A Wealth of Common Sense

This book offers a simple framework for making investment decisions. It doesn’t delve into maths, complex formulas, or guilt you into saving money on lattes. Instead, it focuses on simplicity, discipline, patience, prioritizing the long term, and sticking to the fundamentals.

A Wealth of Common Sense

Less is more.

The beauty of a simple investment plan is that it allows you to reach your goals and live your life.

Making fewer decisions in the investment process reduces the chances that decision fatigue from a lack of willpower will ruin your plan by making unforced errors.

Focus on what you can control.

It doesn’t matter worrying about the things you can’t affect. It won’t make a difference.

Too many investors take things personally when the markets or a particular investment goes against them.

Never have more money in stocks than you can stand to lose. It will only lead to poor decisions at the wrong time.

Create a comprehensive investment plan, diversify wisely, understand risk, uncertainty, and your time horizon, and reduce errors.

Everyone is tested at times. It’s going to happen.

The best investment process is the one you can follow in both highs and lows.

Stoicism teaches you how to handle prosperity well, and how to handle adversity well.

You are not one of the world’s greatest investors.

That’s okay.

Letting go of this pipe dream is the first step toward becoming a better investor.

You don’t have to try for extraordinary because above-average performance can put you far ahead of your peers.

Stock picking is sexier, but asset allocation is much more important for your overall performance and risk tolerance.

Get rich patiently and never be in a hurry.

You will have to make uncomfortable decisions occasionally to avoid making the big mistake that could lead to total ruin.

Without a long time horizon, performance in the markets can be quite messy.

Successful investing can be painful over shorter time frames but beautiful over longer ones.

It’s amazing how easy it is to do worse by trying to do better.

Achieving satisfactory investment results is easier than most people realize; achieving superior results is harder than it looks.

Satisfactory results can actually allow you to be above average and beat 70 to 80 percent of all other investors. The problem for average investors is that when they aim for superior results, it more often than not leads to below-average performance.

Better Than Average

The single greatest challenge you face is handling the truth about yourself. This is why it’s an unrealistic goal for the average investor to try to become the world’s greatest investor.

A far more worthy goal is being better than average, which is totally realistic and achievable. Better than average can lead to impressive results in terms of investment performance over long enough time horizons.

It’s all about harnessing the power of thinking long-term, cutting down on unforced errors, and having the patience to allow compound interest to work in your favor.

It takes an understanding of complexity to see the beauty in simplicity.

If you want to win against a team with greater talent, you don’t try to beat them at their own game. You level the playing field by exploiting their weaknesses and utilizing your strengths.

Patience will always be the great equalizer.

Good behavior over a long time horizon gives you an unfair edge. One of the biggest advantages you can have over the pros is the ability to be patient. Being patient and disciplined while extending your time horizon can be a huge advantage.

A patient, disciplined, long-term strategy isn’t easy because most of the time it requires you to basically sit on your hands and do nothing.

Compound interest doesn’t happen overnight. It takes time and slowly builds on itself until it becomes a machine. Too many people judge their performance over time frames that are far too short to have any significance.

Do not envy.

Envy is perhaps the worst emotion that you can feel. It can only lead to problems. There’s no logical reason to compare yourself to other investors. Focus on your own situation.

Negative Knowledge

If you can get good at destroying your own wrong ideas, that is a great gift. Real knowledge is to know the extent of one’s ignorance.

Negative knowledge is the process of first looking at what does not work to eventually come to the realization of what does.

It is impossible to quantify opportunity costs, but most of the best investment decisions you will ever make will be the opportunities you turn down.

Avoid Stupidity.

Some of the most common mistakes you can make and need to avoid in life:

Looking to get rich in a hurry.

Not having a plan in place. A plan is how you place constraints on your lesser self and ensure higher-probability decisions.

Going with the herd instead of thinking for yourself.

Focusing exclusively on the short term.

Focusing only on those areas that are completely out of your control.

Taking the markets and events personally.

Not admitting your limitations. A margin of safety provides room for error in your judgment.

Too much activity, which hurts performance from mistimed buys and sells.

Letting emotions control your decisions. Emotions force investors to confuse their time horizon with everyone else’s, which causes a misalignment of goals as people ignore their personal circumstances.

Traits that define a successful, wise person.

Identifying your current emotional state. Ability to control impulsive decisions. Ability to understand the emotional make-up of others.

Curiosity to learn more and more about how the world operates. The more you learn, you realize how less you really know and understand.

Remaining calm during times of chaos. Remain calm and follow your process

The ability to admit ignorance and say, “I don’t know”. Circle of competence. No need to have an opinion on everything.

Understanding history and knowing how things got here.

Discipline. The good strategy you can stick with is better than the great strategy you can’t stick with.

Use good systems.

Information alone won’t help change your behavior. You have to systematically root out bad behavior by automating good decisions to stay out of your own way.

Simplify, invert, and use multidisciplinary thinking, and things can become much easier when making decisions. There are huge advantages for an individual to get into a position where you make a few great investments, just sit back, and avoid stupidity. You are not paying brokers. You not listening to nonsense.

Skill-Luck continuum: For activities near the luck side of the continuum, a good process is the surest path to success in the long run.

Most people will get much more out of destroying their own wrong ideas than trying to come up with new ones all the time. Once you get rid of the clutter, all that’s left will be the good stuff that you can use to improve your results.

Understanding Risk

Risk should not be defined as volatility, but how you react to that volatility. The biggest risk comes from making poor decisions during bad times.

The first step is to acknowledge that volatility is a fact of life in risky assets.

Risk really only matters if it has consequences attached to it, either through a liquidity event because you are forced to sell or psychologically, because you make a huge mistake at the wrong time.

True risk is that which is irreversible.

Most investors spend their time worrying about their risk on a daily, weekly, monthly, or even annual basis. If you are able to change your mindset from these shorter time frames to thinking in terms of five years or even a decade, then it completely changes your outlook, investment performance, and probability of success. It also ensures you won’t mess things up by becoming more active at the wrong time.

Doing Nothing

The reason overconfidence in one’s own abilities can lead to problems is that it always feels like the information that we have is much more important than what we don’t know.

If you are an investor who is constantly obsessing over beating benchmarks over short-term time horizons, then extremely active investments are not going to be for you. One of the hardest questions to answer as an investor is this: Am I anchoring to a bad investment or strategy, or am I staying disciplined to a good long-term process?

You must be diversified enough to survive bad times or bad luck so that skill and a good process can have the chance to pay off over the long term.

The Process

Focusing only on those things that are within your control.

Focusing on the big decisions that make a difference and systematically minimizing distractions everywhere else.

Written on January 15, 2023