The Uncomfortable Truth

Jon wonders on his blog as to what’s the biggest determinant of investing success? Smarts, information, strategy, or skill are all worthy possibilities.

The market naturally triggers emotional responses that lead to mistakes. Those best equipped to handle those triggers are more likely to succeed. That shouldn’t come as a surprise. Most things in life worth achieving require mental toughness to get through the obstacles that are certain to arise. And investing is full of obstacles. For example, markets can trick people into thinking that investing is ridiculously easy. Raging bull markets, especially, create the illusion that you can earn returns without risk and get rich quick. But once the bull market ends, as they all do, the bear market that follows presents investing as a certain money loser. And to add insult to injury, the market spreads bull and bear markets out far enough for investors to forget how the last one ended.

It’s at these opposite extremes, the major turning points in the market, where the right temperament is in short supply but needed most. Successfully navigating major market turns requires a willingness to think and act against the crowd. Stock prices reflect the obvious, not the obscure.

If the crowd believes a bull market will continue, then it’s obviously already priced in. Which means anything that might disrupt that trend is not. It’s not even an afterthought in the most enthusiastic bull markets. But you can’t wait for the disruption to surface because once the trend breaks, once the crowd realizes it, then the selling begins, and it’s too late. So you have to be willing to be early. You have to be able to sell when prices are rising while the bull market seems endless. But you also must be willing to buy when prices are falling, while the bear market appears to only get worse. Both are difficult. (If it were easy everyone would do it. And if everyone did, the market turns would just happen sooner.)

The final twist in this saga is that betting against the crowd usually fails. It’s only at the turning points where it succeeds. Except, bull markets and bear markets don’t come prepackaged with expiration dates. Being invested during the length of a bull market is very profitable. Getting out early, while profits look good, is hard. Because betting against it, will certainly look wrong, but being wrong is costly. And few investors are willing to stomach that.

Jon concludes that to be successful you have to be independent and decisive, with the courage to appear wrong but ultimately proved right. That’s why the greats stand out. That’s the uncomfortable truth.

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