Lesson 1: The Importance of Faith
Investing is as much about faith as it is about mechanics. As our access to data and models increases, I will borrow words that Tom Friedman used in a different context, and argue that the investing world is becoming flatter. It is not getting any easier to make money from investing and one reason may be that we have no faith in either our ability to attach values to companies, in the face of uncertainty, or in the market’s capacity to correct its mistakes. As a consequence, even those investors who are well versed in valuation mechanics are generally unwilling to act on the valuations that they generate, or when they do, to hold on to them in the face of adversity. Like many of you, I find myself getting impatient when the stock price does not correct quickly towards my estimated value on my investments and growing uncertain with my own judgment, if the divergence persists for months.
Lesson 2: There are no new investment lessons, just old ones to relearn
With superior resources and better investment education, we tend to think that we are not only more sophisticated than investors in prior generations but less likely to make the same errors in judgment. If only that were true ! Just as the skills that allowed the Romans to build the Pantheon were forgotten for a thousand years and had to be rediscovered by Brunelleschi, there are simple lessons that investors learned in past markets that we seem to forget in new markets. Each time we make collective mistakes as investors and there is a market correction, we are quick to say "never again" only to repeat the same mistakes many years later.
Lesson 3: Art and Science
Are you an artist or a scientist? An engineer or a poet? We live in an age where we are asked to pick sides and told that the two cannot co-exist. In the last few years, I have argued not just for a truce between the two sides but also for more engagement, a marriage of numbers and narrative in valuation and investing. There is no divide between art and science. It is a lesson that we seem to have forgotten over time, as we force people to choose sides in a battle where there are no winners.