fundamental principle for us. We often find ourselves going against the crowd. It turns out that there is a lot of conventional wisdom with which we disagree.
The world is complex; humans use shortcuts all the time to keep things simple enough to handle. The problem arises when characteristics of a group are ascribed to each individual within the group, as a shortcut way of dealing with people.
For example, Americans on average are sedentary and overweight. But if you watch who enters the door of the YMCA at 6 A.M., you know that the group characteristics do not apply to every individual. We use this same principle to find clients who will not sell out at low points or fall for the latest overpriced fad.
Behavioral economics indicates that humans tend to behave in counterproductive ways when it comes to investing. But just as the “Y” does not treat each member as if they were overweight and sedentary, we know that counterproductive behavior is optional at the individual level. We choose to try to avoid it.
We were reminded of this recently in reviewing some studies about happiness. The studies show that people quickly take new things for granted, homes and cars for example, so the initial happiness soon wears off. But in our experience, this is a matter of choice.
When in Louisville, I live in the humblest quarters ever since I graduated from college. I am grateful to have an abode that meets my modest needs. In Florida, my days are spent in a nice home that is wonderfully suited to our family. My gratitude and appreciation and happiness about that never flags. This just puts me right in the middle of the pack of the greatest clients in the world. (Our opinion.)
When we read studies about behavior, we will always remember that you are somebody, not everybody. Economists and psychologists can prove all they want about human tendencies, but we will not accept their findings as your fate or ours.
Clients, if you would like to talk about this or anything else, please email us or call.