To investors who have had success in the market, investing may start seeming easy. You buy, the security price goes up, you sell. Easy.

Mistaking luck for skill will make an investor confident in his own abilities. Confidence, in this case, may be synonymous with over-confidence, a cognitive bias that inevitably leads to permanent loss of capital.

The overconfidence effect is a well-established bias in which a person’s subjective confidence in his or her judgments is reliably greater than the objective accuracy of those judgments, especially when confidence is relatively high.

In an interview with The Manual of Ideas, Brad Hathaway reflected on the difficulty of obtaining true “edge” in investing. According to Hathaway, while it is possible to develop an edge over other investors, it is far from easy.

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At the 2016 annual meeting of Daily Journal Corporation, Charlie Munger responded to a question about his “favorite” mental models as follows:

[pullquote align=”right” cite=”” link=”” color=”” class=”” size=””]Anybody who finds it easy is wrong.[/pullquote]

…we’re always talking about multiple models, and that means I have many. That’s the nature of reality. There’s no way that it can be easy. You are all in the investment business – do you find it easy? Anybody who finds it easy is wrong. You are looking at an illusion. Occasionally you’ll get an easy one, but not very many. Mostly it’s hard. How many people find it hard? (Most of audience raises hand.) [source]

Howard Marks, who shares an intellectual kinship with Munger, has commented at length on the illusion of ease in investing:

What Charlie and Professor Galbraith meant is this: Everyone wants to make money, and especially to find the sure thing or “silver bullet” that will allow them to do it without commensurate risk. Thus they work hard (actually, study is intense), searching for bargain securities and approaches that will give them an edge. They buy up the bargains and apply the approaches. The result is that the efforts of these market participants tend to drive out opportunities for easy money. Securities become more fairly priced, and free lunches become harder to find. It makes no sense to think it would be otherwise.

[pullquote align=”right” cite=”” link=”” color=”” class=”” size=””]Anyone who finds it easy is stupid.[/pullquote]

And what about the next seven words: “Anyone who finds it easy is stupid”? It follows from the above that given how hard investors work to find special opportunities, and that their buying eliminates such prospects, people who think it can be easy overlook substantial nuance and complexity.

Marks digs deep into this topic in a memo entitled, It’s Not Easy:

[pdf-embedder url=”http://latticework.com/wp-content/uploads/2016/02/Howard-Marks-Its-Not-Easy.pdf”]

 

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Full Conversation with Brad Hathaway

The following in-depth interview is entitled, “How to Construct a Sound Investment Thesis”.

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