A recent article from Allan Gray sets out “The four fundamental skills of all investing”. It appears simple, but the complexity is immense. We outline the salient points below:
When you first start to study a new field, it seems like you have to memorise a million things. Actually, you don’t. You need to identify the core principles, generally 3 to 12 of them that preside over the field. The million things that you thought you ought to know are various combinations of the core principles.
In investing there are four core skills governing most outcomes:
The ability to be comfortable being miserable
“No pain, no gain”. Returns do not come free. This is the most fundamental of all investment principles. A short-term loss, uncertainty, surprise, confusion, regret and boredom – all these need to be paid before returns are rewarded.
The ability to distinguish “temporarily out of favour” from “wrong”
It comes down to accurately calculating the odds of a company recovering or failing.
The willingness to adapt views you wish were permanent
You can’t be stuck in your old ways. You must be flexible to change.
The ability to distinguish when analysis vs. psychology is necessary
Combining the art and science. Numbers you can see and emotions you can sort of feel. The trick is knowing when which skill is necessary and how one affects the other.
Only four skills?
It’s not a very complicated list, but these four skills are difficult to put into practice. What it does need is perseverance, just like investing.
Conclusion
The article highlights the complexity inherent in investing. There are no easy wins. Every so often, someone hits a lucky jackpot, which often ends in tears as greed overtakes logic and the gain is not realised before reversing. But for 99% of the time, wins in the form of rewards come from hard work. This is the same for investing. One needs to select the right investment managers with the right principles in place that can pay the price of “pain”, which will translate into superior rewards over time.
