5 Investing Concepts That Are Counterintuitive

The Greater Your Skill, The More Luck Matters

In any activity that involves both skill and luck, such as investing, as skill increases the vagaries of luck play an increasing role in the outcome. Financial author Michael Mauboussin describes this challenge as the Paradox of Skill.

It sounds counterintuitive, but it is explained this way: even if your skill is increasing, the skill of your competitors is likely also increasing (e.g., the average investor is a lot more skilled than they were decades ago). As everyone’s actions and performance become more consistent, luck becomes more and more important.

Think about a professional tournament poker player in a game with amateurs and later in a second game with other top-ranked professionals. Skill will help the professional win over the amateurs.

In the second game, since the skill level of all participants will be much closer to parity (all the professionals will know how to play each hand based on the odds), the actual cards dealt to them in any given hand (luck) will be of increasing consequence.

If you win on a large investment, in addition to patting yourself on the back for your investing prowess, recognize that luck also played a role. Over your investing lifetime, you will find there are no shortcuts. Growing your portfolio requires patience, discipline, and yes, luck.

Skill vs. Luck: Understand the difference and focus on what you can control. The amount of your monthly contributions and monthly withdrawals are two of the most important factors in your financial plan, and both are completely within your control. Bull and bear markets are luck of the draw.

See A Stock’s Price, But Don’t Be Blind To Its Value

We all know you can pay too much, even for a “good” thing. But it’s also true that there are very few assets that are so terrible that they can’t become a good investment when bought at a cheap enough price. In this regard, there are no bad companies, only mispriced ones.

“Cheap” doesn’t mean low price in absolute terms. It means low price relative to value. To determine “cheap” you need to understand that value and price are two sides of the same coin. And you need to evaluate both sides before making an investment decision. Buying “cheap” is the most reliable way to grow your portfolio.

Apple’s AAPL stock price is currently trading around $195, near its all-time high. Is this expensive or cheap? That determination depends on what its value will be over the next 3-5 years, not its trading price today.

On the flip side, Howard Marks, co-founder of Oaktree Capital, launched his career by buying the bonds of companies that were near to, or in, bankruptcy. Oaktree made a fortune investing in this so-called “distressed debt”—at the right price.

When The Market Is Down, You Are Eventually Up

If you are in the saving and investing stage with your portfolio, which would you prefer to happen to stock market prices:

(a) Go up (b) Go down (c) Stay flat

It is better to invest in stocks when the market is falling, not when it’s rising. As Warren Buffett has repeatedly said, whether we’re talking about socks or stocks, you should like buying quality merchandise when it is marked down. This makes complete sense in theory but can be quite hard to follow when making actual investment decisions.

One of the best years in the stock market was 1933 when the country saw unemployment hit 25%. It obviously didn’t feel good at the time, but the few investors who had the conviction to invest during the Great Depression reaped the reward. The same was true of the dot-com crash in the early 2000s, the financial crisis of 2008, and the COVID-19 induced drop in 2020.

For long-term investors, severe market downturns have proven to be the best times to invest. When stocks are ‘on sale’ head into the market not out.

You will earn higher returns on the cash you (wisely) invest into depressed markets. You just won’t see the results until after the down market recovers.

Following Market Forecasts Increases Risk

Stock market forecasts should be ignored. One study found that over a 20-year period, the average expert is “roughly as accurate as a dart throwing monkey.” (For a deeper dive on this point, see here and here). I’ll summarize by saying this: Don't fool yourself into thinking that forecasters have special insight into the future direction of the stock market.

Market forecasters are seldom right and even less frequently wrong—but how can that be, you ask? When their prediction proves false, they have two options, admit they were wrong, or move the goalpost. Most choose the latter.

One of the best equity market investors, George Soros, observed – My system doesn’t work by making valid predictions. It works by allowing me to recognize when I am wrong.

Simply put, the future is unknown and unknowable. And not only are we unable to predict the future, evidently, we can't even agree on what happened in the past.

During the 2008 Financial Crisis, was the debt debacle a result of the Fed’s loose fiscal policies, blind faith in complex financial instruments, the government encouraging lending to low-income borrowers, or was it just another example of a manic frenzy?

I don’t know, and I’m not concerned with figuring it out. Similarly, every single stock price fluctuation does not need an explanation or prediction. Don’t get bogged down in the guessing game that is short-term forecasting. Play the long game.

The next time you want to follow a prediction, even one with a compelling argument, ask yourself what you stand to lose if the prognosticator is wrong.

Following a dubious forecast about an unknowable future doesn’t diminish risk, it adds risk.

You Don’t Need More Than Average Intelligence

Some might go as far as to say that high intelligence is actually your biggest handicap. If brain power was the magic ingredient to successful investing, one might think that Nobel laureate college professors populate the Forbes 400 Richest Americans List.

Instead, a more than trivial number of the current/former Forbes 400 includes college dropouts. Larry Ellison dropped out of the University of Chicago. Michael Dell dropped out of the University of Texas. Bill Gates and Mark Zuckerberg dropped out of Harvard. Sergey Brin, Larry Page and Elon Musk all dropped out of Stanford. Steve Jobs left Reed College after 6 months. Ralph Lauren, Lady Gaga, David Geffen—all non-college grads.

I am not advocating for less education. In fact, more education is generally better, but do recognize that high intelligence does not have mystical power in driving wealth accumulation. Having a plan, applying discipline, working hard, and controlling emotions are equally important. The goal of higher intelligence should be enlightenment, but if not used properly, it can instead lead to overconfidence.

That’s why successful investors think more like poker players than scholars. They play the hand they are dealt. If they are dealt a good hand they increase their bet. If they get a not-so-good hand, they fold. As they assess this play/fold decision, they know how to evaluate probabilities and keep their emotions in check.

Howard Marks once said that he is convinced that everything that is important in investing is counterintuitive, and everything that’s obvious is wrong.

When it comes to your own wealth accumulation journey, if your ideas seem intuitive, you may want to take a second look.

As always, invest often and wisely. Thank you for reading.

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The content is for informational purposes only. It is not intended to be nor should it be construed as legal, tax, investment, financial, or other advice. It is merely my own random thoughts.