Good things taken too far can be dangerous

Morgan Housel reminds investors that good things can be taken too far – helpful at one level and destructive at another. They can be more dangerous than bad things because the fact that they’re good at one level makes them easier to rationalize at a dangerous level. A lot of things work like that, don’t they? Good things – praise-worthy things – that in a high enough dosage backfire and become anchors?

A few Housel sees in investing:

1.    Contrarianism is great because the masses can get it wrong. But constant contrarianism is dangerous because the masses are usually right. Identifying and avoiding times when millions of people have been derailed by bad incentives and a viral narrative is a wonderful thing. Most investment fortunes come from a bout of contrarianism. But a larger group of investors has turned contrarianism into something closer to cynicism. Their contrarianism is constant – at all times, for all things. The quirk is that if you survey the list of extraordinarily successful investors, entrepreneurs, and business owners, virtually everyone has been a contrarian. But none – not a single one – is always a contrarian. There’s a time to bet against mass delusion, and (more frequent) times to ride the progress that comes from billions of people collectively searching for the truth.

2.    Optimism is great because things get better for most people over time. But it’s dangerous when twisted into the belief that things will never be bad, which is never the case. A lot of people pick optimism because they rightly, correctly, get excited about the long history of progress mixed with confidence in their own skills. But when optimism is taken so seriously that it assumes things will never be bad – that every period long or short will work out in your favour – it turns into complacency. It encourages leverage and promotes denial. It leaves you without backup plans. Worst, it causes you to wrongly second-guess your long-term optimism when faced with an inevitable setback. You can be right about optimism in the long run but fail to ever see it because you overdosed on it in the short run.

3.    Being open-minded is great because the truth is complicated. But being too open-minded backfires because objective and immutable truth exist. Every smart attempt to be open-minded has to be accompanied by a strong nonsense detector. The detector should go off when any of a handful of laws are violated when the author’s incentives favour an outcome, and when a complex answer is given if a simple one would suffice. You have to be firm enough in your views to make confident decisions while being open to new views in a way that lets you occasionally update and change those decisions. “Strong beliefs, weakly held” as they say.