September is the month when cohorts of fresh-faced young graduates descend upon the City of London to begin careers as professional investors – usually as analysts charged with coming up with stock ideas for portfolio managers.
Ever willing to help, here on The Value Perspective, we thought we would offer three pieces of advice that, while important, are unlikely to have been mentioned in any official induction sessions.
1. Get used to being wrong – you are your own worst enemy.
When you come up with an investment idea, your portfolio managers are going to want you to express your conviction in it – but on no account let this desire lead you to have an inflated level of confidence in what you believe.
The reality is that, if you are right even 60% of the time over your career, you will be among the top 20% of investors – and you will still be wrong almost half the time.
In his 2012 book Measurement, Paul Lockhart has some advice for budding mathematicians that holds just as true for investors.
“Now, there is a certain obnoxious type of mathematician who simply cannot allow false statements to be made at any time.
"I am not one of them. I believe in making a mess – that’s how great art happens.
“So your first essays in this craft are likely to be logical disasters.
"You will believe things to be true, and they won’t be. Your reasoning will be flawed. You will jump to conclusions. Well, go ahead and jump. The only person you have to satisfy is yourself.
"Believe me, you will discover plenty of errors in your own deduction. You will declare yourself a genius at breakfast and an idiot at lunch. We’ve all done it.
“Part of the problem is that we are so concerned with our ideas being simple and beautiful that, when we do have a pretty idea, we want to believe it.
"We want it to be true so badly that we don’t always give it the careful scrutiny that we should. It’s the mathematical version of ‘rapture of the deep’.
"Divers see such beautiful sights that they forget to come up for air.
“Well, logic is our air, and careful reasoning is how we breathe. So don’t forget to breathe! The real difference between you and more experienced mathematicians is that we’ve seen a lot more ways that we can fool ourselves. So we have more nagging doubts and therefore insist on a much higher standard of logical rigour.
"We learn to play the devil’s advocate.”
In the world of investment your brain is not always on your side and, without some sort of framework to keep you both honest, it is going to do everything it can to convince you you are right – even when you are wrong.
Even experienced investors do not always realise how they are fooling themselves but try and remember – convictions are for convicts, not investors, so learn to be sceptical about what you think you know.