Limitations
After a previous week that saw significant declines, stock market indices rallied back this past week with solid gains. The S&P 500 and Nasdaq had their best weeks of the year, with gains of 4% and 5.9%, respectively, nearly matching the percentage losses seen the week before.
Markets tend to go Up and Down, as anyone who has been investing for long enough knows. And people who invest in markets never get everything right—even the best investors are usually wrong at least 30% of the time. The key is making a lot more when you are right than you lose when you are wrong.
Part of doing that is trying to find your mistakes early—when they are small, and you can limit the losses—and making sure you are never taking any big risks that can take you out of the game. Part of that process involves being brutally honest with yourself and being aware of your own limitations. As William Green wrote in his excellent book Richer, Wiser, Happier:
In a world where nothing is stable or dependable and almost anything can happen, the first rule of the road is to be honest with ourselves about our limitations and vulnerabilities. As the Athenian playwright Euripides warned nearly twenty-five hundred years ago, ‘How can you think yourself a great man when the first accident that comes along can wipe you out completely?’ Montaigne, one of the wisest of men, had this sentence inscribed on a beam in the library of his château.
We’ve had a volatile couple of weeks. And we’ll have even more volatile weeks—with bigger losses and bigger gains—eventually. Whether that happens soon or not for a little or a long while nobody knows. But it’ll happen, as it always does. And if you want to be a great investor, or even a good one, it’s important to be ready for that eventuality, even if we can’t predict when it might happen.
“You may well say, ‘Who wants to go through life anticipating trouble?’ Well, I did, trained as I was. I’ve gone through a long life anticipating trouble. And here I am now, well along in my 84th year. Like Epictetus, I’ve had a favored life. It didn’t make me unhappy to anticipate trouble all the time and be ready to perform adequately if trouble came. It didn’t hurt me at all. In fact, it helped me.” —Charlie Munger (USC Gould School of Law Commencement Address — May 13, 2007)
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