How to Get Less Stupid at Investing

A few weeks ago I shared a list of things I've learned about how stupid we all are. We're short-term thinkers, biased by politics, tempted to fiddle with our portfolios and overcomplicate simple tasks. All of us.

One reader responded: "It doesn't help to tell us we're stupid without recommending how to be less stupid. Be less of a jerk next time."

OK.

If you want to become less stupid at investing, one of the best things to do is surround yourself with people who disagree with you, and are in different emotional states than you are.

The process of becoming less stupid is different from the process of getting smarter. Getting smarter means learning things you didn't know before. You start from average and go up. Becoming less stupid is realizing that some things you already know are wrong. You start below average and try to get back to par.

People want to feel like they're making good decisions. The easiest way to get that feeling is to make friends with people who agree with you. But surrounding yourself with agreement doesn't teach you anything; in fact, it works wonders at reinforcing bad ideas and falsehoods. You only become less stupid by hanging out with people who think you're wrong. They're the ones who can point out the things you believe that just aren't true.

But doing this is hard. Kathryn Schultz, author of the book Being Wrong: Adventures in the Margin of Error, once explained:

The first thing we usually do when someone disagrees with us is we just assume they're ignorant. They don't have access to the same information that we do, and when we generously share that information with them, they're going to see the light and come on over to our team. When that doesn't work, then we move on to a second assumption, which is that they're idiots. They have all the right pieces of the puzzle, and they are too moronic to put them together correctly. And when that doesn't work, we move on to a third assumption: they know the truth, and they are deliberately distorting it for their own malevolent purposes. So this is a catastrophe.

It's a catastrophe because everyone knows that bad ideas and dumb behavior exist, but most assume it's a problem that afflicts other people, and that you are doing the right thing. If you don't surround yourself with people who disagree with you, you'll never realize that you are just as biased and wrong as everyone else -- and you'll keep making the same mistakes. This is why the average investor not only underperforms the market, but has been doing so for his or her entire investing life.

I attended an investing conference in Vancouver a few years ago. I didn't realize it beforehand, but the most of the speakers and participants were fanatical gold bugs. I expected a debate when telling everyone I didn't own any gold, but got something different: avoidance and pity. Few were willing to talk to someone who didn't believe in gold, and those who did felt bad for my ignorance. This made me realize the First Law of Financial Conferences: People think they go to conferences to learn something, but most often they go to have their beliefs confirmed and reinforced by others.

Study successful investors and I think you'll find the opposite approach. They not only accept differing views, but seek them out.

In his book Ignorance: How It Drives Science, Stuart Firestein writes that science eventually discovers the truth because it encourages doubt, uncertainty, skepticism, and questions. "Scientists don't concentrate on what they know, which is considerable but also minuscule," he writes, "but rather on what they don't know." And focusing on what you don't know is the only way to get better at something.

Berkshire Hathaway Vice Chairman Charlie Munger praises Charles Darwin for this reason. Darwin, Munger says, wasn't exceptionally bright, but he became a first-class scientist by spending his life trying to prove himself wrong. "One of the great things to learn from Darwin is the value of the extreme objectivity," Munger once said. "He tried to disconfirm his ideas as soon as he got 'em. He quickly put down in his notebook anything that disconfirmed a much-loved idea."

Munger tries to do the same himself. While he "can't stand" the political views and economics of New York Times columnist Paul Krugman, Munger says he pays special attention to Krugman's articles in order to expose himself to opposing views. That's how he fights confirmation bias. George Soros does the same, obsessing about why he could be wrong and studying the arguments of those who disagree with him. "I am not a professional security analyst," he once said. "I would rather call myself an insecurity analyst."

More of us should try this. No matter what you're doing in investing, you should always be asking the question, "What am I doing wrong?" It's probably the most important question you can ask yourself. The only way you'll answer it is by seeking out the opinions of people who think you're crazy. As a rule of thumb, the stronger you believe in an investment idea, the more important it is to be able to accurately state the opposing side's position. That's the easiest way to get less stupid at investing.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics

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  • Report this Comment On July 08, 2014, at 10:59 AM, teentradeproject wrote:

    ""One reader responded: "It doesn't help to tell us we're stupid without recommending how to be less stupid. Be less of a jerk next time."""

    I appreciate that you answered this person in a new column, but also reiterated things that you mentioned in the first column... Because you did in fact tell us how to be less stupid, even if you didn't package it that way.

    Munger is full of good information on the topic of decision making and I am happy you quoted him. In Charlie Munger's "Poor Charlie's Almanac" he emphasizes time and time again how important it is to analyze all variables that affect a decision, the most important variables being your biases and unconscious securities/tendencies. This is what those "gold bugs" were missing. In my opinion this is the most important thing that you mentioned above.

    Thank you for pushing wisdom ya jerk!

    Fool On

  • Report this Comment On July 08, 2014, at 2:37 PM, hbofbyu wrote:

    Let's give the credit to the scientific method and not as much to the scientist himself.

    Scientists are just as biased and blind as others.

    They DO tend to focus on what WE as people don't know - not so much on what THEY as individuals don't know.

    The two smartest people in my company are an MIT grad in computer science, and a self made high school drop out who designs our system architecture - both of these guys are brilliant yet one still believes in conspiracy theories about global warming and other doesn't understand that you can't pick your nose during a job interview.

  • Report this Comment On July 08, 2014, at 2:53 PM, deckdawg wrote:

    I wonder if Morgan might be single? Once I got married, I always had someone available to tell me I'm wrong.

  • Report this Comment On July 08, 2014, at 9:56 PM, Thaeger wrote:

    "It's a catastrophe because everyone knows that bad ideas and dumb behavior exist, but most assume it's a problem that afflicts other people..."

    Reminds me of (other) peoples' attitudes about driving ( http://www.allstatenewsroom.com/channels/News-Releases/relea... )

    "American drivers believe their own driving knowledge, ability and safe driving habits are well above other drivers on the road. Nearly two-thirds (64 percent) of American drivers rate themselves as "excellent" or "very good" drivers..."

    ---

    I wonder how many think an 'excellent' driver is someone who 'has what it takes' to go +20mph while weaving in and out of traffic and using their cell phone; or that those who tend to go the speed limit and pay attention to the road without being in any particular rush are the 'bad' drivers.

    Kinda like how many "excellent" investors just 'know' that day trading, options, and margin accounts are where its at; meanwhile 'bad' investors just worry about holding stocks or index funds for the long term and tucking a little more away each month while avoiding flashy, unnecessary 'shortcuts'.

  • Report this Comment On July 08, 2014, at 10:23 PM, Thaeger wrote:

    "It's a catastrophe because everyone knows that bad ideas and dumb behavior exist, but most assume it's a problem that afflicts other people..."

    Reminds me of (other) peoples' attitudes about driving ( http://www.allstatenewsroom.com/channels/News-Releases/relea... )

    "American drivers believe their own driving knowledge, ability and safe driving habits are well above other drivers on the road. Nearly two-thirds (64 percent) of American drivers rate themselves as "excellent" or "very good" drivers..."

    ---

    I wonder how many think an 'excellent' driver is someone who 'has what it takes' to go +20mph while weaving in and out of traffic and using their cell phone; or that those who tend to go the speed limit and pay attention to the road without being in any particular rush are the 'bad' drivers.

    Kinda like how many "excellent" investors just 'know' that day trading, options, and margin accounts are where its at; meanwhile 'bad' investors just worry about holding stocks or index funds for the long term and tucking a little more away each month while avoiding flashy, unnecessary 'shortcuts'.

  • Report this Comment On July 09, 2014, at 11:36 PM, ksk3888 wrote:

    Great article as usual. Instead of talking to people who are against our investing principle, could we read articles online which are against our investing beliefs? Any big difference between these ?

  • Report this Comment On July 10, 2014, at 3:21 PM, drborst wrote:

    That's why I keep reading your articles Morgan...

  • Report this Comment On July 11, 2014, at 1:47 PM, macollin wrote:

    Thank you for your insight. As a begining stock investor (I've owned mutual funds for years) and a young scientist, I would not have observed the parallels between science and investing.

  • Report this Comment On July 11, 2014, at 3:54 PM, ffbj wrote:

    One reason movie stars and other celebrities often act like such jerks, is that have no one around to tell them otherwise. Hangers on and their entourage are not going to call them on rude or otherwise anti-social behaviors similar to yes men and the boss. Why bite the hand that feeds you?

    This is been shown to be why they feel so entitled and not wrong. Kanje West is a fine example of this sort of mentality. When you tell everyone you are genius and all those around agree perhaps you start to believe your own line of B.S.

    Also related to group think and the best and the brightest. How could we possibly be wrong?

    Good article.

  • Report this Comment On July 11, 2014, at 6:41 PM, DeltaVictorBravo wrote:

    Munger is wrong when he says "Darwin wasn't exceptionally bright, but he became a first-class scientist by spending his life trying to prove himself wrong."

    That's what the scientific method IS. Testing hypotheses-- Darwin was brilliant, and he applied the scientific method. He didn't "become a scientist by spending his life trying to prove himself wrong." He was a scientist the whole time he was doing that, by definition.

  • Report this Comment On July 12, 2014, at 1:33 AM, sailrmac wrote:

    Great article. Unfortunately much easier said than done.

    For instance the comment on margin bad, index fund good, was rather ironic under the circumstances. It was just doing the very thing the article was designed to warn against, confirmation of one's own biases instead of questioning them.

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