Mental Models: Part 3
Market Meditations | July 19, 2021
1️⃣ Independent Thinking.
In a world where incentives rule, it is critical to think independently. Other people may not be incentivized to protect your best interests. In particular, you should always fear professional advice when it is good for the advisor. Your favourite twitter account may criticise a project but perhaps you should view that criticism with caution if you know they are a founding member of a competitor project. It suits them to turn you against a competitor! In investing, independent thinking is often referred to as contrarianism. It is the best way to protect yourself. Curiosity was praised when we were younger. We always asked: Why? This is the most important question of all. It is relevant to the entire human experience. It’s time to ask why again! Do not just believe what you hear or read.
We come across many people who believe they require extreme skill or knowledge to do well in investing. Actually, sometimes a simple buy and hold strategy can outperform an elaborate and time consuming scalping schedule. The degree of difficulty varies but sometimes the reward doesn’t! To quote Munger: “if our predictions have been a little better than other people’s, it’s likely because we make fewer of them”. It is sufficient to take a simple idea but take it very seriously. For instance, create a simple DCA strategy but stick to it very strictly.
3️⃣ Opportunity Costs.
Resources are finite. Therefore whenever you decide to spend time or money on something, you are forgoing other opportunities. Not all choices are equal and sometimes your resources are better used elsewhere. When it comes to investing, Munger imagined a ‘measuring stick’. A baseline return he could obtain from an investment. Every new investment opportunity that didn’t meet that baseline was disregarded. For instance, imagine you have found a passive income strategy where you earn 5% APY a year. Why then, would you consider a more risky investment than only yields 4% APY? Your money is finite and your opportunity cost is an extra 1% APY. Always be aware of the opportunities at hand and the sacrifices that come with every decision you make.
? For yield earning opportunities, check out our passive income guide.