Updated: Dec 4, 2020
“Wouldn't economics make a lot more sense if it were based on how people actually behave, instead of how they should behave?” - Dan Ariely, Duke University professor & author
You played until you lost. Winners stayed on the court. It was the local 24 Hour Fitness, but the intensity felt like game 7 of the NBA Finals. Losing meant waiting for over an hour before getting back out on the court. You didn't want to lose.
Players came and went, but there was always a core group of ballers. They never missed an open gym. If you paid attention, you could pick up on player tendencies and use it to your advantage. There were a few guys you wanted taking shots if they were on the opposing team, even better if they made shots early in the game.
We call it "fools gold."
Fools gold meant a poor shooter making a three pointer early in the game. The success gave the player false confidence for the rest of the game. The emboldened player would usually hoist three after three; exactly what we would want to happen. The bricks would pile up and our side would cruise to an easy victory. Making the first shot, turned out to be a curse.
The losers would walk off the court. We scampered off to get a quick drink of water before the next game started.
The same paradigm exists in investing. Make a right investment call and you're bulletproof. You're encouraged to make other impactful decisions because you were right before.
Here's a real life example.
I was waiting on the tee box about to hit my shot, when my buddy blurts out...
"I'm thinking about going to 100% cash in my 401k before the election."
This friend ran a successful company and had done very well for himself. He's in his early 40s and his comments caught me off guard.
"Why?" I asked.
"I think the market is going to tank after the election. I can buy back in after the sell-off."
"I don't think that's a good idea, but not for the reasons you might think. The worst thing that could happen to you is being right." I said.
My friend just stared at me. Perplexed by my statement.
"Look, you're relatively young. If you're right, you'll likely make the same decision at some point down the line. You'll be armed with false confidence from being right previously. The stakes will likely be much higher as you get older."
For my friend, being right would have been fools gold (my friend ended up doing nothing). He would likely set himself up for failure down the road. Not because he's not a smart guy, but because he would be mistaking luck for skill.
I could play Tiger Woods ten times in a golf match. Tiger would wax me exactly ten times. His superior skill would win out every time.
I could play Phil Hellmuth heads up in poker for ten hands. Given the small sample size of hands and the role of luck in the short-term, it wouldn't be out of the question to win a few pots. I would be an idiot to conclude I'm one of the best poker players in the world.
This is exactly how skill and luck get crossed in investing. We get feedback, but it's full of noise rather than meaningful signals.
The opposite is also true. I spoke to a young couple that decided to sell all of their investments prior to the election. In hindsight, the decision turned out to be disastrous, but that's not really the point. The failure was in the process. Trying to jump in and out of the market is conditioning a lifetime of the wrong behaviors.
Hopefully, they learned their lesson and will embrace the power of patience, savings, and compounding to grow their nest egg.
Be careful about making large, impactful decisions outside of your long-term investment plan (if you feel compelled to trade, Scratch Your Degenerate Itch and keep your core plan on the rails). Many times, the worst thing that can happen is being right. There's an indistinguishable line between luck and skill in investing.