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.
