Quotes of the Day: Bedeviling thinking pattern…

While establishing the format for our lengthy year-end client letter, I’ve decided to kick things off with 3 analogies I’ve offered up over the past 3 years to help folks understand what inspires and drives our disciplined approach to markets.

As I searched for blogposts that featured the ones I’m after, I stumbled across the following from a past “Quote of the Day.” 

In a nutshell, Annie Duke captures what I view to be probably the greatest, albeit hidden, danger that more than any other explains how too many folks ultimately fail at the game (the art) of investing.

It’s the too-often destructive (eventually) — at times devastating — belief that short-term positive results always stem from quality decision-making:

“…as I found out from my own experiences in poker, resulting is a routine thinking pattern that bedevils all of us. Drawing an overly tight relationship between results and decision quality affects our decisions every day, potentially with far-reaching, catastrophic consequences.”

Here’s the close from our own basketball analogy, which drives home that point:

We can sum up investing as follows. There are:

1. Good investments that make money.
2. Good investments that lose money.
3. Bad investments that lose money.
4. Bad investments that make money.

#1s are great.

#2s are fine, unavoidable, and possess a livable probability rate.

#3s, while costly, are the most predictable and, therefore — being costly — should be readily avoided.

#4s: I can’t think of a worst case scenario than a new investor hitting a #4 right out of the gate. The perverse feedback from that experience could absolutely send him or her to the poorhouse — as he or she might think that he or she’s discovered a high probability investing method and chalk up the subsequent string of losses to rotten luck. I.e., believing what are in reality #3s to be #2s. The emotional imprint from that early “success” may indeed last longer than his or her capital.”

I fear that the record crowd of newbie investors may be unwittingly taking on huge #4 risk, as the powers-that-be desperately pound liquidity into financial markets, and as Wall Street houses self-servingly cheer them along…

Time will tell…

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