6 Insights for Investors From the Best Essay Ever Written


My favorite essay in American literature is Self-Reliance by Ralph Waldo Emerson. Each line, it seems, contains a valuable insight that is applicable to my life in some way.

I thought Emerson's knack for expressing universal truths in memorable prose might be especially useful for investors. Here are six thought-provoking quotes from the essay that may help you in developing your investing temperament.

1. "Whoso would be a man must be a nonconformist." Truly enlightened men and women should think for themselves, according to Emerson. They mustn't rely on conventional thinking, which is often based on error. He admits that he's "ashamed to think how easily we capitulate to badges and names, to large societies and dead institutions."

Being a nonconformist also seems essential for becoming a successful investor. The great Howard Marks, chairman of Oaktree Capital, illustrates that point perfectly in a recent client memo titled Dare to Be Great II. He argues that investors "can't take the same actions as everyone else and expect to outperform." If your portfolio is the same as everyone else's, you might do well or you might do poorly, but you "can't do different."

Outperformance requires unconventional thinking, and for that, investors need to think differently from the crowd. In order to be different, Marks suggests investors buy things others haven't found or don't like or find too risky. Or they might concentrate heavily on a few ideas. He also recommends being wary of market darlings.

For Marks, "everything that's important in investing is counterintuitive, and everything that's obvious is wrong." He ultimately believes that "unconventional behavior is the only road to superior investment results." In other words, superior investors are nonconformists.

2. "Trust thyself: every heart vibrates to that iron string." This simple point is central to Emerson's essay. He believes that individuals should stop relying on others -- preachers, teachers, politicians, etc -- for their moral well-being. A lot of important things we need to know in life come from within.

I think this principle has a financial application as well. Regardless of whether you go it alone or seek out professional assistance, all of us must take final responsibility for the state of our financial affairs. Leaving it all to the experts can be expensive and can result in disastrous outcomes. Placing complete trust in Bernie Madoff – once a respected and successful leader in the investing world -- for example, seemed like a good idea until he was led away in handcuffs.

Always remember that financial professionals, at their best, are there to help you achieve your goals. At their worst, however, they'll try to enrich themselves at your expense. One way or another, you're the boss when it comes to your portfolio. That means educating yourself about fees, retirement accounts, and a variety of other issues. For this you need to trust yourself -– everyone else should be viewed with a healthy dose of skepticism.

3. "A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines." Emerson feels that "great souls" embrace flexible thinking. If you believe something is true today, you mustn't fret about the fact you thought it was false yesterday. And you shouldn't care what others think of such flip-flopping, either.

I've always felt the best investors had similarly nimble minds and don't feel the need to double-down on being wrong just because they were wrong in the past. That might sound obvious, but we see people adding money to flawed investments all the time. Mistakes are a huge part of investing, so owning up to them early and then moving on seems like a sensible approach to take.

There's even academic research in support of such flexible thinking. In a study of political forecasting, the author Philip Tetlock found that those forecasters who were tolerant of ambiguity and uncertainty performed better than those who were convinced they were right on any given issue. The need to always "be right" can be very expensive for investors, though to be fair, it might also result in a lot of CNBC appearances.

4. "To be great is to be misunderstood." Emerson warns that anyone who is truly an original thinker will be misunderstood. But he doesn't think that's a bad thing at all, noting that Socrates, Jesus, Galileo, and Newton were all misunderstood. Apple's famous Think Different ad, of course, offered a similar insight.

Some of the highest investment returns often come from businesses that were misunderstood by the market at some point. Whole Foods (NASDAQ: WFM  ) is a perfect example of this phenomenon, I think. On a recent conference call, the company's co-CEO and founder John Mackey remembered a time when analysts questioned whether his business "had any legs at all." One analyst even said "you guys are a bunch of hippies selling to other hippies." Nowadays, of course, Whole Foods is a proven concept with a market cap of $14 billion. Who knew hippies were such a lucrative market?

5. "The voyage of the best ship is a zigzag line of a hundred tacks." Emerson observes that our lives are made up of numerous choices, many of which may appear to be contradictory on close inspection. Looked at from a sufficient distance, however, the trajectory of one's life "straightens itself to the average tendency."

This insight is helpful for investors, when looking at their portfolios over time. Decisions and results will appear uneven up close. Over the long term, however, a wise investing strategy will yield an upward trajectory, regardless of the short-term ebbs and flows.

6. "Nothing can bring you peace but yourself. Nothing can bring you peace but the triumph of principles." The first sentence here is obvious -- the whole essay is a meditation on the concept of self-reliance, after all. In the second sentence, he's warning us to avoid relying on chance and randomness. Referring to "Fortune" Emerson writes "most men gamble with her, and gain all, and lose all, as her wheel rolls."

Sound investing isn't like spinning a roulette wheel. Rather, it requires a battle-tested process that will allow you to achieve your goals over a long time frame. I like this quote because it underlines that each of us is  responsible for ourselves -- whether it's our mental well-being or our financial future. That's a simple but powerful takeaway from one of the finest essays in American literature. 

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  • Report this Comment On May 31, 2014, at 11:58 PM, Mega wrote:

    "The voyage of the best ship is a zigzag line of a hundred tacks."

    Is the analogy anachronistic? Does tacking really apply that well to life (and investing) outside of sailing? These days we are well aware that the most effective way to get somewhere is to fly directly.

  • Report this Comment On June 01, 2014, at 2:36 PM, MikeBorchardt wrote:

    Thank you for the Emerson quotes. This has inspired me to pull out the "Complete Writings" book I bought a few years ago and begin reading it -- starting with the "Self-Reliance" essay of course. I was amazed to find another quote I had jotted down years ago after a co-worker had mentioned it. In fact it's one you've included above about "A foolish consistency..."!

    I appreciate the encouragement here to be an independent (foolish) thinker. As I look to retire in the very near future, I'm getting ready to put my funds' rollover plan into its final draft. This will be a culmination of talks with financial advisors, countless online articles, books, etc. I am feeling confident to trust myself as I tune in to the "vibration" of that "iron string".

  • Report this Comment On June 01, 2014, at 3:10 PM, TMFBane wrote:

    @MikeBorchardt,

    I'm glad you enjoyed the quotes! And congrats on putting your plan together. It sounds like you are doing all the right things. Emerson's great for a bit of inspiration every once in a while.

    Fool on!

    John Reeves

  • Report this Comment On June 01, 2014, at 8:57 PM, duuude1 wrote:

    Hi Mega,

    This afternoon, I had a conversation with my 8-year old daughter about people not saving for tough times when things looked good now but running into trouble when those good times stopped and what lesson did that sound like - and she replied that it sounded like the grasshopper and the ants story from Aesop's Fables...

    Some lessons are timeless.

    In life and in business, none of us are equipped with a jet and can take your direct flight. We all have, at best, a leaky sailboat on rough seas. And the hundred tacks sounds to me like wisdom of the highest caliber.

    Some of the best business minds of our generation include Jeff Bezos, Reed Hastings, Steve Jobs (you can fill in your own heros)... and the paths each of their companies (and lives) have taken look to be better described by Whitman's anachronistic hundred tacks than your direct flight.

    If there were no competitors, impeding regulations, reluctant customers, antagonistic environmental groups, local taxes, international trade barriers, rapidly evolving technology, and Rumsfeld's unknown unknowns... of course a direct flight makes sense. But that's not the world we live in.

    And so we need captains who can steer nimbly and tack a hundred times - but who can keep their eyes firmly on the long-term goal...

    I'm all for rapid evolution and being on the cutting edge - but I also think that some of the wise men of old did have it right and that their wisdom is not anachronistic.

    Duuude1

  • Report this Comment On June 05, 2014, at 4:41 AM, nijkerkpig wrote:

    Inspiring, in an American, pull-yourself-up-by-your-own-bootstraps sort of way, but ignores the fact that you simply cannot do "it" alone. Your success is rooted in those around you and a deep relationship to God. That relationship is the "triumph of principles" and what gives meaning, purpose, morality, and charity to a life; that brings "peace".

    Having written this, perhaps I am just reinforcing the premise of the article since my "non-conformist" post is liable "not to be understood" by some of you!

  • Report this Comment On June 08, 2014, at 5:06 PM, Lishster wrote:

    @Duuude1,

    Great comment!! I wish there was a way to rec it!

    Lishster

  • Report this Comment On June 12, 2014, at 9:27 PM, BillFromNY wrote:

    As an undergraduate English major I was exposed to Emerson and Thoreau. In fact I think we even studied them in high school. I thought that Emerson had some wonderful turns of phrase ("A foolish consistency is the hobgoblin of little minds") but that he was one of the largest egotists in the land.

    Who was he to instruct all men on how to live their lives? I would rather hear it from an Alexander Hamilton or Benjamin Franklin or Abe Lincoln or some one else who changed history. What did Emerson accomplish in his life? He is probably not even taught any more since school curricula had to make room for Bobby Seale and Malcom X and Gloria Steinem.

    That said, it is an impressive piece of writing and makes one want to aspire to fulfill Emerson's expectations.

  • Report this Comment On June 13, 2014, at 7:28 PM, gordonsgold wrote:

    Someone once told me years ago that the definition of a "non-conformist" is "conformist" conforming to the prevailing standard of non-conformity.

    Anyone know who or whom actually said that?

    Gordon

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