Thread by @jposhaughnessy

1/ Successful Active Investors Have A Long-Term Perspective on Their Investments.

“Having, and sticking to a true long term perspective is the closest you can come to possessing an investing super power.”
~@CliffordAsness

2/ Cliff is right, but, sadly, most investors lack this ability. Evolution has programmed us to pay far more attention to what is happening now than to what might happen in ten or twenty years. For our ancient ancestors, that made a great deal of sense

3/ Those who reacted quickly to rustling in a nearby bush—assuming it was a predator who could kill them–ran away and survived, whereas those who didn’t were often killed. Guess whose genes got passed down to us? Of course it was those that ran, even if there was no fatal threat.

4/ Our culture has evolved much more rapidly than our brains, which doesn’t help us keep a long-term perspective on our investments. When you time-weight short-term information for investment decisions, you create a reactionary model, not an anticipatory one.

5/ Many behaviors that hobble making good investment choices seem to be encoded into our genes. In their paper Why do Individuals Exhibit Investment Biases?, researchers Henrik Cronqvist and Stephan Siegel write: “We find that a long list of investment biases—e.g., the reluctance

6/ to realize losses, performance chasing, and the home bias—are human, in the sense that we are born with them. Genetic factors explain up to 45% of these variation in those biases across individuals. We find no evidence that education is a significant

7/ moderator of genetic investment behavior.” Wow! It’s no wonder that the majority of investors succumb to short-term volatility in the market by selling and waiting until markets have been very strong to begin buying, even though more than 30 years of studies have proven

8/ this is exactly the wrong thing to do. It’s literally programmed into our genes and is impervious to education. We are also prone to a slew of cognitive biases, from overconfidence in our own abilities to our tendency to overweight things simply based upon how

9/ easily they are recalled. And knowing about our biases of judgment—something that has been noted in market research for more than 30 years—hardly eliminates them.
Successful active investing runs contrary to human nature. It’s encoded in our genes

10/ to overweight short-term events, to let emotions dictate decisions and to approach investing with no underlying cohesiveness or consistency. Successful active investors do not comply with nature; they defy it. The past, present and future make up their now.

11/ It’s not natural to watch others get caught up in spirals of greed and fear, causing booms and panics, and remain unmoved. It’s not natural to remain unemotional when short-term chaos threatens your nest egg.

12/ And, it’s not natural to persevere in a rigorous, consistent manner—no matter what the market is doing. And, as I'll cover in another thread, successful investors prefer a tested, well thought out and explainable process,

13/ that they view as more important than any single outcome. For, if you base decisions just on outcomes, you'll never know if it may have just been dumb luck that caused the outcome, even if it's attached to a compelling narrative. As W. Edwards Deming says:

14/ “If you can’t describe what you are doing as a process, you don’t know what you’re doing.”