AMONG THE MANY people around the world who can impact our success as investors, two rank as the most important to know and understand. Yet many investors fail to recognize this reality.
Sure, Warren Buffett and Janet Yellen and Burt Malkiel are well worth listening to and learning from. There are also many others at home and abroad who are important. But all serious students of investing would agree that the two I have in mind are much more important.
Who’s the most important person you need to know and understand? That would be you. “Know thyself” has long been recognized as the single most important step toward success in life and, of course, in investing. As ‘Adam Smith’ (the pen name of George Goodman) put it in his 1968 bestseller The Money Game, “If you don’t know who you are, [the stock market] is an expensive place to find out.”
“Know thyself” is particularly important because each of us is different from other investors. We differ in incomes, assets, spending and saving, age, family responsibilities, investment expertise, time for and interest in investing, risk tolerance and self-discipline.
Because we differ from other investors, each of us should develop and stick with a long-term investment plan that is unique to us. As investors, the first step toward success is to know and understand ourselves, and develop the plan that’s really right for us. The best plan will be in writing.
The next step is to be self-disciplined and stick with that plan. But both depend on knowing ourselves, particularly when and why we make mistakes. Of course, when there are major changes in our lives or in our assets, each of us should make time for a careful review of our plan to see if any modifications need to be made. Such changes should be rare.
That brings us to the other important person we need to know. Clever, flirtatious, intriguing Mr. Market is always looking for the chance to divert our attention away from the long term and the discipline of staying on plan. He wants us to focus on the short term. He wants us to change our investments. Any change will please him. Any change at all.
Originally identified by Ben Graham, author of The Intelligent Investor, Mr. Market wants to have fun. He enjoys tricking investors into all sorts of decisions to buy and sell. He doesn’t care when those decisions don’t work out. In fact, he likes it best when we investors are making the most mistakes. Meanwhile, his cousin Mr. Value does the hard work of creating value over the long term. Mr. Value soberly develops companies that produce the products and services that people want—work that Mr. Market is anxious for us to ignore.
Emotionally unstable, Mr. Market bounces around. Sometimes euphoric, sometimes depressed, he causes trouble if we let him. He knows our emotional buttons and how to push them, sometimes with fear, sometimes anxiety, sometimes high hopes. All he really wants is for investors to take action, any action. Once he gets us started, it gets easier and easier to keep us taking action after action after action, as we pay more and more attention to the always changing market.
Of course, the best way to protect yourself from Mr. Market’s manipulations is to be expert on that other important person: yourself. Of all the many people in the world, the most important is you. Sure, it’s important to study and learn about the market. But it’s even more important to study and learn about yourself, particularly your weaknesses. You need to figure out what’s really important to you and how you can improve your chances of avoiding mistakes, so you minimize costs and taxes, stick with your plan—and thereby enjoy the ample rewards that come with successful long-term investing.
Charles D. Ellis is the author of 18 books, including Winning the Loser’s Game, which is now in its 8th edition, with 600,000 copies sold. Charley has taught investing courses at both Yale and Harvard business schools, and he served for 17 years on Yale’s investment committee. Check out his earlier articles.
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Thank you for sharing your wisdom, Dr. Ellis. Happy new year!
TY Mr. Ellis, this seems so relevant with regards to financial decision-making (and probably well beyond that!). Heck, it reminded me of a saying in medicine attributed to both Jesus as well as an ancient Greek aphorism, “Physician, heal thyself” and “know thyself”. So you’re in good company, albeit much more contemporary!
I have learned from a few of your books and your recent posts on HD. Lots of wisdom condensed in this article. I’m still learning about investing and about myself. I try to read broadly, which not only exposes me to various ideas, but occasionally, a familiar idea expressed in a unique way which finally makes it easier for me to grasp.
Mr. Ellis – You have an incredible gift of explaining the context of difficult to interpret concepts in a magnificently simple way. Two of my favorite gifts to hand out are Winning the Loser’s Game and The Elements of Investing. Both accomplish utilizing your gift (along with Mr. Malkiel in The Elements). I am really looking forward to your future articles in 2022.