Practice Humility

“𝘐𝘵 𝘢𝘪𝘯’𝘵 𝘸𝘩𝘢𝘵 𝘺𝘰𝘶 𝘥𝘰𝘯’𝘵 𝘬𝘯𝘰𝘸 𝘵𝘩𝘢𝘵 𝘨𝘦𝘵𝘴 𝘺𝘰𝘶 𝘪𝘯𝘵𝘰 𝘵𝘳𝘰𝘶𝘣𝘭𝘦. 𝘐𝘵’𝘴 𝘸𝘩𝘢𝘵 𝘺𝘰𝘶 𝘬𝘯𝘰𝘸 𝘧𝘰𝘳 𝘴𝘶𝘳𝘦 𝘵𝘩𝘢𝘵 𝘫𝘶𝘴𝘵 𝘢𝘪𝘯’𝘵 𝘴𝘰.“ – 𝘔𝘢𝘳𝘬 𝘛𝘸𝘢𝘪𝘯

Practicing humility is one of the most underrated traits. Humility is proportional to your depth and breadth of knowledge and ignorance is to overconfidence.

The more you gain knowledge, the more you realise how much you don't know and more humble you become. You realise there are so many variables that can move the needle and that you are not even aware of. You can't prepare for all the events that can happen in your life. The role of randomness in life is often overlooked. We can only have some influence over variables that are within our control and you should know that most variables are not within our control.

The country and family you are born in, people you will meet, impact of geopolitics, natural disaster, diseases you may encounter, accidents that can happen. I can go on and on. You don't have control over all these. But they will add randomness in your life. Yes, we can focus on the things that are within our control. We can try our best from whatever position we are in to make the best out of our lives. But realising that most of the variables in our lives are not within our control will help you build realistic expectations. You will be surprised less often. You will not be sure of something that you can't be so sure of.

So, what does this perspective of life have to do with investing?

Well, investment is not immune from the fundamental nature of life and the world. In fact, the business of forecasting should be the most humbling. You will be wrong all the time. When you think of investing in a business, you try to figure out the value by forecasting its future cash flows. How can you increase your odds of success when the future is uncertain?

Here are few helpful practices that you can adopt:

𝗦𝘁𝗮𝘆 𝗶𝗻 𝘆𝗼𝘂𝗿 𝗰𝗶𝗿𝗰𝗹𝗲 𝗼𝗳 𝗰𝗼𝗺𝗽𝗲𝘁𝗲𝗻𝗰𝗲 𝗮𝗻𝗱 𝗲𝘅𝗽𝗮𝗻𝗱 𝗶𝘁 𝘄𝗶𝘁𝗵 𝘁𝗶𝗺𝗲: You can only know few businesses deeply. You can’t predict them accurately, but by studying them deeply you can try to increase your odds of success. When you go beyond your circle of competence, you lower your odds of success.

𝗣𝗿𝗲𝗱𝗶𝗰𝘁 𝘁𝗵𝗮𝘁 𝗮𝗿𝗲 𝗽𝗿𝗲𝗱𝗶𝗰𝘁𝗮𝗯𝗹𝗲: Businesses with few drivers that move the needle are easier to study and predict compared to the businesses that have too many variables. Look for simpler business models or when you look at complex businesses, try to bring as many variables as possible under consideration to increase the predictable surface area.

𝗜𝗻𝗳𝗼𝗿𝗺𝗮𝘁𝗶𝗼𝗻𝗮𝗹 𝗲𝗱𝗴𝗲: You may have some sources of information that most others don’t have. You can look at businesses in those areas and utilise informational edge to have a contrarian view.

𝗪𝗶𝗱𝗲𝗻𝗶𝗻𝗴 𝗺𝗮𝗿𝗴𝗶𝗻 𝗼𝗳 𝘀𝗮𝗳𝗲𝘁𝘆: Nick Sleep and Qais Zakaria, who managed Nomad Partnership and turned $1 of their investors to $10.21 in a span of ~12 years, had a rule of buying stocks at 50% less than their estimation of intrinsic value. They tried to expand their room for error by applying this rule in buying decision. This is margin of safety. By widening the margin of safety, you can expand the room for error that you can endure. You can find such margin of safety only in bearish market.

What if you don’t find any stock that is trading 50% (you can choose your own %) less than their intrinsic value. Either you wait or you can take on higher risk accepting the fact that now the room for error is narrower.

Ensuring margin of safety in a bullish market becomes narrower. When you accept the fact that you can be blatantly wrong in predicting the future, try to minimise the cost of being wrong by avoiding bullish crowded market. Pick the time when nobody is buying.

𝗜𝗻𝗰𝗿𝗲𝗮𝘀𝗲 𝗶𝗻𝘃𝗲𝘀𝘁𝗺𝗲𝗻𝘁 𝗵𝗼𝗿𝗶𝘇𝗼𝗻: Stock can trade below the intrinsic value for years. To increase your chances of generating expected return from the stock, you can increase your investment horizon. It will reduce the probability of realising losses too early.

𝗔𝗰𝗰𝗲𝗽𝘁 𝘄𝗵𝗲𝗻 𝘆𝗼𝘂 𝗮𝗿𝗲 𝘄𝗿𝗼𝗻𝗴: In predicting the future, you will eventually know if your chances of being right is narrowing or expanding as more truths unfold with time. With more new evidences, update your thesis. Let your ego out of the way. You don’t need all your investment picks to be the winners. You only need few winners to take care of your overall portfolio return.

Practicing humility in your investment process will lower your probability of making fatal mistakes and increase your odds of success.