You can succeed intellectually, physically or emotionally. The intellectual way is how we would all like to succeed: being so smart that we understand things more clearly and see farther ahead than every other investor. The pre-eminent example, obviously, is Warren Buffett. But people like him are very, very, very rare. The physical way to succeed is simply to work harder, to start at dawn and grind away till midnight and carry home a heavy briefcase full of research and keep working right on through the weekend too. This way is the most popular on Wall Street, where nearly everyone seems to try it. And for some of them, this way works — well, I can’t say I’ve met many people for whom it actually works, but they must think it does, or they wouldn’t keep trying so hard.
The third way to succeed as an investor is difficult emotionally. When that seductive fellow Mr. Market comes around, you have to pay absolutely no attention to him, no matter what happens. You have to control your emotions, and most of the time that means the best thing to do is nothing. If you can’t control your emotions, being in the market is like walking into a heated area wearing a backpack full of explosives.
I’m not smart enough to succeed the intellectual way, and I can’t work hard enough to succeed the physical way. But the emotionally difficult way takes very little time and makes no intellectual or physical demands on you at all. Statistically, judging by how the public invests, most people don’t like the emotionally difficult path. Then again, more and more people are trying it; the amount of money in index funds has been rising year after year. The emotional path is the only reliable way that I know of to succeed.
WALL STREET’S WISEST MAN
Successful investor … must posses an interest in the process. It’s no different from carpentry, gardening, or parenting. If money management is not enjoyable, then a lousy job inevitable results, and, unfortunately, most people enjoy finance about as much as they do root canal work.- William Bernstein
Gambling and Investing
Investing is an action that defers consumption in the present in the hope that you will be able to consume more in the future. An investor has an expectation of a positive real rate of return, even though it is possible that this will not happen (especially in the short run). In other words, an investment is a net present value-positive activity (the likelihood of the net present value of the potential benefits minus the likelihood net present value of the potential losses is positive).
Gambling is a form of present – moment consumption, and the net present long-term value of the activity is negative. Many people who think they are investing are actually gambling.
Some people try to outperform the market by saying essentially “ I can be smart about picking other people who will outperform the market via active investing.” Munger believes that if something related to active investing is worth doing, then it is worth doing yourself.
Munger has said on this point:
I think you’ll at least make fewer mistakes than people who think they can do anything, no matter how complex, by just hiring somebody with a credible label. You don’t have to hire out your thinking if you keep it simple.
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