6 Insights for Investors From the Best Essay Ever Written

Emerson's essay "Self-Reliance" offers invaluable lessons for investors.

May 31, 2014 at 8:00AM

Final Emerson
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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