Put faith in your circle of competence

Life/Investing Mantra

  • While assessing your circle of competence is itself a form of modesty, it is not helpful to be immodest about having your circle of competence.

    • The market is both efficient and inefficient, and you are trying to find the inefficiencies (and inadequacies).

    • Too much modesty will discourage you from acting on private information and doing what you know is right.

  • It is not arrogant to believe in your circle of competence.

    • Do not reduce this question into one about status.

    • Just because you think you have a better answer to this particular puzzle doesn’t mean you think you’re smarter than everyone else.

  • The point is to avoid over-confidence, not to be under-confident.

    • Overconfidence and underconfidence are symmetric mistakes.

    • Overconfidence and underconfidence will both cost you.

    • Modesty and immodesty can both be bad heuristics if you are prone to overreacting.

    • In investing, overconfidence is certainly more deadly than underconfidence, but underconfidence also gets you nowhere.

    • Remember: when you see it, bet big.

  • Modest people end up believing that they live in a world that is inexploitable.

    • These people avoid acting like an arrogant person and end up exploiting nothing.

  • Decide for yourself whether you trust yourself more than a particular person, or a particular field, at this particular time, in this particular place.

    • It is okay to think about particular areas where the market is inefficient or inadequate, and it’s okay to end up believing that you know better.

    • Just make sure that you check against observation whenever and wherever you can, and that you update in either direction.

    • As long as you check your results and are building up skill, you are on the right path.

  • In short, when you’ve done enough work, the answer to “Do you really think you’re smarter than professional experts on this?” is “Yes.”


Quotes:

“Modesty—the part of this process where you go into an agonizing fit of self-doubt—isn’t actually helpful for figuring out when you might outperform some aspect of the equilibrium.”

— Eliezer Yudkowsky, Inadequate Equilibria

“Great investors have confidence in their own convictions and stick with them, even when facing criticism. Buffett never got into the dot-com mania though he was being criticized publicly for ignoring technology stocks. He stuck to his guns when everyone else was abandoning the value investing ship and Barron’s was publishing a picture of him on the cover with the headline ‘What’s Wrong, Warren?’ Of course, it worked out brilliantly for him and made Barron’s look like a perfect contrary indicator. Personally, I’m amazed at how little conviction most investors have in the stocks they buy. Instead of putting 20% of their portfolio into a stock, as the Kelly Formula might say to do, they’ll put 2% into it. Mathematically, using the Kelly Formula, it can be shown that a 2% position is the equivalent of betting on a stock has only a 51% chance of going up, and a 49% chance of going down. Why would you waste your time even making that bet? These guys are getting paid $1 million a year to identify stocks with a 51% chance of going up? It’s insane.”

— Mark Sellers


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