Arrogance vs Humility
Second essay of series on greyness of messy world & (seeming) contradictions that this leads to
It’s clear that investing is arrogant. Zero-sum game. I win, you lose dynamic on each transaction (it’s slightly more complicated as time-horizons can differ, but that nets out over time). Each side implicitly views counterparty as the sucker. As it’s a negative-sum game after costs, both may well be suckers. Contrarian, value-seeking (not cheapness seeking) investing is particularly arrogant. Buying an unloved business in gloomy times after a precipitous drop is a bet that consensus is the sucker.
It’s less clear that investing is humble. Investors are perennially on TV bullshitting about everything, not unlike clueless celebrities. Bull run & budget expectations. Sensex targets, structural shifts & secular trends. New normal & next big thing. Gratuitous advice for Sitharaman & Powell. Some of it is salesmanship, as appearing full of doubt isn’t good for AUM. That said, we seem as humble as media is neutral. But it gets better with a quality filter. Better investors are judicious about frequency and certitude of public prognostications. Best investors have a long history of humility: no idea where market is headed; no view on macro, currencies, commodities; too-tough bucket; “if you’re not confused, you don’t get what’s happening”.
So, what’s the right balance between humility and arrogance? My answer: imbalance, not balance. 99% humility, 1% arrogance. Humble towards messy world, arrogant towards buggy humans. Humility is default setting, arrogance is an exception, rare but necessary.
Most straightforward case for humility is as follows. Investing is a bet on the future. Future is unknowable. Buggy humans are disastrous forecasters. Ergo, we have good reason to be humble. This manifests itself in two ways. First, avoidance. Avoid basing decisions on unknowable (macro-type) variables lining up just right. Avoid situations where history suggests adverse odds. Avoid counting on a greater fool. Avoid aggressive assumptions. If you just can’t get comfortable, avoid even if popular. Despite years of trying, well over 90% of messy world falls under ‘avoid’. It feels like Irodov redux. Counter-intuitively, this percentage has increased, not decreased, with time.
Second manifestation of humility is caution. After separating attempt from avoid, it’s a long path from attempt to invest. This is all the stuff I usually belabor: history, industry, company, construct, prudent price, patience to wait for same. Cautiously tackling a fraction of what’s out there is an acknowledgment of our bugginess as well as world’s messiness. It’s common to attempt and give up if requisite conviction is lacking. Or to spend most of the time waiting for a forgiving price rather than investing. Net-net, it works out to over 99% humility, but I rounded down.
Arrogance comes at the very end, as a residual. After applying humility, avoidance and caution to whittle it down to a tiny subset, conviction is hopefully well-earned. While it’s nice to think that cold, calculation is enough, investing in extreme times needs a bit more. A dash of arrogance helps translate conviction into decisive, sizable action. Arrogance is more covert than overt. It’s the kind that warms the cockles of my passive-aggressive heart. It’s about: not seeking anyone’s opinion; deliberate indifference to opinions thrown my way; ignoring specific views (sell recos); ignoring general views (we’re all gonna die. Yeah, right); ignoring who counterparty is, or what his motivations are. After spending years and going through hoops to build depth in one narrow corner of investing, it would be sad to second-guess myself when it matters. Arrogance makes me secure about my conviction.
In summary, humility vs arrogance is a duality rather than a contradiction. A highly lopsided duality. While humility dominates, given unknowability of messy world, I wouldn’t underplay how crucial selective arrogance is. While humility staves off downside, there would be no upside without arrogance. Good batting is a mix of well-left outside off stump and dispatched long hop to the fence. At the highest level, it’s mostly the former.
PS. This essay touches on a related topic that’s part of my ‘Shades of grey’ series: how can we ever build adequate conviction if world is so unknowable. While full answer deserves a separate essay, short answer relates to what is meant by conviction. Even conviction is laced with humility in messy world. Conviction doesn’t mean that I’m right or I know what’ll happen. Conviction is a situation where I can do OK even if I’m (part) wrong.
Nicely written. Aligns well with Buffett's thoughts about developing a circle of competence and more importantly knowing the boundaries of that circle. And Munger's quote "“The wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don't. It's just that simple.” Key really is to know for yourself when you have that edge/odds and then act accordingly.
Thank you for brilliant post.
market is efficient most of the time except in extremes