Are you comfortable being miserable?

n his book Succeeding, John Reed wrote one of the smartest things I’ve ever read:

When you first start to study a field, it seems like you have to memorize a zillion things. You don’t. What you need is to identify the core principles – generally three to twelve of them – that govern the field. The million things you thought you had to memorize are simply various combinations of the core principles.

This extends beyond those learning a new field. I think it’s most relevant for those who consider themselves experts. The root of a lot of professional error is ignoring simple ideas that seem too basic for those with experience to pay attention to.

Having seen the investing world from several different angles, four skills stand out as governing most of outcomes.

1. The ability to distinguish “temporarily out of favor” from “wrong.”

The two strongest forces in investing are “This investment looks broken because that’s how opportunity presents itself” and “This investment looks broken because it’s actually broken.” It’s hard to tell the difference in real time. Distinguishing between the two relies on accurately calculating the odds that something will eventually come along to heal or promote the market or company that looks broken. And since those odds are always less than 100%, it can take a while to tell if you’re any good at it, because even when the odds are in your favor the outcome can go the wrong way. It’s hard to do. But worse, and more common, is forgetting that a distinction needs to be made in the first place.

2. The willingness to adapt views you wish were permanent.

Economies grow because businesses, consumers, and technology change and adapt. It’s ironic how many investors attempt to ride this wave of change with rigid beliefs. There are a set of truly timeless investing ideas. But most of what guides us are beliefs that reflect what we’ve happened to experience in the narrow view of our own lives. Even when investors study history, they put more weight on stories that align with their own experiences, because those stories are easier to understand and confirm their beliefs. It’s painful to contemplate, but a lot of what all of us believe about investing is either right but temporary, or wrong but convincing. If you’re unwilling to update your views when the world changes, or be open-minded enough to realize that some of your views were anecdotal to begin with, boy, you will be eaten alive in this field.

3. The ability to be comfortable being miserable.

This is the most fundamental of all investment principles. You can’t enjoy the benefits of exercise without some sort of discomfort, because being out of breath, sore, or tired is the sign that you’ve put in enough effort to deserve a reward. Same in investing. The financial rewards for being comfortable as an investor are the same as the physical rewards for sitting on the couch.

Returns do not come for free. They demand a price, and they accept payment in uncertainty, confusion, short-term loss, surprise, nonsense, stretches of boredom, regret, anxiety, and fear. Most markets are efficient enough to not offer any coupons. You have to pay the bill.

There are four psychological states of investing, in order of lucrativeness:

• Miserable but confident in its eventual rewards.
• Miserable and giving up.
• Comfortable and accepting of its future downside.
• Comfortable and oblivious of what’s to come.

Some are better at coping than others, but that’s the complete list.

4. The ability to distinguish when analytics vs. psychology is necessary.

If investing were only about numbers, no one would be good at it, because computers would arbitrage away all opportunities. And if it were only about psychology, no one would be good at it, because every investor has different, arbitrary, goals and markets would never coalesce around something objective.

Good investing is some part analytical and some part psychological. An art and a science. The trick is knowing when which skill is necessary, and how one affects the other.

Parts of investing are counterintuitive – like the prevalence of volatility, margin analysis, or moats repelling competition – and require data to understand. But there are things data can’t help with, like the tendency to embrace false narratives that justify your actions, or your willingness to throw your strategy out the window after the emotions of a big win or loss. Data doesn’t teach you about fear or patience, and psychology doesn’t teach you about discount rates and EBITDA.

The hard part is that analytics and psychology couldn’t be more different. One is rational and stable, the other makes no sense and changes all the time. One is numbers you can see, the other is emotions you can sort of feel, sometimes. Attacking a problem with two different skills is hard. But attacking a problem with two conflicting skills can make you question what you’re doing. And even harder is the frustration that comes from attacking an analytical problem with psychology, or vice versa.