Investing When It Doesn’t Make Any Sense

“If you don’t know when you’re wrong, you certainly don’t know when you’re right.” – Adam Robinson

I love finding new ways to explain old topics. The world is constantly changing but the basic principles are almost always the same.

So whenever I read or hear a novel explanation of an age-old topic I’m always pleasantly surprised.

Tim Ferris recently sat down for an interview with Adam Robinson, one of the founders of the Princeton Review education courses for standardized tests. He’s also a former chess prodigy (who played regularly with Bobby Fisher) and is currently an advisor to some of the world’s largest hedge funds and family offices.

I really like the way he explained his investing process:

I start to write down what I expect to happen. I think the key to investing is to have expectations and then wait to be surprised. And one of the key things with investing is to be aware when you hear a voice in your head that says, “It doesn’t make sense.”

And that’s always a sign of something really powerful.

So if somebody says to me, “It doesn’t make any sense why gold keeps going lower,” I know that it’s got a lot lower to go. Because what that person just said, in saying it doesn’t make sense, is this person has a dozen logical reasons why gold ought to be going higher; and it’s going lower. And he says, “That doesn’t make sense.” But the world always makes sense. What doesn’t make sense is his model. And this applies to life.

If a stock goes up and there’s no rational reason, it means that there’s some x-factor that you haven’t considered. Because it makes total sense now in retrospect. But then it didn’t. […] People stumble on these ideas and they dismiss them because they go, “Ah, that doesn’t make any sense.” And that’s where the gold mine is — things that don’t make sense.

2016 perfectly encapsulates this idea. How many times did you say to yourself or hear from an expert or pundit that something didn’t make sense this past year? It was a regular occurrence.

Robinson continued with some thoughts on what he focuses on:

Things that are really obvious. If it’s obvious, no one bothers to examine it. In global markets, I start from the premise that understanding is an illusion, that explanation is impossible. The world is simply too complex to understand, so I don’t bother trying.

The world (and the market specifically) is an unbelievably complex place. No one will ever understand everything that’s going on with all of the moving pieces and different goals and agendas out there. This is one of the reasons I think it makes sense for investors to let go of the why and instead focus on what have control over.

Robinson does this by paying attention to what other investors are doing:

All I do is I watch investors attempt to make sense of the world. And they form views. So they’re looking at the world, trying to predict what’s going to happen and all I’m doing is studying them, because they’re the ones who are going to make buy and sell decisions and affect asset prices.

It’s like playing poker. And I see the hands that global investors are playing. So I don’t try to understand the world, I just try to get into their heads.

This idea reminds me of the old John Maynard Keynes analogy about the beauty contest:

Professional investment may be likened to those newspaper contests in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view.

 It is not a case of choosing those which, to the best of one’s judgment, are the really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects average opinion to be.

A few simple takeaways:

  • Don’t always assume that you’re right and everyone else is wrong. It may be that you’re looking at an old version or model of the world that’s no longer applicable.
  • Understanding where and when you’re wrong is more important than understanding where and when you’re right.
  • Successful investing is not just about understanding yourself, but also understanding the actions of other market participants.

Adam’s ideas on investing start at around the 28-minute mark. It’s worth a listen:
Becoming the Best Version of You (Tim Ferriss Show)

Further Reading:
Investing, Basically

Now here’s what I’ve been reading lately:

  • George Soros, fallibility, reflexivity and the importance of adaptability (Enterprising Investor)
  • Making better decisions through blindness (Dan Egan)
  • Budgeting that actually works (Peter Lazaroff)
  • 11 things everyone on Wall Street needs to stop wearing (Business Insider)
  • “it’s easy to have illusions about the future if you don’t even have a grip on your own recent past.” (Irrelevant Investor)
  • Why the finance industry is failing (Tim Hanso)
  • How diversification became a 4 letter word (Pension Partners)
  • Commodity futures investing is both complex and unique (Alpha Architect)
  • An interview with Jerry Seinfeld (HBR)
  • FOMO and imperfect portfolios (Abnormal Returns)
  • 99 reasons why 2016 has been a great year for humanity (Angus Hervey)