By: Chamath Palihapitiya
Successful investing is all about behavior and psychology. You can have the best model or analysis in the world but if you panic, you lose.
Said differently, everybody has a plan until they get punched in the face.
The most important thing you can do to maximize the odds of success is figure out what, if any, behavioral advantages you have or can create for yourself.
What rules can you live by that will prevent you from doing something stupid especially when everyone is losing their mind?
Here are my behavioral decisions:
1. I don’t trade stocks. I buy companies.
Buying a company is like hiring a great CEO to work for you and your family. You can rest well knowing that Bezos, Musk etc. are on the job. That’s not true for all CEOs so decide accordingly.
2. I try to buy companies that I think can potentially 10x in 10 years.
If I’m not willing to do that, I don’t buy it. This doesn’t mean that I will bat 100% but that isn’t the goal. The goal is to become disciplined in a process, repeat this process and don’t deviate.
3. It’s all about the annual report vs quarterly earnings.
If I become too short-term focused, I am my worst enemy and will overthink, overreact and underperform my potential.
Once you’ve bought a company, the hardest decision is no decision…patiently waiting to be right.
4. I try not to look at prices every day.
The market has an amazing way of giving you great opportunities to see the truth. You just need to realize that the price and the truth aren’t always the same. Looking at daily prices makes it harder for me to see the difference…
5. I don’t play with derivatives.
Options seem fun but they are like allowing a toddler to play with a loaded gun. You can have a few close calls but it eventually catches up with you.
In short, I have come to believe that the markets are the summation of everyone’s collective consciousness in any given moment.
What this means, to me, is that I see the markets constantly over-reacting and under-reacting in any given moment based on people’s psychology.
But I have also seen that over time, as you zoom out, sanity always prevails.
By creating some rules and living by them, you give yourself the best chance of not losing momentum in moments of chaos, finding and sticking to your truth and letting prices catch up.