It helps in investing to know the difference between a few key things.

You should know the difference between patience and stubbornness. Patient people are willing to wait a long time, but will change their minds when proven wrong. Stubborn people are also willing to wait a long time, but no amount of facts can change their opinion. They come up with new arguments for why they believe something when the original argument is disproven.

You should know the difference between volatility and risk. Volatility is the market going up and down, sometimes by a lot. Risk is your own asinine tendency to react to these moves by buying high and selling low.

You should know the difference between unemotional and oblivious. Unemotional is staying calm when disaster strikes. Oblivious is not knowing that disaster is capable of striking.

You should know the difference between average and normal. You should never think "average" is what should be happening right now. The S&P 500 has gone up an average of about 9% a year over the last century. But since 1900, stocks have gone up or down more than 20% in almost twice as many years as they have gained between 5% and 10%. Nine percent is average, but chaos is normal. Same goes for valuations. They're more likely to be swinging between some state of insanity that no one can justify than hovering near an historic average.

You should know the difference between a forecast and the odds of a forecast occurring. No one can say we're going to have a recession this year, because the world is complicated and doesn't work in certainties. But if someone says there's a 60% chance of a recession occurring this year, that's a completely different call, and one reasonable enough to listen to.

You should know the difference between politics and partisanship. Politics influences the economy, and we shouldn't ignore it just because it's immature and aggravating. What investors should avoid when making financial decisions is partisanship, which is the most toxic substance your brain will ever meet.

You should know the difference between history and historical interpretations. History is unemotional and factual. It doesn't care what you think and knows no bias. It is a rare find. Historical interpretations are incomplete, biased, partisan, and uninformed. They are pervasive.

You should know the difference between a contrarian and a cynic. A contrarian knows the masses get it wrong sometimes. A cynic thinks he's smarter than the masses all the time. 

You should know the difference between entertainment and advice. Anything produced for a mass audience is entertainment. It can't be advice, because the person on TV, or the author of an article, has no clue about your or your goals. Financial media lets you know how other people think and shows you how other people fail, which is invaluable. But you need to think for yourself, or find advice from a qualified person who knows your situation.

You should know the difference between skill and luck. The problem is we almost never can. I advocate humility by accepting that some -- maybe many -- of the world's best investors are more lucky than they are smart. This is especially true for those whose whole success is attributable to one or two big calls.

You should know the difference between a business and a stock. It's the same as the difference between a house and the title to a house. 

You should know the difference between pessimism and cautiousness. Pessimism is the stupid idea that things will never get better. Cautiousness is the smart idea that things get better over time, but only if you have enough flexibility to stay in the game when things get ugly.

You should know the difference between sophistication and obfuscation. In sales documents, the more complicated something is, the more sophisticated it appears. In real life, the more complicated something is, the higher the fees you can get away with charging.

Check back every Tuesday and Friday for Morgan Housel's columns. 

 

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