Pembridgecap

A Wealth Creation Journal

Why is successful investing so hard?

I am fascinated with the notion that investing is “simple but not easy”. The principles of investing look deceitfully simple, buy low and sell high, while the execution of these principles can be hellishly hard. And the execution is hard because the process of learning and improving from the mistakes in investing does not work in the same way as it does with other activities such as sports.

First, unlike most sports activities, investing lacks an immediate feedback loop where the outcome of an investment decision is presented at once and mistakes analysed. One must, sometimes, wait for years before knowing the outcome of an investment decision which meant useful learnings and improvements potentially come on the back of a string of mistakes. It is the equivalent of trying to improve baseball batting skills but only knows the result of each bat one year later.

Second, the quality of the feedback is very weak as the investment outcomes do not always reflect the strength of the investment decision, i.e. one can be right for the wrong reasons or wrong for the right reasons. The inability to determine the precise causes for a particular investment outcome is very dangerous as one can put huge confidence in the wrong lessons learnt. It is analogous to practising basketball shots in the dark. One would have to rely solely on the sound of the basketball hitting the rim to determine how much more or less strength to apply for the next time. The lack of information for shot calibration impedes the basketball player’s rate of improvement.

Third, most lessons in investing have nuances and contexts such that they can only be applied to certain conditions and environments. In another word, these lessons are seldom generalised. The trick here is to balance between following the broad prescriptions of investment lessons but also able to recognise the exceptions to the rule. For example, a shrewd investor would rightfully conclude that based on historical precedents to avoid heavy-indebted companies is a wise thing to do. However, John Malone’s TCI supported by its steady cash flow is heavily indebted, but it turned out to be a great investment.

Fortunately, we stand on the shoulders of giants today. We can study the life of great investors and learn from their success and mistakes. We can observe the rise and fall of companies to find patterns. However, there is no better way to learn and grow as an investor than to work alongside like-minded and very accomplished investors.

TC & MC

1 Comment

  1. Very insightful thoughts

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