Columbia Business School professor and investing guru Bruce Greenwald has said that you do not need to be right all the time to be a good investor. He has said that if you can get things roughly right 60 - 65% of the time, you’ll end up in the top 1% of investors.
That would mean superstardom. It also suggests that getting things right is pretty hard – and that you can get a lot of things wrong but still be okay if you’re generally more right than wrong.
But in investing, how do you know when you’re right or wrong? Dumb as it sounds, there are moments when you don’t know.
If you buy a stock and watch the price gap down, how wrong were you? If your stock surges to the sky, how right were you? More important, what do you do next?
To identify mistakes and learn from them and improve at an activity, you need meaningful, timely feedback. If you are learning to play soccer or the violin, you can get meaningful feedback immediately if you have good instruction. Plus, you will get the chance to practice thousands of repetitions incorporating that feedback.
But investing is not like that. First, in investing, feedback is seldom timely. It can take years to know if you’ve made a good or bad decision. Second, the feedback can be fuzzy because investing involves both skill and luck.
Michael Mauboussin has said that some activities involve mostly skill, some involve mostly luck, and many lie on the continuum in between. On the high-skill end of the spectrum is something like basketball, where outcomes usually align with skill level, and a more skilled basketball player usually beats a less skilled one. But as you move toward the luck-end of the continuum, the link between skill level and outcome starts to break down.
Investing is somewhere along this continuum -- requiring skill but getting entangled with luck. Mauboussin has said that one way you can tell how much skill and luck are involved is that in high-skill activities, you can lose on purpose. A good basketball player can lose on purpose. Good violin players can play terribly if they want. But putting together a portfolio that underperforms badly over a given time period? It’s not as easy as you might think.
It’s the long time scale and the fuzziness around outcomes that make it hard to assess how you’re doing. That has become very clear to me as I’ve been combing through the past investments we made that went wrong – and the investments we didn’t make that would have gone right. There’s a lot to learn from examining different decision points, but for now, this is what I can say:
First, we sometimes took actions in an attempt to correct what we thought were mistakes when we shouldn’t have done anything. We should have just let things be – so take action sparingly.
Second, even though there are moments when you cannot tell if you are wrong or not, the mistakes become clear after enough time has passed – sometimes glaringly so. So that means learning does happen.
And third, if learning is happening, that means there’s hope for getting better at investing after all – even if the learning is slow and the advances are incremental. Investing is a long game.