Two weeks ago, I wrote about the first excerpt from the book Big Mistakes: The Best Investors and Their Worst Investments. It was dedicated to Benjamin Graham.
Error called “I’m a genius!”
Today, I’m going to present an error called “I’m a genius”. This is a very common mistake, most common among small investors, but it does not avoid also to the top investors. Also, they can undergo the self-deception of their own geniality.
John Meriwether and his associates with Long Term Capital Management (LTCM) are a classic example of top professionals. They brought the best brains of the time to the management of this fund. In the first years after its founding, they had been achieving unprecedented profits. Then the Russian crisis came, and everything was different. They got to the troubles because they thought their models were 100% safe and they could control all risks while counting with every possibility.
In an unexpected event, people react in an unexpected way, and at that time markets have not behaved either according to fundamentals or according to common logic based on which the fund scenarios were built. Such scenario was not included in their models, and it became fatal – daily losses were several times greater than their models predicted for catastrophic scenarios.
Since at that time it was historically unprecedent failure, which had been threatening global markets, also FED had to intervene in the fund´s rescue process.
Small investors do something similar. Almost everybody talks about success, few people talk about failed investment. People are debasing their failures and exaggerate their achievements.
The evaluation of investments often looks as follows: when the investment fails, it is usually explained as several negative circumstances together. When it’s good, it’s because the investor is a genius. Even in a situation where the appreciation of the investment was achieved thanks to the longer-lasting bull market.
Be aware that markets are not rewarding just for being smart. There is always something else, intelligence in investment is relative, not absolute. Higher IQ may be an advantage, but it does not guarantee a better result.
You must not be ruled by your pride. You must admit that you are not infallible, you do not know everything and you should not neglect education.