How to Successfully Invest for the Long Term
“We’re blind to our blindness. We have very little idea of how little we know. We’re not designed to.” – Daniel Kahneman
Humans crave assurances. We want others to confirm our biases and tell us the future is certain when it certainly is not. CNBC wouldn’t be popular if analysts got in front of the camera and said: “markets might go up tomorrow, but we’re really not sure.” Instead, they speak with conviction that tries to assure viewers and make speculation seem like prophecy.
To be a successful long term investor, it is important to understand that the “gurus” in the financial media are not that different from everyone else. Sure, there will always be the Ray Dalio’s of the world who tend to get it right more than the average speculator. But that doesn’t mean he will be right next time, or that any bet on the future can be made with 100% certainty. (for what it’s worth, Dalio is saying we are at a late 1930s moment in the U.S.).
I’m not going to make any specific investment recommendations in this article; good investing rarely occurs when you try to copy someone else. Instead, I am going to go through three basic principles, based mostly on writings from Daniel Kahneman, on how to invest with an endured time horizon.
Understand What You Know for Certain
The only thing in life that is certain is uncertainty. Expect the unexpected. The only things guaranteed in life are death and taxes (unless your Amazon). There is an endless supply of sayings that sum up the ambiguous world we live in.
Understand that there is risk wherever you put your money. The amplitude may vary, but it is never zero. Just think if there was a true “zero-risk” security. Why would anyone ever sell it? Our financial systems run on risk, and thinking you can somehow avoid it is plain ignorant.
With that being said, here are some trends I’d bet on continuing over the next 100 years:
Investors will tend to follow the crowd.
The planet will continue to warm.
Low fees will beat high fees.
Information will become more accessible.
Humans will search for purpose in their lives.
Good results will validate irrational decision making
Understand that Facts Change over Time
Generally accepted facts have a fickle way of eventually getting disproven. Why this happens is a complicated question but it probably stems from the idea that our brains “crave certainty and avoid[s] uncertainty like it’s pain.”
If you lived in 1900 you probably thought smoking cigarettes was healthy, that there was a mysterious, ubiquitous ether in the universe, and that babies don’t feel pain. All three are ridiculous sounding now but were commonly accepted practices only a few generations ago.
It is highly likely humans will look back at the early 21st century (especially any tweets before 2012) in disbelief, just like we do with our ancestors today.
Understand Basic Human Tendencies
Investors should (or need) to learn about basic human instincts and how our emotions, state of mind, and past information can affect our actions. Why? So they understand their natural biases when looking at investments and try, as hard as possible, to suppress these biases.
Humans act differently when the brain is under cognitive strain. We tend to make fewer errors when in deep focus but are less creative.
System 1 (which is just a way to describe our automatic and unconscious brain) has trouble comprehending the quality of information it’s being fed.
The anchoring effect. Random numerical values of a quantity influence our estimates of that quantity. This can be easily seen in investing when traders anchor to a stock that had a high price in the past when that has no bearing on what the future holds. It is also probably what people buying Bitcoin are thinking right now.
Adding details can make a story more persuasive, but has no bearing on its validity.
Things (and investors) tend to regress to the mean. Doesn’t mean someone can’t outperform the market but they will be working against historical evidence.
We tend to base projects, business plans, and most definitely stock predictions on best-case scenarios. Realize we are all improbably optimistic about our choices and predictions.
The endowment effect. This is the proven theory that we put more value on things if we own them. Investors should think about this when evaluating what stocks they own.
So, there you have it, my thoughts as a novice on the best ways to think about investing for the long term. Please let me know if you have any other tips, or disagree with any of my points, in the comments below or on Twitter @marketsbros. Stay patient and please, stop listening to the pundits on CNBC, they don’t know anything more than you do.
Disclosure: The author is not a financial adviser, and may have an interest in the companies discussed.