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Charles Darwin said that it is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change. So it is with investors: we need above all to have a mind-set that allows us to look at how the world really is, how it works, where it is going, and adapt accordingly.
This requires an openness to seeing the world as it really is, rather than coming at it with a preconceived notion or wishful thinking. As Charlie Munger says “recognise and adapt to the true nature of the world around you: don’t expect it to adapt to you.”
Hard work is required to gain a sufficiently good understanding of the way the world is working: You must “commit far more time to learning and thinking than doing” (Charles Munger). Continual action leaves insufficient time for understanding; it’s important to spend most time gathering facts and ideas, mental models and perspective and only occasionally buying or selling.
In developing your view of the world or of a particular company, the macroeconomy or the stock market try to avoid being too hopeful “It is optimism that is the enemy of the rational buyer” (Warren Buffett).
Thus, you need to build in a good margin of safety between the intrinsic value estimated and the price paid so that if your analysis turns out to have been biased towards the optimistic you have some buffer to protect you.
Prof Glen Arnold now offers a Managed Portfolio Service at Henry Spain Investment Services under which clients’ portfolios contain the same shares as his (write to Jackie.Tran@henryspain.co.uk)
