It is amazing how many people focus on being smart than avoiding stupidity. One could be the smartest person in town, but if they keeping making silly mistakes, eventually the mistakes pile up enough to waste a smart decision. This is even more true in investing. I am one of those people trying to be smart instead of avoiding mistakes. This reminds me of an article I read a long time ago about the findings of a scientist and statistician Simon Ramo.
What we learn from tennis
What Ramo found was that in amateur tennis, the person who makes fewer unforced errors has a better chances of winning. Unforced error in tennis is when a player makes a mistake of their own doing. A forced error on the other hand is when when a player could not play because of the brilliant play by the opponent. In the first case (unforced error) the person is in control of the outcome. In the second case there is nothing much they could have done. Ramo observed that ordinary players can win by making less unforced errors instead of trying to play brilliantly.
What this tells us is that if you are an amateur player, you should concentrate on returning the ball back to the opponent’s side of the court. As long as you can keep it inside the court even if the ball goes straight back to the opponent it is still better than trying to outsmart them with fancy shots which might miss the court. Let the other person make unforced error. Your worry should only be to avoid mistakes, not showing brilliance.
Of course in professional tennis, the skill matters way more than unforced errors. Expert players have such great skill that they can keep rallying back and forth forever. These exceptionally talented players rarely make unforced errors. It is a winner’s game where 80% of the points are won by skill while in the case of amateurs 80% of the points are lost due to stupidity.
How it applies to investing
Like in tennis, so too in investing, it is always better to avoid mistakes than to be smart unless you are a expert investor. But even in the case of an expert, sticking to avoiding mistakes is far more important than seeking brilliance. Instead of looking for the best mutual fund or stock to invest in, put that effort into following your plan. The market is not in your control. What is in your control is the amount of savings and the discipline to invest through ups and downs of the market. Follow your asset allocation and look for ways to increase income. Those are in your control.
It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.Charlie Munger
I have seen many investors trying to find the best fund to invest in. They are looking to maximize the returns. But today’s best fund could be tomorrow’s dud. Then they want to get out of the fund to another good fund. This is an endless cycle that will just accumulate tons of funds into your portfolio which eventually becomes unmanageable. Isn’t it better to just invest in a good index fund at that point? Of course I am not suggesting investing in an index fund. What I am suggesting is that you should put some effort in finding a good fund, which is the planning part. Then, stick to it, which is following your plan. And following a plan is where most people fail which eventually drags down the returns. Doesn’t that defeat the whole purpose of maximizing your returns which is where you started?
Mistakes I made
I am writing this post as if I am immune to it. But I am not. Behavior problems are ubiquitous. In the past and still in the present I have been guilty of making several stupid mistakes in investing. For one, I thought I was an expert at stock picking and picked a stock that went bust. I invested quite a bit and lost more than 50% of the value.
Another mistake I made was to look for excessive returns and that too in debt mutual funds. Eventually I invested in the now closed Franklin Ultra Short-term funds. I should have at least exited it when I realized that there was some trouble brewing, but I did not. Eventually a whole chunk of money got locked when I needed the most during the COVID times.
Currently I am running an experiment where I try to change the asset allocation based on how I perceive the market. No one knows for sure if this will work in the long term. So far I neither did better or worse than a fixed asset allocation. Only time will tell if this is another mistake.
It is better to avoid stupidity than exhibiting brilliance in the long run, especially when it comes to investing. It is not something that we can change in a day but I am working on it. When I look back I see a lot of people both in school, college and work who avoided making mistakes live a better life than those who try to overachieve and make mistakes. Minimize your unforced errors.