November 2023
IN THIS ISSUE
Why market timing doesn’t work
It pays to wait
More investment managers should run marathons
They say “Investing is a marathon not a sprint.” But if more investors actually ran marathons, I suspect they would not make so many mistakes that marathoning can teach investors.
Mint’s Raj Mehta wrote a nice piece titled Lessons from running a marathon that can be put to good use in investing. For one, Mehta draws the mostly obvious point of focusing on the long distance of the race rather than the short term elevation changes, although I prefer to make this important point with a different metaphor - the only people who get hurt on roller coasters are those who jump off, so the preferred approach is to analyze a coaster’s ups-and-downs in advance, make an informed decision whether to get on, and if you decide to get on then commit to riding out the expected-and-planned-for volatility that makes a coaster, well, a coaster.
There are loads of other investing lessons that I have personally learned and extended from my time running marathons. Here’s one of my most important insights:
On the scale of luck vs skill, marathoning is very much a skill-driven endeavor. Contrast that with poker, for example, in which luck is more determinative than skill. Michael Mauboussin’s The Success Equation - Untangling Skill and Luck in Business, Sports, and Investing) makes this point:
“It’s hard to discuss skill in a particular activity without recognizing the role of luck. Some activities allow little luck, such as running races and playing the violin or chess. In these cases, you acquire skill through deliberate practice of physical or cognitive tasks. Other activities incorporate a large dose of luck. Examples include poker and investing. In these cases, skill is best defined as a process of making decisions. So here’s the distinction between activities in which luck plays a small role and activities in which luck plays a large role: when luck has little influence, a good process will always have a good outcome. When a measure of luck is involved, a good process will have a good outcome but only over time. When skill exerts the greater influence, cause and effect are intimately connected. When luck exerts the greater influence, cause and effect are only loosely linked in the short run.” (page 18)
Source: Analysis by Michael Mauboussin in The Success Equation
A good process helps shift investing along the spectrum away from luck and toward skill. Less like poker, more like marathoning. That’s where investment managers should be.
ONE MORE THING…
Why market timing doesn’t work. Likelyhoods readers know this well. Why market timing doesn't work: S&P 500 is up 14% this year, but just 8 days explain the gains
It pays to wait. I’ve said it before. Munger offers counterintuitive but valuable advice against over-active management. Charlie Munger Says, "The Big Money Is Not In The Buying And The Selling But In The Waiting" — High Returns Don't Actually Require High Effort
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